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Asian Morning Update

European releases on Friday:

European data remains stable with CPI still high but not yet out of control. The Bank of France reported that business sentiment ticked higher over February which is in line with industrial data but the CB also revised Q1 GDP lower by 0.1% to +0.4%. They identified a slower order book but not excessively and still maintain that French industrial activity is still on an upward path.

States releases on Friday:

Data from the U.S. was modestly good - and by that I mean it wasn’t bad. However, clearly it was dwarfed by fears over Bear Stearns and its exposure to Carlyle Capital and to the sunprime in general. This caused other banks shy away from providing any financing and bringing Bear Stearns close to break point.

Friday saw JP Morgan providing financing to Bear Stearns but only with a guarantee from the Fed. The stricken investment bank commented, ‘Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity. We have tried to confront and dispel these rumors and parse fact from fiction.’

Over the weekend the WSJ has reported that Bear Stearns is closing in on a deal to sell itself to JP Morgan, it would appear to stall a potential rout in the markets before they open later today. The sale price being suggested by the newspaper is almost half of Bear Stearn’s $4.08bn value.

This comes on the day that attempts to revive the Carlyle Group failed and American International Group is urging regulators to change controversial accounting rules on asset valuations to stem the tide of writedowns that have wreaked havoc on Wall Street.

Elsewhere the WSJ also revealed that 36 of the 51 respondents in a survey consider the U.S. economy to already be in recession and they feel it will be worse than the ones in both 2001 and 1990-91.

The Dollar tumbled for the rest of Friday and into the Asian open which has seen a new 12 year low against the Yen and record lows against the Euro and Swissie.

In response the Fed has acted one day earlier than the FOMC meeting and cut its discount window by 25bps to 3.25% effectively immediately. In addition it has also created a facility to let primary dealers borrow at the discount rate at the NY Fed and has increased its maximum maturity of discount window loans to 90 days from 30 days.

This has allowed modest recovery in the Dollar but unless there is some announcement from JP Morgan concerning the buy out of Bear Stearns fear will continue to rule.

The fear will be a similar fallout as seen following the Junk Bonds in the 1980’s.

It is very difficult to give an outlook for today. Technically the Dollar has reached my long term targets and even a little beyond. In general momentum conditions are overstretched but this means nothing if the Dollar doesn’t recover. Indeed, the downside could even accelerate.

It is recovering following the Fed’s action but so much depends on the outcome of the talks between JP Morgan and Bear Stearns. Even then there will still be a significant window where market fears will heightened with the threat that further incidents will occur.

With the current sentiment one can only favor the downside. If there is any recovery in the Dollar it would come quite sharply. However, I can only see one way this can happen and that is from central bank intervention. This is not impossible but it seems as if, until now, there has been a large measure of reluctance to do so…

More later once the daily analysis has been done…

There following releases are due from Asia due today:

Japan - January
Tertiary Industry Index (MoM) +0.7%
Leading Economic Index (F) 30.0%
Coincident Index (F) 22.2%

Ian Copsey
Global Forex Trading
http://www.gftforex.com

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