The EUR USD closed sharply lower this week because of a combination of a flight to quality break and a possible interest rate cut by the European Central Bank. The market started the week steady but was quickly met by selling pressure as signs developed indicating that European Banks were on the brink of collapse. This news triggered a flight to quality rally into the Dollar. Early in the week the Dutch bailed out Fortis, the French helped Dexia and the Bank of England took over mortgage giant Bradford and Bingley.

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FINANCIALS
The December Treasury Bonds and December Treasury Notes are rallying sharply higher in a flight-to-quality rally. Global turmoil is putting downside pressure on stock markets worldwide. Although the U.S. took the first step on Friday to shore up its financial markets, the world is realizing that the credit crisis is not just a U.S. issue as toxic debt is infecting banks throughout the world. Over the week-end Germany agreed to bailout Hypo Real Estate and BNP Paribas SA is taking control of Fortis. These two events sent the initial shock waves through the markets as traders now expect the situation to worsen. It looks as if some form of global intervention or across the globe interest rate cuts are necessary to prevent the entire collapse of the global financial system.

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ENERGIES
December Crude Oil is trading sharply lower overnight as the growing financial crisis is expected to slow down the global economy and lessen the demand for energy. Prices are trading under $90.00 and are expected to trade lower over the near term as the financial situation gets worse. The charts now indicate a downside target of $72.00 is likely before there is a significant turn to the upside. Continue to look for places to short the crude.

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Back in the 80’s and 90's we used to call long bonds / short stocks the “depression spread”. I always thought that was a severe description to describe times when stocks would correct and interest rates would work lower. But then again we worked on the trading floor of the Chicago Board of Trade, and let’s face it, commodity guys are not the most positive lot as it is, and the term, like most trading floor sayings, had no doubt been passed down by smarter operators than us.

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