FINANCIALS
December Treasury Bonds and Treasury Notes are trading mixed to better as fear of a global recession slowly creeps back into the market after Thursday’s report that the U.S. Third Quarter Gross Domestic Product had contracted. Fed Funds indicate the market is already beginning to price in a rate cut in December.

Overnight the Bank of Japan reluctantly cut its benchmark interest rate to .30 percent down to .50 percent. This action seemed more like a symbolic move since the rest of the world has been lowering rates for several weeks.

Today’s reports include Employment Cost Index, Personal Income, Personal Spending, Chicago PMI and Michigan Sentiment. Personal Income and Personal Spending will be closely watched for clues as to how long and how deep the economic contraction is expected to last.

Barring any surprise in the Personal Income and Personal Spending Reports look for the treasuries to trade firm. The move could be exaggerated to the upside if the stock market weakens substantially.

EQUITIES
Global equity markets are trading lower overnight. Volatility has been high this week as the market has been trying to put in a bottom. Based on the size and duration of the recent sell-off, it looks as if traders are asking for another test of the lows to be certain a bottom has been formed. So far the three major indices have not been able to change the trend to up by crossing tops. Each rally and subsequent break recently has been lowering the tops, bringing the breakout point to the upside closer. All the market has to do is begin forming higher bottoms to trigger a huge breakout to the upside.

Despite global interest rate cuts this week, enough confidence has not been restored to the markets to attract long-term buying. Investors have been especially fearful of the volatility because they are not getting paid for the risk associated with it. The intraday swings and the late session sell-offs have made the market appear to be dominated by day-traders.

There is plenty of cash on the sidelines, but this cash is not being put to work in the stock market at this time. Investors are content with keeping their money safe in low paying treasuries. October is over today which means pressure from mutual fund window dressing and hedge fund redemptions may be ending. This may mean the professionals may be in a position to invest some of the excess cash in the equities markets starting next week. A strong rally next week will send a clear signal to investors that a bottom is in especially if the indices can start crossing old tops.

CURRENCIES
The Dollar is regaining its strength after a 3 to 4 day setback this week. The short-covering rally appears to be over in both the December Euro futures and the December British Pound. In both contracts, the markets reached key retracement areas and met resistance. In spite of the strong rally, the Euro and the Pound were not able to change the trend to up. Pressure is coming from sellers in anticipation of a rate cuts by the European Central Bank and the Bank of England on November 6. Fear of a global recession is once again dominating the trade.

The Bank of Japan lowered its key interest rate to .30 percent from .50. The vote by the policymakers was mixed as some members wanted a cut to .25%. Some traders feel this rate cut was more symbolic than necessary and just a show of solidarity with the other countries cutting rates this week. From an economic standpoint, the cut was necessary to weaken the Yen because of the high Yen’s impact on exports. Traders are rallying the December Japanese Yen this morning because many had priced in a cut to .25%. If the Yen begins to pick up the trend of the last two weeks and begins to rally substantially then look for the Bank of Japan to threaten intervention to stem its rally.

The December Canadian Dollar is feeling downside pressure once again as the main trend is once again dominating the trade. Yesterday’s news that the U.S. economy had contracted is renewing fears of a recession. This means traders are once again focusing on slowing demand for key commodities such as crude oil, natural gas, lumber and wheat. Slow demand and lower commodity prices will put pressure on the Canadian economy. More downside pressure on the economy is likely to renew talk of an interest rate cut by the Bank of Canada.

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