Market Rumours

Treasury market is left bouncing around flat after NY Fed's announcement that it will conduct small scale reverse repos with primary dealers in the coming weeks. Fed says operations are being done to ensure operational readiness and no inference should be drawn about monetary policy. Transactions should have no material impact on mkt rates, Fed says. Tsys taking Fed at its word, with 2-yr flat to 0.70%, 10-yr dn 3/32 to 3.22% and 30-yr up 3/32 to 4.20%.

U.S. stocks are expected to open modestly lower Monday as investors continue to worry about the fallout from the Dubai World debt default amid weaker European and Persian Gulf shares. "For once it could be European markets that dominate how the U.S. will trade and, with the major financial stocks all lower at the moment, the prospects for the open on Wall Street look bleak," said Ian Griffiths, a dealer at CMC Markets. A wary tone is expected to pervade U.S. markets: "The mood will most definitely be a cautious one as many wait to hear just which banks have exposure to the Dubai situation," added Griffiths. He said he expected the Dow Jones Industrial Average to open down eight points at 10,302 and the Standard & Poor's 500 down one at 1090. By 1155 GMT, the December Dow futures contract was down 0.1% at 10,278 and the December S&P 500 contract was also down 0.1%, at 1088.1. European stocks were lower, after a brief move upwards at the open, with investors opting to take money off the table as concerns over Dubai World's debt default persisted. Meanwhile, the dollar was weaker, bonds were stable, oil prices were little changed and gold prices were lower. Equity trading was volatile, with investors adopting a wait-and-see stance ahead of any further developments in the Dubai situation. "The Dubai news is still being digested by many and, with volumes starting to come back to normality after U.S. Thanksgiving, the markets could be a bit choppy until we get into the main crux of economic data later this week," said Joshua Raymond, market strategist at City Index. The Dubai World issue is endemic of a wider problem, said Michael Hewson, analyst at CMC Markets. For the last six to nine months, markets have been ignoring the fact there is a lot of bad debt out there and "Dubai was a wake-up call that debt problems are still there," he said. By 1155 GMT, the pan-European Stoxx 600 index was 1.0% lower at 240.13, London's FTSE 100 index was down 0.7% at 5208.81, Frankfurt's DAX index was 0.9% lower at 5634.27 and the CAC-40 index in Paris was 0.9% lower at 3686.72. In the Persian Gulf, the main Dubai stock market index closed down 7.3% at 1940.36, while Abu Dhabi's principal index closed down 8.3% at 2668.23. Earlier, in Asia, markets were mostly higher Monday, led by a rebound in financial stocks after Friday's sharp selloff, as investors were reassured by indications over the weekend that any contagion from Dubai World's debt crisis will be limited. Japan's Nikkei 225 was up 2.9%, Hong Kong's Hang Seng Index added 3.3% and China's Shanghai Composite tacked on 3.2%.Greg Gibbs, currency strategist at RBS in Sydney, said the United Arab Emirates central bank's weekend statement to reassure investors that it stands behind its banks and branches of foreign banks should help calm markets. "As such we will not see a Lehman style lift in interbank funding costs and a squeeze of liquidity. Contagion across markets should remain contained," Gibbs said.Nonetheless, the markets have yet to recoup all of Friday's losses, suggesting some investor caution.In the European foreign exchanges the dollar was weaker all round as currency traders and investors decided to take on some more risk. By 1200 GMT, the euro was trading at $1.5028, up from $1.4990 late Friday in New York, while the dollar was quoted at Y86.31, down from Y86.54.But despite the dollar's weakness gold continued to decline. At 1200 GMT it was quoted at $1171.70 per troy ounce, down $4.40 from the New York close. Nymex January crude oil futures were down three cents at $76.02 per barrel.In the European bond market, December bunds were up 0.06 at 123.54. However, U.S. Treasurys were slightly lower, with the 10-year note at 101 10+/32, down 2+/32 from Friday, yielding 3.215%.

Sterling is on the slide again as UK banks's exposure to Dubai World comes back into focus after the Dubai government told CNBC it does not guarantee the debt. GBP/USD prints the day's low of 1.6457, EUR/GBP the day's high of 0.9136.

If USD/JPY ends the month below 87.00 it will be a very bearish medium-term signal says Mizuho Corporate Bnk's Nicole Elliott. She still favors the downside and for a strategy would sell at market with a stop above 87.50 for a short-term downside target of 85.00 and a longer term target of the all-time low of 79.75. USD/JPY now at 86.50.

Short USD/JPY 3-month to 1-year calendar spread, looking for near-flat curve to invert as front-end vols rise on demand for options protection, given worries about sovereign risk, Japan intervention threats, while back-end vols wedged under stubborn range-top resistance, says Dow Jones CommentaryPlus senior analyst Russell Floyd; recommends shorting spread from +0.15 vol, targeting return toward 1-year mean of negative 0.71 vol or lower. Curve collapsed 1.65 vols last week but has plenty of room to fall further if spot USD/JPY continues to whipsaw--USD/JPY plunged to 14-year low 84.80 Friday, rebounding to 87.45 today in Asia before sliding again. Calendar spread sagged to extreme negative 9.00 vols in Oct 2008 in wake of Lehman Brothers, Floyd notes.

European stocks were lower Monday, after a brief move upwards at the open, with investors opting to take money off the table as concerns over Dubai World's debt default persisted. Meanwhile, the dollar was weaker, bonds were stable, oil prices were steady and gold prices were lower. Equity trading is expected to be volatile, with investors adopting a wait-and-see stance ahead of any further developments in the Dubai situation. "The Dubai news is still being digested by many and, with volumes starting to come back to normality after U.S. Thanksgiving, the markets could be a bit choppy until we get into the main crux of economic data later this week," said Joshua Raymond, market strategist at City Index. The Dubai World issue is endemic of a wider problem, said Michael Hewson, analyst at CMC Markets. For the last six to nine months, markets have been ignoring the fact there is a lot of bad debt out there and "Dubai was a wake-up call that debt problems are still there," he said.

GBP/USD may be bouncing as Dubai concerns subside. But, says UniCredit, the pair needs to make a full break through 1.6590 to reopen a test of its 1.67 highs. The pair is now at 1.6487.Look for EUR/USD to make a new test of 1.5140 even though the pair may be volatile, says UniCredit. "Easing Dubai concerns and renewed caution by China regarding a sharp CNY rise may further boost EUR/USD," the bank says. The pair is now at 1.5034.

Intraday EUR/GBP: Recovers strongly off former resistance at 0.9060 to bring the focus back onto last Friday's marginal high at 0.9133. A break through there is favoured, opening room for further gains towards 0.9149 and the 0.9192/0.9201 Fibonacci resistance area. Corrective dips are limited to the 0.9060 area.

USD/JPY slips back below 86.00 and this will put the market back on BOJ intervention watch. Friday's 14 year low of 84.82 brought a raft of interventionist comments from Japanese officials and that, along with talk of BOJ checking rates sent the market scurrying back to the 87.0 handle. USD/JPY now trades at 85.91.

The EUR may still be trying to establish itself over $1.50 but Standard Bank suggests that peripheral euro zone countries, such as Ireland and Greece, could be destroying the "bull" case for the single currency. "Ireland seems to be in the tightest spot, which is partly down to the extra disadvantage of sterling's weakness, but Greece and some others look in dire straights as well, the bank says. "Bond spreads and CDS prices in these countries are rising and we think they will continue to rise long after Dubai World and its problems have faded into the background."

USD may have passed its 2009 low point but AUD, NZD still likely to gain 10% or more in coming six months, say NAB strategists. "Whilst we see no change to the structural dollar negative combination of easy monetary policy, a ballooning fiscal deficit and a U.S. Presidency which will soon be bogged down by mid-term elections, the cyclical dynamics of a sudden increase in risk aversion and position-squaring suggest the dollar's low point for 2009 may...be behind us." Says further out, given growth outlook for Australia, buy AUD/USD; "the medium-term outlook remains positive thanks to China's continuing boom and Australian growth accelerating rather than moderating, so buy on any dips below 0.9000, targeting parity by March 2010."

The Dubai World crisis is an opportunity for China to invest in gold and oil, a senior official with the State-Owned Assets Supervision and Administration Commission was quoted saying in an Economic Information Daily report Monday. "Though it's not known how much the Dubai crisis will affect the global and domestic economy, it's going to at least last for a while, and this may give China an investment opportunity, to use part of its foreign reserves to buy gold and oil reserves," Ji Xiaonan, chairman of the supervisory board for large firms under SASAC, was cited as saying in a report published by The Economic Information Daily, a newspaper run by the state-controlled Xinhua news agency. An official with the commission's press office declined to elaborate, saying it would only comment on official media releases. No Chinese banks have reported exposure to the Dubai World debt crisis.

EUR/USD hits 1.5070 vs intraday low 1.4965 as Asia sovereign hedge fund buying triggers stop-loss buy orders around 1.5000, says dealer at major Tokyo bank. Following UAE central bank's decision to provide additional liquidity to banks in UAE over weekend, "successive Asian sovereign fund euro purchases (Monday morning in Asia) pushed investors to follow suit by issuing substantial stop-loss buying orders." But says players unwilling to buy risky EUR further "unless things become clearer on Dubai's debt issue," keeping EUR topside heavy. Tips EUR/USD resistance at 1.5080, last 1.5060.

EUR/USD up sharply as players reacting positively to United Arab Emirates central bank's decision to provide additional liquidity to banks in UAE, says Barclays Capital senior trader Motonari Ogawa; "The market welcomed the news as the Dubai shock last week was definitely bad for the euro." Nikkei 225's 2.4% rise also helping EUR as it fuels risk appetite. But Ogawa adds, players not ready to drive EUR much higher as outlook for economy in UAE, Europe remain uncertain. Tips EUR/USD resistance at 1.5080 vs 1.5050 last.

1-month ATM implied volatilities down slightly 13.90%/14.60% vs 13.95%/14.65% in NY Friday, as underlying currency market stays in narrow range, easing demand for protection against USD weakness. Options traders at major Tokyo banks say implied volatilities may rise back to 15% ahead of Friday's U.S. employment report. Options trader says, "we generally think this week's currency markets may become more stable compared with last week, which may dent demand for protection. But we also consider risks of a dollar plunge after the outcome of the closely-watched jobs report."