The market showed a huge sign of weakness during today's session, increasing concerns on a global economic slowdown, company defaults and credit rating cuts.

 

The panic selling show is on but when will it stop? It is difficult to define a clear endpoint because this huge speculation could last long if the policy makers do not implement soon what is in their minds. Worldwide indexes lost today a 5% average of their value while the US was trying to enjoy its Martin Luther King holiday despite its regression's concerns.

 

Total traded volume was higher than the average of last week even if many US investors were supposed to have their PCs off. Maybe the investment community has waited today for a decreased number of players to shock the market and urge some reactions from central banks. We do not think that this reaction will be prompt because policy makers still do not know what to do. ECB in particular is forced to cut its interest rates to contain the decline in financial markets.

 

On the other side, Trichet has to fight against an inflation that will average 2.5 percent in 2008 and Unions increasing salaries and then spending powers. ECB will take its time to make its decision on 30th January when we will not assist to an endpoint of the free fall but only a decrease in volatility.

The USD fell to an all-time low today and the Euro FX future march delivery broke the 1.51 price level. The macroeconomic scenario is complicated and major currency analysts predict that the rate can rise up to 1.55 by the end of march. We have to focus on rate decisions of both Fed and ECB to understand the price upside movement.

 

The US central bank will likely reduce again its overnight lending rate to fight a slumping economy. On the other hand it seems that ECB has no intention to cut Euro lending rate because of inflation concerns fueled by dangerous data release on German import prices. Considering the interest rate parity theory (IRP), an increase in the spread between US and Europe interest rates will carry to a backwardation condition in Euro FX future. We are already in this condition, because March future is higher than the June's one. We do not expect Euro FX future to be at 1.55 by the end of march for this reason, however we expect it to trade above 1.50.