Key News

• The German economy contracted more than economists expected in the third quarter, pushing the nation into the worst recession in at least 12 years. (Bloomberg)
• The European Union cannot deal with the financial crisis effectively if multinational banks are regulated solely by their home countries, European Central Bank Governing Council member Ewald Nowotny said on Thursday.

Key Reports (WSJ):

8:30a.m. Initial Jobless Claims For Nov 4 Week: Expected: +4K. Previous: -4K.
8:30a.m. Sep Trade Balance: Expected: -$57.3B. Previous: -$59.1B
10:00a.m. DJ-BTMU Business Barometer For Nov 3: Previous: -0.1%.

Quotable

“It seems to me that Europe, especially with the addition of more countries, is becoming ever-more susceptible to any asymmetric shock.  Sooner or later, when the global economy hits a real bump, Europe’s internal contradictions will tear it apart.”
                            Milton Friedman

FX Trading –Case against Euro vs. US$ still!

1. Still overvalued on a Purchasing Power Parity basis against the dollar


2. Interest rate differential to shrink as ECB catches up to the Fed


3. Safe haven money flow i.e. risk aversion still favoring the buck


4. Shift in oil equation i.e. reallocation no longer favoring euro


5. 7-year global dollar short position likely not reversed in five months


6. Emerging market chaos reverberating back into European banking system given Euro-banking huge exposure there. 

We think number six will be the trigger for the next leg down.  The next guess is timing? No doubt the euro appears extremely oversold against the dollar.  And it acted very well yesterday relative to the pack.  A significant correction would not be a surprise and maybe the G-20 meeting this weekend will play a role. 

But, on the global macro side of the fence, we think a big capitulation of the remaining emerging market equity bulls will coincide with the timing of the euro’s next major move lower.  For a capitulation out of EM is another liquidity drain, that may be the catalyst for multiple country defaults. And default is the link back to the Eurozone banking system [asymmetric shock].  And taken a step further, if this chain plays out, it increases the probability that European Monetary System may not survive this crisis.  And just the thought of that seeping into market psyche can do a world of damage to the currency.