TARP passed as the Euro Zone falters

Another turbulent week was fittingly ended with the eventual passing of the revised TARP bill on Friday, the original 3 page document tabled by Paulson finally swelling to a massive 451 pages, loaded with pet projects and tax breaks aimed at reining in some of Paulson and the Treasury’s power with the taxpayers chequebook.

The champagne was hardly flowing on Wall St however, as weak economic data arrived throughout the week. Home prices fell 16.3% annually; national factory activity fell to the worst levels since 2001 as did initial jobless claims. A disappointing nonfarm payroll figure on Friday confirmed that the US economy is in a far from healthy state.

Much has already and will continue to be said about the TARP bill but it will be history that ultimately decides its fate. One cannot overlook the certain degree of irony that the measures carry, a partial nationalisation of the financial system that for years has prided itself on its capitalist foundations. It may be a little premature to suggest the beginning of the end for America’s great free market system, as desperate times call for desperate measures.

Despite all this US gloom, the dollar still managed to have its best week in 16 years as the dollar index rose 5%. This was due to sustained and deep-set financial concerns spreading to Europe, UK and the emerging markets. The past week in Europe saw lifelines thrown to Fortis, Glitnir, Hypo and Dexia as well as Bradford and Bingley getting the nationalisation treatment in the UK.

The Euro was punished on all sides as questions were raised on how Europe will manage the financial crisis going forward. A lack of coordination and the fractured legislative system the Euro runs isn’t helping kick-start any decisive action as yet, and there is continued disagreement within on how to best deal with the crisis. This was highlighted by Ireland and Greece guaranteeing all bank deposits last week in an attempt to stabilise their banking systems, effectively leaving other Euro members out in the cold.

The big piece of data out this week will be the BoE rate decision on Thursday but one can only guess what surprises are hidden around the corner, which institution will stumble, and what response it will bring. In the words of the famous economist Paul Samuelson “What we know about the global financial crisis is that we don’t know very much”

Trade of the week

With Sterling Euro at current favourable levels the trade of the week was a 6 month hedge for a client buying Euros. The trade had a guaranteed worst case rate of 1.27 and a best case rate of 1.40. If the spot rate at the expiry date was between these two levels the client would simply buy at spot. This required a premium of 1.8%. For further details please contact one of the World First options traders.

Have a great week

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