Good morning,

With central banks around the world cutting rates aggressively, the US dollar is mixed against most major currencies but the Japanese yen continues to shine. The US dollar index is up .24 at 87.27. Overnight Libor rates: US is at .51875%( .88125%), EU is at 2.89% (2.90375%), UK 2.0625% (3%). 3mth Libor to 3mth OIS spreads are higher reflecting increased aversion to risk: US is at 187.75 (182.5), the EU is at 166.4 (164.2), the UK is 238.275 (244.125). The 1yr OIS are US at 0.3150%, EU 1.723%, and UK at 1.141%. The TED spread is 218.24 (219.11). While the TED spread has clearly stabilized at these levels, we need the Libor-OIS to follow suit.

Today, the rate cuts have not generated much of a rally in the global equities as only the Swedish Riksbank was a surprise. The US S&P futures are down 5 pts. The US 2yr note is yielding 0.90% and the 10y note is 2.624% with the spread is 172.4. Commodities are lower again with crude at $46.11, nat. gas is at $6.335, and home heating oil is at $1.5750. Precious metals are slightly lower with gold at $770 and silver is at $9.477. Grains are up with wheat at $5.16 and corn is at 3.4600.

Spanning the Rate Cut Globe

This was an extraordinary day in the world of interest rates even in these extraordinary times. Central banks around the world have aggressively cut interest rates and the United States is planning on a mortgage rate cut cram down. Like voting in Chicago, the rate cutting started early and often. The Reserve Bank of New Zealand cut a massive 150 basis points and took their overnight rate down to 5.0%. After peaking at 8.5%, this rate has been cut 350 basis points since June and reflects the credit crisis' ability to reach into a commodity country with high interest rates to force action. Since June, the New Zealand dollar has fallen 32% against the US dollar.

Next up, the big surprise. The Swedish central bank cut interest rates 175 basis points and took overnight rates down to 2.0%. This was 75 basis points more than expected and excited the markets that the Bank of England and the European Central Bank would cut more as well. Like the ECB, the Swedish Riksbank raised rates in the summer only to capitulate in a massive rate cut today. Overnight rates in Sweden have fallen 275 basis points and the currency has lost 41% since June. As an example of this country's problems, the WSJ carries a story today about how Nordic telecoms are getting hurt because they aggressively went into Russia and the ruble is killing them.

The Bank of England cut rates did not surprise today in their rates cuts, but did cut rates 100 basis points to 2.0%. Unlike the ECB and the Riksbank, the BOE was cutting rates from the end of 2007. Since December of last year, overnight interest rates have dropped 375 basis points and the currency has fallen 28%. Clearly, housing is the major reason why the cuts The UK nationalized some of their biggest banks as their financial sector has been caught in the middle of the nuclear explosion that occurred in the credit markets. Like the US, the UK is studying plans to help stabilize their housing markets. Today, they announced an aggressive plan to defer some mortgage payments for up to two years to counter rising foreclosures. House prices fell 2.6% in November and a record 14.9% for the last 3 months.

The European Central Bank joined the party by cutting rates by 75 basis points which was more than was anticipated prior to the Riksbank rate cuts. After raising rates in June by 25 basis points, the ECB has now cut rates 175 basis points to 2.50%. The currency has lost 21% since late June. After initially believing they were going to avoid the fallout from the US credit crisis, Europe has seen their economies collapse and doubts have been raised over the European Union's ability to put together comprehensive financial stabilization packages. The rate cut today signals that the ECB recognizes they must do their part regardless of their predilection to see inflation under every rock. Today, ECB head Trichet said that it may be possible for ECB to purchase assets outright. This would be a significant change and begin a program of quantitative easing.

Finally, the US Federal Reserve isn't cutting rates today. However, the Treasury is studying a plan to force mortgage rates down. While the plan is evolving and may not be ready before Obama takes office, the details surround using Fannie Mae and Freddie Mac to lower mortgage rates by 100 basis points or about 150 basis points over the US 30 year Treasury bond. So far, the plan only wants to be targeted at borrowers buying a home and not for refinancing. This appears to be part of a coordinated plan with the Tsy/Fed buying up to $600 billion of debt issued by Fannie, Freddie, Ginnie and FHLB.

Besides the positive impact on housing, think about how low these rates are for corporate borrowers. I've been thinking that the spreads over libor or Tsys would deter most borrowers from coming to the market. This happened between September through November. However, the spreads matter only if the overall structure of rates stays put. If the yields on Tsys fall dramatically (like they have), then even a borrowing cost of Tsys plus 400 is very attractive to meet IRRs of double digits (approximately, you'd need a 15% 2 yr project for this to work.)

All of these are big positives for stabilizing the current credit crisis. All of these are big positives for stabilizing the global economy. All of these are positive for stabilizing stock markets.

Andy

© 2008 BMO Capital Markets Corp.