S&P Sees Trouble At State Street as EUR/USD Moves Above 1.47

- Summary of trade between 17:00 ET and 23:30 ET: The USD came under renewed selling pressure in Asia as markets priced in a Fed interest rate cut at the December meeting. Bargain hunters provided some early support to Japanese stocks, but the Nikkei index nose-dived on a rumor that another U.S. financial institution will announce a major loss. The rumor provided momentum to Euro's move above 1.47 despite the ECB president's verbal intervention, and expectations of more Fed interest rate cuts to contain the worsening credit crisis pushed oil prices higher by more than 1.0%. S&P cut ratings on a CDO managed by State Street after the investment vehicle said that it was liquidating its assets. Despite higher crude prices and USD weakness, gold prices dropped in Asia on valuation concerns. In the ongoing war of words between the U.S. and China, U.S. Treasury Secretary Paulson urged speedier Chinese reforms, while the chairman of a Chinese state controlled financial suggested that China cut the proportion of dollars in its forex reserves. In other news from the troubled credit markets, Taiwan's National Treasury Agency said it may not be able to pay interest on bonds from the middle of the month unless funds are freed up by the legislature. There were no major economic releases for investors to digest.

- Worries of more asset write-downs at U.S. banks: S&P said that State Street Global Advisors may have started selling off it assets, and the ratings agency cut ratings on a CDO managed by the firm. The S&P action relates to the Carina CDO, which decided to liquidate according to S&P. The ratings on the most senior class of assets were cut to BB from AAA, while another class was cut 18 levels to CCC-. Carina was originally a $1.5B CDO.

- Forex: EUR/USD moved above 1.47 despite ECB president Trichet signaling that "brutal and unwelcome" Euro gains are constraining the central bank's flexibility in setting interest rates and dealing with inflation. Trichet last referred to currency moves as "brutal and unwelcome" in late 2004, when the euro was at a then-lofty $1.30. Analysts point out that the Trichet's effort in 2004 to talk down the euro eventually worked, although the unwinding of speculative bets against the U.S. dollar towards the end of 2004 also played a role. It was a very volatile session for the high yielding AUD and NZD currencies, with AUD/USD trading between 0.9260 and 0.9320 and NZD/USD trading between 0.7760 and 0.7820. Between 17:00 ET and 23:26 ET: EUR/USD +0.30%, GBP/USD +0.21%, CHF/JPY +0.52%, USD/CHF -0.53%, NZD/USD +0.32%, USD/CAD -0.54%, GBP/CHF -0.31%, USD index -0.35%

- Equities: At 23:16 ET the Nikkei is -0.08%, ASX is +0.39% and the KOSPI +0.50%. Ongoing credit concerns caused banks to lead declines on the Nikkei, while news of a deal between BHP and Rio Tinto lifted the ASX index. There was more evidence that Australia remains well insulated from the credit crisis, with National Australia Bank trading higher after the company's FY profit easily beat analyst expectations. Chinese stocks saw some early selling, with the benchmark CSI index dropping below 5,000 for the first time since Aug 21, but bargain hunters lifted the index towards the end of the morning.

- Commodities: Crude oil gained +0.97% between 18:00 ET and 23:24 ET, last quoted at $96.38/bbl. Some investors feel that gold is overbought at current levels, and the commodity traded lower by -0.26%, last trading at $835.30/oz.

(by Eben Esterhuizen and Gavin Pierce)