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Russia's Medvedev: Intl Cooperation Needed on Financial Crisis

Russian President Dmitry Medvedev called for "urgent joint action" to tackle the financial market crisis.Â Russian stock markets have plummeted in recent days, sparking numerous halts in trading to slow down the decline.

Fixed Income: Bonds Slide on Hopes of Rate Cuts

Bund futures are sharply lower in early trade, in line with overnight Treasuries and as the sharp RBA rate cut sparked hopes of cuts elsewhere and supported Asian stock markets. European stock market futures are higher ahead of market opening. As of 6:31GMT, the December 10-year Bund future is down 37 ticks on the day at 116.80. The 10-year Bund yield is up 4 bp at 3.79% and the 2-year yield is up 11 tick at 3.17%. By comparison the December 3-months Euribor future is up 0.035 at 95.510 and back months future are down from the June 09 contract onwards.

FX Update: European Outlook

The RBA's mammoth 100bp rate cut -- its biggest since 1992 -- has set a precedent and boosted speculation for a coordinated round of global rate cuts to counter recessionary winds. That saw Australian stocks rally and Asian markets pare losses. Commodities, which fell limit down in Shanghai trading, managed to find a footing. In the FX world, the relaxation in risk aversion saw the USD, JPY and CHF give back some of their recent gains versus the AUD and the main European currencies, though lower global rates are likely to ultimately benefit the US currency more. As Fed members Bullard, Fisher and Evans implied on Monday, the US monetary policy cycle is already at its outer limits in terms of effectiveness (real rates are negative). Focus will remain on the unfolding crisis, and currency moves are likely to reflect the ebb and flow of risk aversion. European data today are likely to reflect the weakening economic picture, which can only get worse with money markets remaining near frozen, while a Bernanke speech and Sep-16 FOMC minutes highlight the US calendar.

Fixed Income: Gilts Slide

Gilts slumped in opening trade, in line with Bunds, as stock markets showed a bit of a relief rally after the RBA 100 bp rate cut overnight. The domestic agenda holds August industrial and manufacturing production, but data is likely to continue to take a back seat as the latest events unfold within the financial market crisis. The December 10-year Gilt future is down 38 ticks to 113.71. The 2-year cash yield is up 7 bp to 3.72% and the 10-year yield is up 3 bp to 4.26%. FTSE 100 opened 1.9% higher.

FX Update: Cable Steady

Cable held steady close to 1.7500 versus overnight lows of 1.7408 amid reports of Asian reserve management demand from early European trade. Meanwhile, GBP/JPY and GBP/CHF are also relatively stable, trading close to 180.00 and 2.0000 respectively. RBA's aggressive 1% rate cut overnight has predictably fueled coordinated rate cut speculation, although the individual nuances of each national economy may argue for a less aggressive hand from the BOE. The Bank has already cut 75 bps and while the calls for 50 bp grow louder, most are still calling for a 25 bp move. The market will focus on August industrial production ahead, which will underline how rapidly the UK economy is cooling, which will keep rate cuts hopes at fever pitch ahead of Thursday's BOE MPC decision. Elsewhere, the UK Times said the Treasury may take a GBP 50 bln stake to shore up high street banks

FX Update: Yen Gains Amid Turmoil

JPY buying accelerated amid more banking sector fears. There was speculation of potential UK government funding in UK banks, while Iceland's Landsbanki went in to receivership and Italy's Unicredit came under more heavy selling amid speculation of balance sheet problems. Meanwhile, Deutsche Bank also fell 10% on talk of capital increase, but this was dismissed as nonsense by a financial source. The turmoil in the market saw USD/JPY fall from 103.00 down to 101.48, while EUR/JPY retreated to 137.27 lows and GBP/JPY moved back in to 176.50 from levels above 180.00. JPY should remain supported in the near-term, with flight to quality trading and general unwinding of long standing carry trades expected to support. Japanese officials will not be happy over protracted JPY gains, but appear to accept that the market is going through a broad based restructuring of long-term risk/leverage.

FX: Flight To Quality Supports Swissy

CHF remained supported by global risk aversion, with EUR-CHF trading on a heavy footing underneath the 1.5500 handle, although it has held up since it rebounded from Monday's 1.5377 lows. Meanwhile, USD-CHF is trading ahead of 1.1400, with the dollar benefiting on selling interest via the European majors, although it trades below the 1.1485 highs seen in Asia and in Monday's session. The CHF should benefit from further unwinding of leverage positions, although hopes for a coordinated round of rate cuts has tempered fresh gains.

FX: Cable Faces Pressure; Other Euro Units Off Lows

The European market continued to focus on the dire state of the European banking sector, which left the European majors on a heavy footing, although with the exception of Cable most currencies remained above Monday's lows. Cable came under increased pressure amid speculation that three leading U.K. banks had asked for assistance from the U.K. authorities, although this was later denied. Cable hit new trend lows of 1.7322 before it rebounded above 1.7400 on short covering. EUR-USD traded under the 1.3600 handle, but found support ahead of 1.3500 and consolidated close to 1.3580 ahead of the N.Y. open. Elsewhere, JPY traded on a firm footing, with the theme of global deleveraging continuing to support. Elsewhere, AUD-USD maintained a supportive tone after it found good buyers ahead of 0.7100 in early European trade, leaving the pair close to 0.7200

Markets Report

European indices shook off early losses to trade higher amid reports major UK banks may ask the government to buy stakes in an attempt to shore up liquidity. The FTSEurofirst gained 0.8%. The FTSE 100 future rose 0.6%. The DAX future added 1.3%. The CAC future was up 1%. UK banks fell sharply, with RBS at one point off nearly 40% on a slew of reports that it, Lloyds, HBOS and Barclays are mulling stake sales to the UK government. Iceland took control of its second largest bank, and the country's currency hit new lows against the euro. Reports say Iceland took a EUR 4bln loan from Russia to shore up its cash position. Russia denied the report. VW skyrocketed 48% on reports Porsche will take a controlling stake in Europe's largest automaker by 26 November. Economic data was mixed. UK August industrial production dropped for the sixth straight month, the longest such run in 30 years. German August industrial orders rose 3.6% m-o-m, the first increase in nine months. Y-o-y orders plunged 7.6%. The UK banking crisis hammered sterling early in the session, and trading remained highly volatile. Cable was down 0.1% after falling to a 30mth low in intraday trading. EUR/GBP added 0.5%. GBP/JPY was was off 0.2%. EUR/USD added 0.5%. Bonds eased as equities returned to the green. The Bund future dropped 8 ticks to 117.09. The 10yr Bund yield rose 1bp to 3.77%. The 10yr Gilt yield was up 2bps to 4.24%. The 10yr JGB yield added 9bps to 1.47%. The 10yr T-note yield gained 4bps to 3.5%. Oil rallied on dollar declines and an unexpected 100bp cut by the RBA overnight. WTI was up 3.2% at $90.60 after a brief stint above $91. Brent added 2.4% to $85.77.

Fixed Income: Treasuries Dip in Nervy Conditions

Treasuries are opening lower after a choppy overnight trade. A rebound in equities after a bigger than expected 100 bp cut by the RBA and ongoing hopes for action by the G7 has taken some of the bullish momentum out of bonds. However, the markets remain very jittery and distrusting. Overnight Libor rates spiked higher; there were reports that U.K. banks asked the Chancellor for capital, while Iceland's second largest bank, Landsbanki, was nationalised and the Icelandic krona was pegged to the euro. And there are expectations for more liquidity actions from the Fed and Treasury, perhaps including purchasing commercial paper. Chairman Bernanke's speech to the NABE highlights today's session. Also of interest will be the FOMC minutes to the September 16 policy meeting. The Fed's Stern will speak on financial shocks. Data includes the weekly chain store sales and August consumer credit.