Equities have ugly start to the week - carry trades pushing lower again. A very busy week awaits.

US event risks this week include Wednesday's FOMC announcement, and Friday's Employment report and ISM.

MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• New Zealand Dec. Performance of Services survey out at 53.9 vs 62.6 in Nov.
• Japan Dec. Corporate Service Prices rose 1.4% YoY as expected

THEMES TO WATCH – UPCOMING SESSION
Key event risks today (all times GMT):

• Sweden Riksbanks's Nyberg to speak (0830)
• US Dec. New Home Sales (1500)
• EuroZone ECB's Tumpel-Gugerell to speak (1700)
• EuroZone ECB's Hurley to speak (1800)
• Japan Dec. Jobless Data, Overall Household Spending (2330)
• Japan Dec. Retail Trade (2350)

Market Comments

Asian stock markets fell out of bed to start the week after Friday's ugly close in US markets, and this time there is no rogue French trader to blame it on. Carry trades took a hit again overnight in sympathy with the contraction in risk willingness. This week looks like a key one for the markets, as we look for a 50 bp cut from the Fed and look for further signs that the US is entering a recession as the employment report and ISM are the key data points for the week on Friday. This may be a key pivot week for the USD, as the market needs to decide whether the US is hopelessly damaging the credibility of its currency by slashing rates mercilessly, or whether it is actually at the vangaurd of monetary policy and bravely showing the rest of the world the way. We lean to the USD bullish view, but don't have the technicals in line for this view just yet. The JPY may possibly continue to correlate with the USD, so the currencies to play a USD view against, besides the EURUSD benchmark, may be AUD and NZD.

The US administration and politicians from both parties are trying desperately to roll out this $150 Billion stimulus package to stem the risk of economic weakness, but before you believe that this will have a dramatic effect, recall that the US economy is very different creature this time around than it was in 2001, when the last mini-recession was underway. First, back then we were only seeing a business spending recession, as personal consumption continued to show growth even through the worst of the stock market crash. Second, the US was actually running a hefty budget surplus (ok - there's plenty of controversy on how true that is, but the books were certainly far more balanced than now.) Back then, the Fed cuts fed straight into the housing market, where there was still plenty of room for growth. In the years of strong growth since the mini-dip of 2001, however, the budget deficit first ballooned to almost -4% of GDP as new stimulus measures were introduced and then only contracted to about -1% of GDP at the height of the housing boom. This leaves the administration with little ammunition for stimulus if tax revenue shortfalls begin anew - especially with a world already awash with US debt. And the big question is how much would any stimulus work as US consumers are overextended and seeing a reverse wealth effect as their home equity disappears. We are on recession watch - let's see how bad the Q4 numbers were on Wednesday for a possible preview of future numbers.

A look at this week's calendar highlights:

Tuesday: US Durable Goods Orders and Consumer Confidence
Wednesday: EuroZone Retail PMIs, UK Mortgage Approvals, US ADP employment report, US GDP (Q4 - first estimate), US Fed announces rates (50 bps expected)
Thursday: New Zealand Trade Balance, Japan Housing Starts and Small Business Confidence, UK House Prices, Germany Retail Sales and Unemployment, EuroZone Business and Consumer Confidence, UK GfK Confidence, US PCE Inflation data, Canada GDP, US Chicago PMI
Friday: EuroZone Manufacturing PMIs, US employment report, US ISM Manufacturing, US Michigan Confidence.