U.S. stocks edged off their highs yesterday but still closed with substantial gains in choppy and very thin trading. An encouraging report on durable goods orders helped quell fears of a backsliding economy even as oil prices ticked higher.

A major caveat is that this has been the second quietest week of the year in terms of trading. Any moves are really only minor skirmishes before the real war starts after the Labour Day holiday next Tuesday

Several pieces of news appeared to brighten prospects for Fannie Mae & Freddie Mac. Bloomberg reported that their profits from new investments are at 10-year highs, easing the possibility that the Treasury will need to nationalize them. Fannie rose 15% to $6.48, and Freddie was up 20% to $4.75. Also bolstering confidence was a successful sale of $3 billion in short-term Fannie and Freddie bonds, suggesting the companies can still raise money in the private sector.

News To Watch Today

• The noun for a group of hawks is a “kettle” and we saw a big angry boiling one yesterday as no less than four members of the ECB’s rate setting council warned that they spotted evidence of the ‘dreaded second round inflationary effects’. Impication: rates could still be HIKED again.
• It hasn’t required much of a push to go lower, but Sterling got it as the UK press continues its campaign to push the UK into recession. The Times reports research from Capital Economics which states that not only will the UK slip into recession but it will stay there for 2009. National Income will decline by 0.2% in 2009 versus current market consensus of a 0.9% increase. EURGBP has taken out good long term resistance at 0.8033, which opens up a return to the 0.8099 high.
• The FT is reporting that the US, Europe and Japan discussed the possibility of co-ordinated currency intervention to support the dollar during the Bear Stearns crisis in March.
• German union IG Metall have asked for a pay rise of 8% for their 3.5m members. Good luck lads. This request claim comes despite the fall in German inflation to 3.0% and the pessimistic figure of the IFO survey of Business Sentiment.
• Economists at French bank Societe Generale offered a hint as to the extent the financial sector’s exposure to Fannie and Freddie. They estimate that U.S. commercial banks own $1 trillion in debt from Fannie or Freddie. This amounts to 9% of the commercial banks’ balance sheets! Recall that JP Morgan wrote down their investments in Fannie & Freddie by 50% Monday.

UBS Are Recommending Clients Buy Gold
They write that the three conditions they were waiting for have now been satisfied:

• Firstly, substantial profit taking in the gold market
• Secondly, unprecedented physical gold demand from India, some European consumers and other Asian clients
• Finally, the dollar appearing to top out for now

UBS recommend investors go long on gold, looking for an initial target of $850, which is also their one month forecast. They expect extension towards our $900 in three months time.

UK: House Prices Continue To Fall Sharply in August
British house prices fell 1.9 percent in August, their biggest annual drop since monthly records began in 1991. The decline, which was bigger than most analysts were expecting, pushed the average price of a property to the lowest level since May 2006. If prices continue at this rate of decline, they will be down 15% on the calander year. Remember with inflation running at 5% that means house prices will really have fallen a whopping 20%. The stagflation conundrum continues to beset the BoE.

Data Today
Eurozone M3 was expected at 9.5%, but was just released at 09.00 and came out at 9.3%/
UK CBI Survey is due at 11.00am (expected: -30)
US Initial weekly jobless & continuing Claims and Q2 GDP should be with us at 1.30pm (exp 2.8%)

Equities: Not Much To Cheer
Irish airline Aer Lingus have cited very tough market conditions and increased costs for lowering their guidance for the second half of 2008.

Irish builder McInerney Holdings unsurprisingly reported very poor first half numbers impacted by big land value write downs and restructuring costs.

A dodgy morning for French stocks beckons as Banks Credit Agricole, Natixis and food giant Carrefour all posted results that disappointed.

Guinness owner Diageo also missed estimates.

Elsewhere TUI is in talks with Lufthansa and Thomas Cook’s about a possible merger.

The Post-Olympic Dash