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U.S. Market Update
Dow +157 S&P +22.25 NASDAQ +45.90
- The Fed has sent markets for a wild ride since yesterday's disappointing reaction their interest rate decision. Equity futures rebounded overnight after reports surfaced indicating that the Fed was considering alternative measures to address the liquidity situation, and an announcement could come as early as today. A half hour ahead of the NY open Central Banks didn't disappoint when the FED, ECB, BOE, and BOC announced a joint effort to add liquidity to money markets around the world. Equity futures spiked initially helping the Dow open up more than 200 points, and sellers flocked to the Treasury market. The yield curve shifted into flatten mode for the as short end yields rose sharply in a reversal of the flight to safety trade. The 10-year yield has climbed back to 4.14% and the 2-year is holding near 3.20%. Both the 30- year and 10-year future are trading down more than a full point. The Feb fed fund futures contract still sees close to 100% odds of another 25bp rate cut at the Jan meeting, but the any probability of 50bp has evaporated. Advancers still lead decliners by a wide margin but many of the financial stocks that gapped up on the open are well of their highs and in many cases are into negative territory. C -2.9% BAC -2.3% WM -3% AIG -0.5% FNM -4.5% Surging oil prices are also serving as a bit of a headwind for equities. Front month crude, heating oil and gasoline are adding 2% or more following weekly inventory data and the Fed action. Airline stocks are heading lower after pre-market downgrades at Morgan Stanley.
- Currency markets reacted decisively to the announcement of coordinated liquidity measures. The central banks set up Forex Swap lines for the next six months. Upon this surprise announcement, the carry trade related currencies pairs of CHF and JPY erupted into enthusiasm as the US equity markets sharply rebounded from Tuesday's post FOMC rate decision slump. GBP/JPY soared over 400 pips above the 230 handle, EUR/JPY rallied over 200 pips to test 165. Dealers remain caution on the final outcome of the liquidity operation to ease the credit squeeze that began in August as recent attempts failed to have any lasting effects. The USD overall reaction was mixed as carry-related crosses took the helm. The USD was softer against the GBP and EUR, but firmer against CHF and JPY. The Fed's first auction of term funds will be $20 billion on Dec. 17. The second auction will provide up to $20 billion, taking place Dec. 20. The central bank plans two more auctions, Jan. 14 and Jan. 28, with possible additional operations thereafter. EU's Almunia noted that it was not a secret that the USD needed adjustment and reiterated that China needs to speed up currency flexibility. Almunia noted that the French export problems are not directly linked to the exchange rate. He pointed out that both French and EMU trade performance has improved despite Euro's rise. Lastly, Almunia stated thatmonetary policy and exchange rate policy would not cure France's trade woes. Fixed income futures were broadly lower as global equity market rose. Mar Bund futures fell over 70 ticks to test 113 handle, Mark Gilts off over 110 ticks at 107.95. European equity markets recoved from initial 1% declines to rise into positive territory. FTSE up 0.25% at 6553, CAC +0.5% at 5750, DAX firmer by 0.8% to 8076.
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