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Monday September 29, 2008 - 15:42:46 GMT
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Forex Blog - US Market Update

Today 11:26am

US Market Update

Dow -295 S&P -43.3 NASDAQ -85

- Markets are under extreme pressure this morning as credit market dysfunction deepens, central banks undertake major liquidity injection and investors await the House vote on the Emergency Economic Stabilization Act (formerly TARP). Oil is off more than $6 around $100 and other commodities are also down on global economic concerns, although gold is higher on safe-haven buying. Overnight governments in the UK, the Netherlands, Germany and Iceland moved to rescue several major financial firms, including Fortis, Bradford & Bingley, Hypo Real Estate and Glitnir Bank as the shockwaves from the US financial crisis take out the European banking system's weakest links. European borrowing costs rose to record levels after the government-led bailouts heightened concern that there will be more trouble to come in Europe, prompting financial institutions to hoard cash. The Fed, FDIC and Treasury arranged the sale of Wachovia to Citigroup this morning. Morgan Stanley released the concrete details of Mitsubishi UFJ's investment, noting that it would pay $25.25 for an initial 9.9% stake, eventually raising that to 21% for a total investment of $9B. MS is down more than 10%. Apple was cut at RBC and Morgan Stanley overnight. Analyst Kathryn Huberty cut her AAPL price target 35% and reduced the name to equal-weight, noting that slowing iPhone and Mac orders should force the company to cut prices to compete this holiday season, weighing on earnings. AAPL is down nearly 14% on the news, while fellow tech names GOOG, RIMM, DELL and TXN have fallen 4-6% in line with Apple; QCOM is down 8%. The Baltic dry bulk index fell sharply again today, the sixth consecutive decline for the critical indicator of shipping rates. Ocean freight companies are down sharply on the news, led by EXM-16% and EGLE-14%, with DRYS, DSX and GNK down 10%. The energy complex is weak as oil falls more than $6, with COP and BP down more than 6% and CVX and XOM down around 4%. Mining stocks RTP, RIO and FCX are down more than 10% on news that Chinese buyers of Indian iron ore are defaulting on import contracts, while steel names down on cautious comments in the WSJ, which reported overnight that US steel companies are facing a sharp decline in demand as buyers become concerned about the credit crisis and global slowdown. Inventories are rising and prices on some key products have fallen by 10%. CC-10% missed EPS and revenue estimates by broad margins this morning, and withdrew its 2009 guidance. The firm's CEO noted that "Our sales were below plan for the quarter, driven by a significant decline in traffic, which we believe reflects the worsened macroeconomic environment, competitive pressures and a weakened brand position." WAG-4% is under pressure despite reporting mostly in-line with estimates.

- Events moved quickly at Wachovia over the weekend, with the government finally stepping in to arrange the sale of the bank to Citigroup this morning. Last night reports circulated that Citi and Wells Fargo were bidding to take WB's banking operations, with the WSJ even saying that WFC was the preferred buyer. This morning Citi was tapped to assume $42B of losses, senior and subordinated debt, and a $312B pool of loans from Wachovia for $2.1B in total. As part of the deal, Citi has granted the FDIC $12B in preferred stock and warrants to compensate it for backing up certain losses from the bank. As a result of the acquisition, Citi cut its dividend in half. This FDIC's Bair said the decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury, and was necessary to maintain confidence in the banking industry given current financial market conditions. Treasury Secretary Paulson noted that Wachovia's failure would have posed a systemic risk, while the sale has prevented a market disruption. Oppenheimer analyst Meredith Whitney told CNBC that she believes she would be a seller of Citigroup following the deal, noting that Citi would need to raise as much as $10B.

- Stress in the credit system remains extremely elevated both here and overseas as money flows to the relative safety on shorter-dated Treasuries. The curve is steeper with the US two-year yield falling to 1.85%. The US three-month TED spread traded briefly traded above 350 basis points for the first time. Talk that credit default swaps for certain countries were widening out noticeably added to the jitters.

- In currencies the global liquidity crisis remained the dominant theme, with USD, JPY and CHF seeing significant moves in a trading session defined by heightened stress, thanks to the European bailouts, US development central bank liquidity operations. The EUR/JPY cross was off 350 pips as it probed towards the 151 handle while GBP/JPY fell over five big figures to test 189.50 during the New York morning. The EUR/USD traded as low as 1.4305 before retracing toward the mid 144 area. Safe-haven flows headed to the shorter end of the yield curve in both Europe and the Satets. The Fed said it would take a series of steps to help global central banks to increase dollar funding in their home markets, noting that dollar-funding rates abroad "have been elevated relative to dollar funding rates available in the United States," reflecting "a structural dollar funding shortfall" outside of the US. The Fed increased the size of the 84-dayTAF auctions to $75B per auction from the current level of $25B and proceeded to raise swap lines foreign central banks to $620B versus $290B prior. Note that several European central banks added to upside momentum in gold after curbing futures sales of the yellow metal. Germany's Bundesbank said it would halt gold sales this year under its existing central bank agreement while the SNB noted that no more sales are planned at this time after reducing its amount held to 1,040 tons.



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