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Thursday October 2, 2008 - 16:24:19 GMT
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Forex Blog - US Market Update

Today 12:02pm

US Market Update

Dow -230 S&P -28 NASDAQ -54

- Markets continue to fight a worsening case of credit market pneumonia as traders digest a plethora of data and headlines. Participants are grappling with the Senate's passage of the revised bailout bill, major moves in the EUR/USD, the deepening freeze in the commercial paper market, worse-than-expected unemployment and factory orders, the ECB holding rates steady at 4.25%, the extension of the SEC short selling ban and GE's big equity offering. Indices headed straight down from the open before finding a floor with the DJIA-2% and the Nasdaq-2.5%. Oil has continued its slide from the last few days, trading around the $95 handle, while spot gold is trading off more than 5%. The major financials are behaving relatively well considering but sellers have stepped in late in the NY morning as well, with JP Morgan and Citi around even, BAC under pressure, and Morgan Stanley and Goldman down nearly 5%. Credit market worries persist as Dow components that rely on short-term financing continue to take it on the chin despite a dearth of news. AXP is off 7% while IBM, HPQ, CAT and AA have each give back roughly 6%. GE-8% has rolled out its common stock offering, undertaken hand in hand with the announcement of a major stake by Warren Buffet yesterday. The industrial giant will offer 547.8M shares of common stock at $22.25 a share. Entire market sectors are under pressure in early trading today. A couple of the most well know US insurance names remain under pressure after Sen. Reid suggested another large widely followed company was near collapse. MET -13% HIG -10% Automakers are feeling the heat after nearly every name in the industry reported double-digit declines in September sales yesterday: F-2%, TM-2.5%, HMC-4% and GM-4%. Ford CEO Mulally stated that he believes 2009 will be no better than current year and does not see any recovery until 2010. In a cold-comfort moment, the WSJ quoted him in today's edition as saying that "bankruptcy is not being considered" for the company. And trouble in the sector is spreading: Toyota's European CEO said that he no longer believes the 2009 sales target of 1.3M units is achievable. The oil complex is taking hits after Merrill Lynch cut prices targets of oil services firms (including SLB-6% and HAL-7%) and refining names (including XOM-1.5% and CVX-1.5%). With the weakness in metals the XAU has inched back towards multi-year lows. Steel and ore names remain in free fall. Merrill also downgraded fertilizer names, with AGU-20%, MOS-30% and POT-22%. The Baltic Dry Bulk index slipped below 3000, although it fell less than it has in recent days. In other news, ATML receives $5.00/shr cash takeover bid from ON Semi and Microchip Technology for a $2.3B deal. ON Semi's CEO said that the deal could be signed by the end of December and closed by March 2009 if negotiations remain friendly.

- Treasury prices are higher once again as credit markets remain almost completely dysfunctional. The US three-month TED spread went above 360 basis points for the first time and dealers are noting what could be considered and effective ease in rates as the fed funds rate has traded between 100 and 150 basis points below the 2% target rate for the entire session. The US yield curve is the steepest it has been since March while the Fed fund futures are now nearly fully pricing in a 50 bp cut by the next FOMC meeting.

- The Senate passed its revised bailout package by a wide margin of 74-25 last night, in a move that will surely put pressure on the House when it votes on Friday. In the end, 40 Democrats and 34 Republicans voted for the bill, while 15 Republicans and 10 Democrats voted against. The Senate measure includes a variety of "Christmas ornaments," added to the initial $700B plan in an effort to attract more support in both houses. In addition to allowing the Treasury to buy illiquid assets, the bill also temporarily raises the FDIC deposit insurance limit to $250K from $100K. Other additions include $152B in tax breaks, including energy tax breaks and language that would protect middle-class tax payers from the alternative minimum tax (AMT). The Fed will have the power to pay interest on its reserve balances and the SEC will be able to suspend fair value accounting rules. Following the announcement of the vote, S&P 500 Futures moved lower by more than 1% while both the US ten-year and two-year yields declined.

- In currencies, the euro violated key technical levels in numerous currency pairs after the ECB danced around the topic of a potential interest rate cut, with dealers noting that the central bank has withheld "keywords" that would prepare the market for a future rate cut. The EUR/USD broke below its six-year uptrend line at 1.3820 area after Trichet confirmed easing was discussed at today policy meeting and that the final decision was unanimous. Meanwhile the EUR/JPY hit two-year lows as it approached the 145 level while the EUR/GBP cross was off 60 pips at 0.7855. In its statement, the ECB noted that the financial market turmoil had intensified, noting the high degree of uncertainty stemming from the recent developments on both growth and inflation fronts. European economic outlook is facing "increased downside risks," yet wage growth has "picked up" coupled with decelerated labor productivity. In true ECB style, Trichet ended today's press conference by noting inflation risks have diminished but have not been eliminated.

- Nevertheless, currency traders focused in on hints of a ECB rate cut and ignored the usual concerns about secondary inflation, noting that the Eonia curve now is pricing in over 95% chance of ECB rate cut by November (with numerous analysts now amending forward their ECB rate cut forecasts). Market are also pricing in a high probability of a second ECB rate cut by February. Dealers are also noting that the yield curve experienced a net steepening effect as the ten-year Schatz are at 3.26% and the ten-year Bund is at 3.93%.

- Risk aversion continues to propel a firmer JPY and CHF and credit market stress continues to exhibit a high degree of uncertainty. The rumors continue to circulate that prominent corporations face pressure in refinancing needs, and the latest stats from the Fed do not contradict this overall assumption. US Commercial Paper Outstanding fell w/w by $94.9B compared to last week's drop of $61.0B, with total commercial paper outstanding now standing at $1.6T and US asset-backed CP outstanding fell to $724.7B in the most recent week.



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