- 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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