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Tuesday October 7, 2008 - 16:02:23 GMT
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Forex Blog - US Market Update

Today 11:35am
US Market Update Dow -56 S&P -6.5 NASDAQ -15.4

- Markets saw an early rally this morning, with the DJIA up 1.5% just after the open on news that the Fed would step in and backstop the commercial paper market. However, indices are off their best levels, undulating in and out of positive territory for the most part with a downside bias beginning to develop late in the morning. Crude is around $90 after spiking up $3 on erroneous reports from the Iranian press agency that the Iranian Air Force had grounded a US warplane that strayed into its airspace. Bank of America reported its Q3 results several weeks early yesterday after the close, noting that dramatically changing economic and financial market conditions have impacted operations. The bank reported earnings that were a quarter of the expected amount and revenue that was below estimates, as well as higher provisions for credit losses and rising net charge offs. The bank it believes the economy has moved into a recessionary environment and feels the risk of a prolonged recession has increased, and ominously stated that increased loss and delinquency trends first experienced in the home equity and homebuilder portfolios have now spread into the first mortgage, unsecured consumer lending and credit card portfolios. CEO Lewis noted that the bank now expects the Merrill Lynch transaction to break even in 2010; back on 9/15, the company said the deal would be accretive in 2010. Then before the open it filed to offer 300M shares of common stock; CNBC noted that the issue is about half sold, and will be priced sometime this evening. Shares of BAC fell steadily before the open and through mid morning, and are now trading down 15%. In addition, BAC's CFO said the Merrill deal could close as soon as year's end, helping the latter trade down 12%. At the close yesterday Citigroup and Wells Fargo signed a "litigation standstill" agreement, pledging to halt all pending legal action regarding a takeover of Wachovia. The standstill terminates on Oct 8. Citi is down 3%, while WFC is around even. MS-9% after the Fed approves Mitsubishi UFJ's purchase of up to 24.9% of the company. The CME confirmed that it would launch an integrated credit default swaps trading platform together with Citadel Investment Group in 30 days. The companies will cooperate in a joint venture that will develop and run an electronic trading platform providing an integrated central counterparty clearing facility for CDS. The JV will operate as an independent organization with its own board of directors and management team. CME and Citadel have set aside 30% of equity for major CDS market participants to join as founding members with certain market-maker privileges. AMD announced it would spin off its manufacturing unit as a joint venture with ATIC, a technology investment company wholly owned by Abu Dhabi. The new entity will be called the Foundry Company; ATIC will invest $1.4B in the JV and pay AMD $700M in exchange for a 55% stake. ATIC also committed to making $3.6-6.0B in additional funding for the venture. AMD says it is making the move to cut costs. AMD to receive a $8.4B investment from Abu Dhabi.

- Confirming press reports and their own pledges to continue developing "creative responses" to the financial crisis, the Fed and Treasury announced a new plan to bail out commercial paper markets. The "special funding vehicle" will backstop issuers of commercial debt by purchasing unsecured and asset-backed three-month commercial paper directly from eligible issuers. The Fed will lend funds to the vehicle at the target Fed funds rate. Fed officials said they believe the entire CP market is around $1.3T, but noted that they don't expect to spend anywhere near that amount. They emphasized that they want to get the vehicle up and running as soon as possible, hopefully soon enough to get out in front of year-end funding pressure.

- Though equity reaction can best be described as subdued, credit markets do seem to be functioning marginally better following central banks' latest attempts to provide liquidity relief. Treasury futures extended a move lower after the commercial paper announcement and the US three-month TED spread has improved some 30+ basis points. The yield on the three-month T-bill has inched back above 0.9% as well. Fed Fund futures sold of noticeably at one point not fully pricing in a 50 basis point cut before recovering slightly. The US curve is flatter but to a lesser degree than seen earlier this morning. The 10-year yield is back towards 3.5% and the two-year is approaching 1.5%.

- In currencies, the carry-related pairs focused their attention on the US and European financial fronts. The Fed's effort to address the lock-up in the giant commercial paper market, which has become a key bottleneck in the credit crisis, received an initially favorable response as dealers noted that corporate borrowing costs fell on top-rated overnight US commercial paper by 0.74-2.94%, while seven-day borrowing costs increased 125 bps to 4.0%. The EUR/JPY cross moved back above the 140.50 level as risk appetite became a bit healthier after probing the 136.70 in the Asian session. EUR/CHF is firmer by 70 pips to trade at 1.5580 area after testing 1.5450 in the Asian session. During the European morning the level of credit-related stress remained high as chatter circulated that the UK could invest as much as $79B in the country's three largest banks, coupled with actions in Iceland, where the government took possession of Landsbanki, the island nation's second-largest lender, and pegged its currency to a trade-weighted index. The EUR/USD was up almost 200 pips from its opening levels in Asia in a technical retracement responding to the Fed's commercial paper activities. Higher oil is also aiding the euro after reports that Iran grounded a Western aircraft containing military personnel. EUR/USD ended the New York morning at 1.3700. Elsewhere in the credit crisis, the Ecofin Communiqué noted that the EU would support "systemic" financial companies, adding that the support should come from national governments.

- European yield curves have flattened out during the New York morning. Dec Bunds futures -21 ticks at 116.95; Dec Gilts -39 ticks at 113.70. European bourses have been on a roller-coaster ride, and are presently up in positive territory. Euro-Stoxx 50 Index +2.0% at 2,982; FTSE 100 Index +1.7% at 4,668; CAC 40 Index +2.1% at 3,792 and DAX Index +0.8% at 5,428.

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