- Markets have been highly volatile in the wake of this morning's historic
coordinated central bank rate cuts. Before the open the Fed, ECB and four other
central banks lowered interest rates in unison in an unprecedented effort to
unfreeze credit markets and arrest declines in stock markets. However, US index
futures continued declining in the wake of the cuts as major retailers released
September same-store sales results early, with the numbers showing US retail
very weak last month. Shares of Bank of America plunged in the pre-market as
investors seemed to panic over the emerging results of the bank's $10B equity
offering. This moment of discomfort passed and markets turned around to rally
through the open, although indices have returned to negative territory mid
morning on heavy volume. September retail sales were very negative, with a few
exceptions. JC Penny sales fell more than 12% in the month, Saks was down more
than 10% in September and Dilard's sales were down 12%. Department stores
Kohl's and Target fell slightly less, at -5.5% and -3%, respectively. Discount
big-box retailers Wal-Mart, BJ's and Costco maintained positive sales, with
COST leading the pack with sales up 9%. The major retail names are down 2-5%
mid morning; WMT remains around even, while KSS and BONT are up 2%. AA-15% rang
in the Q4 earnings season yesterday after the close, reporting earnings well
below expectations, thanks to rising costs and negative currency impacts. Alcoa
noted that it sees 2008 global aluminum demand up 6% (down from the prior 8%
forecast). COST-2% has come off its worst levels after reporting Q4 results
before the open, with earnings and revenue stronger than expected. MON+8%
showed earnings losses that were much lower than expected for the quarter,
although the fertilizer name also guided much lower than expected for FY09.
Fellow fertilizer names POT+10% and AGU+4% are rising on the not-so-bad news
from MON. Insurance giant MET-13% announces a 75M share stock offering and
pre-announced Q3 results yesterday evening. The company said earnings would be
well below estimates and withdrew its FY08 guidance, noting that the move
reflects a decline in variable investment income driven by negative hedge fund
and private equity returns.
- Global markets have been responding to the unprecedented coordinated 50 basis
point cut by the Fed, ECB, Bank of England, Bank of Canada, Swiss National Bank
Riksbank. Separately, China's
central bank lowered its key one-year lending rate by 0.27 percentage points.
Central bankers acted two days before gathering with G7 finance ministers in Washington.
Dealers are noting that the main question posed by the Big Cut is how to
measure the success of the move, with many believing the key will be how stocks
end the day. Global equity markets remain subdued as liquidations continue the
month/quarter end hedge fund redemptions. Dealers are also noting that selling
pressure in equities are likely coming from fear among pension fund investment
committees, which meet quarterly, and investors that check statements that come
once a month in the mail.
- The IMF stated that the world economy was in a "major downturn" due
to financial shock and lowered their 2009 global growth rate to 3%. The IMF
expects the US
to enter recession, noting that major economies could encounter and may be too
late for policy responses to prevent downturn. The IMF stated that the
coordinated interest rate cuts were a step in the right direction.
- The Icelandic Central Bank stated that its support for a fixed ISK was
insufficient and announced that it would cease attempts to boost the krona for
the time being. S&P noted that Iceland
would not be considered in default if it does not honor its deposit guarantee
- The price action in currencies, fixed income and equities match the historic
central bank move. EUR/USD was trading in the mid-1.36 area as the European
close approached. The focus has been all about the carry-related pairs after
the extreme moves witnessed in Asia and European
session. The JPY is off its best level but remained in firm territory. The
EUR/JPY is around 136.70 level and AUD/JPY at 66.20, off more than 500 pips
from its Asian open. Note that Singapore's
finance minister said that banks and financial systems in ASEAN countries do
not face a crisis of confidence, although they would likely be affected by the
- The shape of the yield curve looked more like the streets of San
Francisco as it wavered between steeping and
flattening shapes throughout the European session. Dec Bunds -31 ticks at
116.74 and Dec Gilts -32 ticks at 113.55. the spread between the US
2year/10-year remained at the 209 bps area and various swaps remained highly
elevated. After approaching multi-year and in some cases historic lows US
Treasury yields are moving higher. The 2-year yields dipped towards 1.3% before
rallying some 15 basis points. The US
benchmark curve did get as steep as 210 basis points. There has been only
marginal improvement in US TED and LIBOR OIS spreads. Though various market
participants have affirmed their support for this morning's coordinated rate
cut, several notable names have indicated more cuts will likely be needed. To
that end the Nov fed fund future is close to fully pricing in another 25 basis
point cut by the next FOMC meeting.
- European equities remain in negative territory buy off session lows. Euro
Stoxx 50 index -5.7% at 2,716; FTSE 100 Index -5.1% at 4,368; CAC 40 Index
-5.55 at 3,526 and DAX Index -5.8% at 5,020.
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