Markets stared into the abyss this morning as the Dow plunged nearly
800 points and then rapidly sliding below 8000 in the first ten minutes
of trading in very heavy volume. This dramatic move sparked a buying
frenzy that rocketed indices back into positive territory for a short
time, and not surprisingly had many market prognosticators discussing
the ever fleeting notion of capitulation. Multiple market barometers
continue to hit historic levels, including the Vix, which has extended
its string of record highs, hitting 70.9 after the open in a sign of
extremely elevated levels of stress. The three-month USD LIBOR fixing
also hit new record highs, climbing to 4.82%, slightly above
yesterday's record high. The overnight fixing has been cut in half,
although commentators are disregarding this move due to the Fed's
massive liquidity actions. The US three-month TED spread has found a
footing above 450 basis points while the yield on the three-month
T-bill is hovering below 0.3%. The bottom has seemingly fallen out of
crude, with WTI crude down more than $4.50 around $82/bbl; selected oil
names are suffering, with XOM and CVX down 8-10%. The major financials
opened lower (Morgan Stanley and Goldman Sachs opened down more than
10% a piece). Major banks and financials outside of Morgan and Goldman
immediately saw buyers pounce after the open as the group led the eye
popping rebound in equity markets. Traders are focusing on today's
Lehman Holding CDS auction, with results due around 2pm ET. The initial
value of the securities was set at $0.0975/dollar, and they were
reportedly trading around $0.12-0.13/dollar ahead of auction. This
initial look at the results has tempered much of the enthusiasm brought
about by the equity reversal but indices remain well off of early
multi-year lows. Spokesmen from both MS and Mitsubishi UFJ have
strenuously insisted that Mitsubishi's planned investment is on track
and moving forward, although investors still seem to be betting that
the deal will fall apart and turn MS into the next victim of the
crisis. The WSJ wrote overnight that if Morgan Stanley survives, it
could represent a key milestone for finding a bottom in equities.
Yesterday evening Citigroup gave up on attempts to prevent Wells Fargo
from acquiring Wachovia; the Fed noted that while there were still some
outstanding issues with the deal, it would immediately move to clear
the merger. Wachovia said it was "pleased" that Citi walked away from
its offer. GE reported third-quarter results in-line with expectations
before the bell; the firm also reiterated its full-year guidance and
maintained its dividend. CEO Immelt insisted that he believes the
dividend is safe, and that if the economy is not as bad as feared
full-year earnings could come in at the high end of the predicted
range. He also noted that GE plans to continue originating commercial
financing. More firms are cutting guidance ahead of earnings, with
retailer CHRS-18%, tech firm CPWR-16% and broadline M-6% leading the
way down after revising their forecasts. Investors are responding well
to LNC+10% preannoucing its third-quarter results. The regional bank
said quarterly EPS results would be well below estimates, but also
insisted that the firm has plenty of liquidity to back up their
commitments. In other news, more efforts are being made to develop a
clearinghouse for credit-default swaps, with the Fed meeting with major
industry players to discuss creating such an institution. ICE said it
has signed an LOI with several players to establish a CDS
clearinghouse, although the effort seems to be a very preliminary deal.
The currency market was reduced to a sideshow during the New York
morning as panic gripped markets, driven by the vicious cycle of
continuing deleveraging, margin calls and declining fundamentals. The
USD/CAD broke above the 1.18 despite a "better" September employment
report in which 107K jobs were created. CAD weakened in the aftermath
of the data released as dealers noted that almost 97K of those jobs
were 'part-timers'. The drop in crude oil prices also weight upon the
commodity-currency related pairs. The JPY was softer among the major
crosses as the European and US equity markets moved off session lows.
EUR/JPY at 135.70, up 167 pips and EUR/CHF at 1.5185, lower by 161 pips
from Asian opening levels.
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