The focus appears to have turned decisively from rescue to recession
this morning as indices head south again and the VIX climbs back above
60. Crude is well below yesterday's levels, trading under $75, while
the three-month USD LIBOR fixing did show some slight improvement but
remains stubbornly elevated. Gold is firmer with the Dec contact moving
back towards $850 as stock selling accelerated late in the NY morning.
Soft economic data is only reinforcing investors' concerns: the
advanced September retail sales reading was down nearly twice the
expected figure, while New York's Empire Manufacturing number was down
more than twice estimates, making the worst reading since the index
began in 2001. Investors sold off JP Morgan, Wells Fargo and State
Street before the open despite the firms' better-than expected
quarterly results. JPM reported a smaller-than-expected quarterly loss,
but investors focused on the grim outlook for the firm. CEO Dimon said
that it is reasonable to expect reduced earnings over the next few
quarters, while the CFO noted that quarterly losses in home equity
could rise to as much as $725-800M from the Q3 loss of $663M. If the
prime Libor stays where it is, Dimon said the credit card business
could loose $100B a month. At WFC earnings came in above estimates
while revenue lagged somewhat, but attention turned to quarterly
metrics that showed trouble brewing at the bank, with rising net charge
offs, non-performing loans and assets, and much higher provisions for
credit losses. On the conference call, the CFO said the bank might
issue $20B in securities to offset losses from the Wachovia
acquisition. In any case the bank expects the Wachovia deal to close in
Q4. STT-10% is down despite beating EPS and revenue estimates and
sustaining its level of ROE. Citigroup fell 7% before the open and has
sustained this level in early trading, thanks in part to cautious
coverage in the WSJ's Heard on the Street column. The article notes
that despite the government's big stake, the bank still looks
vulnerable and losses could remain high for several quarters. Other
financial names have lost considerable altitude from yesterday's gains,
with MS-12%, GS-4% and BAC-4%. As crude falls, the airlines soar:
investors disregarded Delta's quarterly loss to focus on the
opportunities in the sector as a whole posed by falling crude. Airlines
have sustained impressive gains over the last week or so, with name up
4-8% today alone. KO+5% has beat Pepsi this time around, with
third-quarter results stronger than analysts had assumed, thanks in
part to a strong FX benefit. Interestingly, Coke's CFO said that the
commercial paper market continues to function and he has seen no
material change in commercial paper spreads versus benchmark rates.
Solar names are under pressure on fears from the overall economic
slowdown. While TSL rose 4% before the bell after they cranked up their
outlook for the coming quarter (and reaffirmed its full-year forecast),
investors dumped the stock in early trading along with other solar
names FSLR-6% and SPWR-8% on fears of the deepening economic slowdown.
Risk aversion has returned in force today with European and North
American equities exhibiting steep losses. In currencies the attention
is turning to emerging market currencies as the wrath of the global
credit crisis reverberates further and further beyond the United
States. As noted in our earlier update, equity markets are sobering up
from Monday's bailout euphoria as reality sets in and economic growth
outlook looks weak for some time to come. The ECB announced that it
would expand collateral rules and additional USD liquidity operations
via FX swaps. Dealers are noting that the Fed is no longer the
exclusive provider of funds as a result. Dealer chatter regarding hedge
fund liquidations and margin calls continue to weigh on the overall
trading sentiment and provide fuel for further declines.
bond market is morphing to a different personality as the long end
softens up and the shorter end narrows. The 10-year note yield has
moved out to its highest levels in 2-months back above 4.05% and the
long bond yield has regained a foothold above 4.25%. The 2-year yield
Is actually lower keeping below the 1.75% level. The battle in
government bond markets is now focusing on safe-haven status and
potential creditworthiness given the increased outflows from the bank
bailouts. The Libor fixing rates remain elevated but stabilizing, with
the three-month USD Libor easing by 9 bps to 4.55% while the Ted Spread
came in at 421bps compared to Tuesday's level of 449bps. Bond markets
continue to foresee a more aggressive rate policy going forward as the
weak data fueled gains in Fed fund futures. The Nov contract is now
pricing in as much as a 40% chance the Fed cuts another 50 basis
points, up from roughly 12% pre-data. Commodity currencies are mixed as
AUD/USD steady at 0.6950 but USD/CAD is weaker by 100 pips as it tests
above the 1.1750 level.
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