Equity markets are still desperately searching for something positive
to hold onto as the painful process of pricing in recession goes on.
Following a brief rally after the opening bell, indices quickly turned
south again, jolting the VIX to fresh record highs above 80. The
morning's economic data is weighing heavily on markets, deepening fears
about the inevitability of a deep and painful recession. The Fed's
September industrial production reading came in much lower than
expected, making for the largest decline since 1974. The October Philly
Fed index was three times lower than the projected figure, with the new
orders and employment components a dramatic illustration of trouble
ahead. The slowdown is really taking its toll on energy markets.
Following weekly inventory data Nov crude dropped below $70 to a
13-month low, prompting OPEC to move up its extraordinary meeting to
Oct 24 from Nov 17. Reformulated gasoline is down more than twice as
much. Similar themes continue to play out in the industrial metals with
Dec copper down another 6%, re-approaching $2, while Jan platinum has
moved below $900, off close to 12%. Citigroup reported its fourth
consecutive quarterly loss, with earnings results coming in more or
less in line with expectations and revenue nearly $3B lower than
analysts expected. The bank noted that declining revenues were mainly
driven by write-downs in securities and banking operations, the North
America cards unit and a $612B ARS write-down. In a sign of things to
come, Citi's CFO said that credit card losses could "move beyond
historical peaks." Weakness in WFC-7% can be partly attributed to a
skeptical article in the Wall Street Journal today, which took a
critical look at the bank's loan-loss reserves. The article questioned
why WFC is not doing more to strengthen its cushion against loan
losses. The rest of the major financials are underwater this morning
thanks to falling markets. UBS and CS have lost any gains made in US
markets thanks to the lifeline from the Swiss National Bank. Several
second-tier financial services firms got smacked by the financial
crisis in earnings reports today. CIT-14% surprised investors with a
massive unexpected loss, driven by a $455M pre-tax write-down at its
vendor finance unit. The CEO noted that the outlook has darkened for
the near future. PNC-4% missed on estimates in a less dramatic fashion,
thanks to a big jump in non-performing assets, rising charge-offs and
falling returns on equity. Note that fallen giant MER reported what are
likely its last quarterly results today, with the CEO noting that the
organization continues to reduce exposures and deleverage prior to
closing the BAC deal. Several consumer-oriented names provided insight
into the slowdown in quarterly reports. WGO-25% disclosed a loss that
was twice the expected amount due to a sharp decline in motor home
deliveries, noting that dealers are cutting inventories and orders.
Earnings at HSY+4% were below estimates on falling margins and
commodity costs. In other news, CEGE-75% is in hot water after
canceling its second GVAX Phase III trial in as many months. In view of
the termination of the trials, the firm is shutting down further
development of GVAX program, laying off 75% of its workforce and
exploring strategic alternatives.
- Fixed-income and currency
markets are mimicking the heightened volatility and wide trading ranges
seen in equities this morning. In any case, calm seems to be slowly
returning to the Libor fixings as the three-month USD Libor came in
five bps below Wednesday's fixing at 4.50%. As the economic data
slammed equity investors, risk aversion made further gains magnifying
the effects of yesterday's weak Beige Book. Overall markets are
expressing disappointment that the G7 central banks failed to initiate
another round of coordinated rate cuts in the New York morning. The
overall theme in FX is mixed as the CHF firms in the wake of Swiss
National Bank "rescue" of UBS, while JPY trading has been choppy in a
wide range as risk aversion and risk appetite take turns in the drivers
seat among related pairs. The EUR/USD has maintained a 200-pip range
from the Asian open and is currently in the middle of this range at
- In fixed income, the European yield curve steepened
through the session and the spread between the German two-year and
ten-year continued to widen to 117bps from 109 earlier in the session
for multi-year highs. US yields have moved lower as money once again
makes its way out of stocks and into the relative safety of government
debt. The 2-year yields has moved back towards 1.5% and the Nov fed
fund future is now pricing in better than a 50% chance we see the Fed
cut rates by 50 basis points. Dec Bunds +20 ticks at 114.17 and Dec
Gilts -20 ticks at 109.74.
Euro Stoxx 50 index -4.3% at 2,465; FTSE 100 Index -4.3% at 3,905; CAC 40 Index -5.3% at 3,201 and DAX Index -3.4% at 4,696.
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