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Tuesday October 21, 2008 - 16:11:38 GMT
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Forex Blog - US Market Update

Today 11:51am
US Market Update
Dow -135 NASDAQ -36 S&P -17.5

- Equity markets are bit choppy as volume remains unconvincing, while investors balance continued improvement in the credit markets with more and more signs of economic strain in quarterly earnings reports. Overnight LIBOR fell below the fed funds target rate for the first time in nearly three weeks and EURIBOR rate dropped to its lowest levels since the Lehman meltdown. The belweather three-month USD LIBOR rate continued to improve as well. Echoing the economic pessimism widely seen in earnings commentary over the last two weeks, S&P cut its 2008 dividend payment view for the S&P 500 by 10%, the worst performance in this metric since 1958. Continuing its efforts to proactively support markets, the Fed launched a new program this morning to buy money market mutual funds that are having trouble meeting redemptions. Three DJIA components (Du Pont, 3M and Pfizer) reported this morning before the bell; all three had solid earnings and revenue performances in the quarter while also noting signs of trouble on the horizon. DD-2.5% came in ahead of estimates for the past quarter but guided significantly below the Street for the coming quarter and the full year, noting that its outlook reflects weakening demand in North American and Western European markets. MMM+6% beat earnings estimates and reaffirmed its full-year outlook, but on the conference call the company's CEO warned that the financial crisis has led to orders being cancelled. PFE+2% reported more-or-less in line with analysts, but narrowed its full-year guidance. Defense major LMT-7% came in a hair above analysts and offering increased full-year guidance. AXP+5.5% offered a mixed bag in its quarterly report, beating analysts' earnings view but coming in behind on revenue thanks to big adds to loss reserves. The CEO noted that the market turmoil will continue well into 2009, forcing AXP to stay focused on liquidity, and said that he expects US charge-off rates to be higher next quarter. Investment management firm BLK-7% missed both EPS and revenue expectations. Several leading regional banks reported this morning, although their results varied significantly. USB is trading even after disclosing solid earnings and weaker revenues, as well as a ROE figure that dropped by half y/y. The CFO optimistically noted that residual loan losses would peak in 2008 and that the deteriorating market conditions would make acquisitions simpler. RF+4% came in well behind the Street and saw ROE fall to a quarter of the year-ago figure. Its loan loss provisions jumped to more than four times the year-ago amount. KEY+9% reported a small loss versus expectations for a slight gain. The losses at NCC+5% continue to mount, and the bank refrained from even offering ROE and ROA figures; the bank fell nearly 10% in the pre-market but has bounced impressively up to +6% in early trading. Airline major UAUA+9% reported a small loss than expected which, combined with another decline in crude, is helping it and the entire airline sector make impressive gains in early trading. The slowdown is catching up with tech, as indicated by Sun Microsystems' prennoucement yesterday after the close. JAVA said it expects a major loss in the quarter, taking the stock down 15% before the open today. TXN-9% reported in-line with analysts' expectations but guided lower for next quarter. The CFO said the company sees continued weakness in chips through Q1, with orders declining rapidly in all areas. But its not all bad in tech, with SY+4% beating estimates and guiding higher for the coming year.

- In currencies, the greenback firmed to 19-month highs against the euro today as the pair tested below the 1.3150 level. Overall the USD continues to respond positively to Fed Chairman Bernanke's endorsement of a second fiscal stimulus package in Congressional testimony yesterday, while today's proactive money news is helping as well. The spread between the US-German two-year Government bonds is also favoring the dollar. The JPY maintained a firmer tone throughout the European morning and into the New York session, with EUR/JPY off 350 pips at 132.40, GBP/JPY lower by 400 pips probing below the 171 handle and USD/JPY retesting the 100 neighborhood as the pair moved 100 pips from its Asian opening levels.

- Discussion among dealing desks is focused on the steady improvement in the LIBOR fixing rates and improvements in various spreads, namely the TED and OIS spreads. Overnight USD libor fell to 1.28% from 1.51% yesterday, the first time it moved back below the Fed's target rate of 1.50% since October 3rd. However, the three-month USD LIBOR though it continues to come down, remains at elevated levels, 233 basis points above the Fed's target rate for overnight loans of 1.5%. There has been some steepening in the US yield as some buyers have returned to the short end in the wake of some selling in stocks. The two-year yield has fallen back towards 1.6% while 10-year cash yield resides at 1.75% once again. The Nov fed fund contract continues to inch higher ahead of next week's FOMC meeting. It now prices in close to a 70% chance the Fed cuts 50 basis points.

- The Bank of Canada lowered interest rates by 25bps to 2.25% just before the open. Although markets were looking for a 50bps cut, the CAD has managed maintain a soft tone as the central bank commented that it would probably have to cut interest rates again in order to fend off the financial market crisis and the emerging global recession. Commodity currencies are also softer in today's session as energy and metal display continued weakness.

- Commodity markets have seen some broad selling on the back of the global slowdown and dollar strength. November crude is coming off the board today adding to the volatility. December crude is down more than 4% once again bringing the $70 level back into play. Front month copper traded below $2 for the first time since late 2005, and Dec gold is off another 2% to $775.

- Emerging markets remain on the G7's radar. Dealer chatter is circulating that Argentina could nationalize its pension system, stemming from news that President Cristina Fernadez de Kirchner is scheduled to announce a pension reform plan to Congress. The word is that she will nationalize 90B pesos ($27.8B) in private pension funds, while dealers are noting that Argentina bond yields have risen from 8% towards 25% in the session.

- European markets have come off earlier highs as several German insurers issued cautious comments on outlook. Euro Stoxx 50 index moving toward the flat line at 2,615; FTSE 100 Index -0.2% at 4,272; DAX Index -0.3% at 4,817 and CAC 40 Index remain positiove but off its best levels following the Government backing of French banks in selling €10.5B in various subordinated debt. European Government yield curve steepened throughout the day as equities upside momentum waned. Dec Bunds +46 ticks at 115.25, Dec Gilts +4 ticks at 110.76. Spreads on UK 2-year/10-year at 117bps and the german 2-year/10-year spread at 105 bps.

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