- US equity indices fell somewhat before the open after political negotiations
over the Detroit bailout broke down last night, although commentators noted
markets were responding more calmly than expected. Indices were well off their
worst levels in mid-morning trading, with the Nasdaq moving into positive
territory. Stocks got a boost when White House reports indicated the President
would consider tapping the TARP to stave off bankruptcy for the automakers.
Crude has given up its gains from recent days, with the front-month contract
just under $45 after falling around $3 in early trading, despite plenty of
pleading and posturing from OPEC and Russia.
Treasury yields have ticked steadily higher following PPI and retail sales data
this morning. The yield on the US
long bond traded below 3% overnight when equity futures made lows following the
no vote from the Senate, but it has since rallied more than 15 basis points to
3.15%. The Jan fed fund has backed off as well, only pricing in a little more
than a 70% the FOMC cuts to 0.25% from 1% next week.
- Washington has been a showcase
for political brinksmanship par excellence over the last 24 hours, as the
Democratic Congressional leadership, the Senate Republicans, the White House
and Treasury Sec Paulson pass the buck around and around regarding a bailout of
GM, Ford and Chrysler. Last night the Senate Republicans successfully blocked
the House's $14B automaker bailout bill, threatening filibuster. Negotiations
fell apart late Thursday night over Republican demands that the UAW accept pay
and benefit cuts in 2009. Senator Corker, who led the Republican side, wanted
to see more concessions in 2009, while the UAW wanted to wait until 2011. After
talks ended, Senate Majority Leader Reid and House Speaker Pelosi called on the
White House to come up with short term aide for the automakers, including use
of TARP funds. Shares of foreign automakers plunged in Asia
and Europe overnight, with Toyota
and Honda loosing around 10%, while GM warned it was preparing for bankruptcy.
Equity futures plunged before the open, with GM opening down more than 30% and
Ford down more than 20%. With catastrophe looming, the White House and then the
Treasury relented, offering to dip into the TARP to come up with enough money
to keep the automakers afloat until a new Congress convenes and makes a final
decision on a comprehensive Detroit
bailout. Shares of GM and Ford are around -4% on the day mid morning.
- The fallout from the automakers is far reaching. Fitch has placed seven US
auto suppliers on watch negative, including AXL, ARM, HAYZ, JCI, TEN, TRW and
VC, based on the anticipated impact of a potential bankruptcy filing by GM,
which in Fitch's view would be followed shortly by bankruptcy at Ford. These
names fell 10-20% before the open, though most are off their worst levels.
There were also some reports that Chrysler's parts suppliers were asking for
advanced payments from Chrysler (which denied the request). Borg Warner cut its
FY08 EPS guidance significantly to reflect the rapidly deteriorating conditions
in the industry, noting that most of its North American operations will shut
down for extended holiday periods starting the week of December 15 and re-open
at various times in January. BWA's CEO noted that "The crisis is not
solely a North American automotive industry issue, nor about perceptions of
domestic automakers not having the right products for the market. Rather, this
is a situation where consumers in every geographic region of the world have
become paralyzed by the global financial and economic crisis."
- Numerous firms cut their forecasts yesterday and this morning, with notable
names including Steel Dynamics, which noted it expects a loss in Q4 due to the
negative impacted of sharp declines in steel and recycled metal demand. The
firm had declined to offer guidance with its Q3 report due to market
uncertainty. Dow component United Technologies broadened its 2009 guidance
target substantially, both above and below its prior range, noting that its
backlog remains strong although it is expecting uncertain conditions throughout
- The initial wave of risk aversion early in the European session has abated
somewhat as market participants ponder whether the auto bailout is dead or not,
or whether the whole thing was just all part of a political game. The
JPY-related pairs moved from their extreme levels registered ahead of the
European morning. The US Treasury commented that it stood ready to prevent
failure of US automakers and was prepared to assist industry until Congress
reconvened, helping the USD/JPY hold above 90.00, while EUR/JPY is 250 pips off
its session lows of 117.55 above the 121 handle.
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