- US equity indices extended yesterday's late rally before the opening bell
this morning, with Senate clearance of the second half of the TARP aiding the
positive sentiment. However indices have steadily lost altitude after the open
as investors dump financial stocks in the wake of Bank of America and Citi's
disclosure of big quarterly losses this morning. The -2% December industrial
production reading, twice the expected decline, is not helping either.
Front-month crude continues to weaken, down $0.60 to $34.80 as focus remains
centered on next week's contract roll over and the large stockpiles in Cushing.
Investors' better appetite for risk on the open has led to higher Treasury
yields as well as certain commodity prices. The Long bond future traded off as
much as 3 points before getting half of those losses back. The 10-year yield is
back above 2.3% and briefly approached 2.4% after the open of floor trade.
Metals futures have been a bright spot after gold was able to hold $800
yesterday. Spot gold is now approaching $840 while front month silver is up 7%.
- Bank of America
and Citigroup both reported sizable fourth-quarter losses this morning, as
expected. Both had moved up their reporting dates on short notice, presumably
to get a handle on their rapidly deteriorating share prices. Citi disclosed a
loss of $8.3B while BAC's loss was $2.4B; shares of the two rose more than 10%
before the bell, although shares of Citi were back in negative territory and
BAC-8% by mid morning. These quarterly reports come after the US
government moved to hand BAC another $20B in TARP capital to help it digest
Merrill Lynch's massive losses (on top of the $25B in TARP funds BAC has
already received). In connection with the TARP funds, BAC has slashed its
quarterly dividend to a penny from $0.32 and agreed to further limit executive
pay. Citigroup also announced that it would split itself into two units. The
first, Citicorp, will focus on traditional banking around the world, while the
other, Citi Holdings, will hold riskier assets slated for eventual sale. In one
piece of good news in the financials, regional bank First Horizon National
reported a smaller-than-expected Q4 loss and actually managed to lower it loan
loss provisions over last quarter. FHN was up nearly 20% in early trading.
- In other equity news, Johnson Controls
surprised markets with a -$0.14/shr loss and revenue that was well below
consensus estimates. The company said it expects to report a similar loss next
quarter as well. Shares of JCI are down 2%, off their worst levels. Elizabeth
Arden offered preliminary second-quarter results and 2009 guidance indicating
that earnings and revenue would be considerably less than the consensus view.
Estee Lauder cut its second-quarter forecast and guided well below the street
for 2009. RDEN-30% and EL-13% fell sharply in early trading.
- In currencies, risk appetite was back in early New York
trading despite the dismal news from Citi and Bank of America. Throughout the
morning a certain level of acceptance of events has been the common thread in
markets, with some dealers noting that it might be easier to be surprised by
moves to the upside than those to the downside moving forward. The risk
appetite prompted a rotation out of bonds and into equities as well as covering
long USD and JPY positions. But the euphoria waned somewhat as the New
York morning progressed as dealers witnessed decent
buying of EUR/USD call options with a 1.35 strike and a mid-week expiration. On
the technical side, dealers noted that the EUR/USD was unable to sustain
bearish momentum below the 1.3070 level on Thursday while the cross tested
above 1.3330 level on Friday before retracing its gains and heading for the
1.3235 area. The pound showed strength, probing the 1.50 neighborhood versus
USD and the mid 0.88 area against EUR. Reports circulated that UK
Chancellor Darling could announce Â£100B of new mortgage guarantees next week.
- The Russian Central Bank confirmed that it has once again widened the ruble
trading band, marking its fifth move in six days, with USD/RUB testing 32.6675.
Dealers say the Russian Central Bank likely spent around $26B defending the
currency this week, with Friday's interventions seen around $5B to $6B.
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