- The US banks, namely Citi and Bank of America, remain under the microscope
this morning as equity indices continue heading lower despite a strong open,
and investors wonder whether nationalization can really be avoided. The VIX
volatility index popped over 50 this morning, reflecting the heightened sense
of unease. Front-month crude is hovering around $40, while spot gold is just
below the $990 handle. Government bond markets have recouped a good portion of
declines as stocks softened after the New York
open. The Bund yield remains just above 3% with the US
benchmark yield is holding near 2.8% but prices are well off their worst
- Shares of Citi rose more than 18% before the open and dropped as far as +8%
in volatile early trading, spurred by press reports that the US Treasury was
holding preliminary talks with Citigroup for up to a 40% US stake in the bank
to improve the bank's tangible equity base. According to the WSJ, under the
plan being considered a large portion of the $45B in preferred shares held by
government would convert into common stock, with other private investors
holding preferred shares encouraged to follow the government's lead in
converting some of their stakes into common stock. The WSJ noted that given
these reports, it appears any government stress tests will dwell on tangible
common equity as a gauge of bank health. Meanwhile the NY Times reported that
stress tests would begin this week. The Treasury's initial response to the
stories was to make no comment while also noting it is open to converting
preferred shares to common stock, if needed. Then early this morning the
Treasury and Fed issued a joint statement stating they stand â€śfirmly behind the
banking systemâ€ť and confirmed that stress testing would begin on Feb 25. Shares
of BAC are sustaining a +13% gain in early trading. Wells Fargo spiked as much
as +18% after the open before trading off to +5%. Investors are continuing to
dump GE-5% following big declines last Thursday and Friday. WSJ's Heard on the
Street reported that GE's shares are down on concerns over GE Capital, which
has substantial exposures to commercial real estate and overseas residential
- Shares of GM were up 5% in early trading on reports the Treasury has started
lining up the biggest bankruptcy loan in history for the auto makers, but that
officials are trying to find a way to restructure GM and Chrysler without
resorting to bankruptcy. Shares of Ford are up 15% after the company reached a
preliminary deal with the UAW over health insurance obligations.
- In currencies the USD has managed to climb back from earlier losses against
the euro to test the 1.2730 level during the New York
session. The Eastern European currency situation has been on the front burner
this morning, with various central players making public statements. The ECB's
Nowotny commented that Eastern European bank problems were manageable but their
business models must change. Czech Central Banker Tuma stated that central
bankers in the region would maintain a united front and was echoed by Hungarian
and Polish central banks. The region's central banks all commented that the
excessive depreciation of their currencies recently has not been in line with
the economic reality on the ground. The Polish Central Bank reiterates that it
could undertake actions to prevent negative impact of FX rate on the economy.
- There was dealer chatter circulating that the Bank of International
Settlements were buying EUR/USD around the 1.2770, but that level eventually
gave away. The JPY moved off its European lows as the equity markets saw their
pre-New York gains evaporate and
move into negative territory. USD/JPY was unable to break above the 95 level
and was at 94.30. EUR/JPY tested 121.90 during the European equity open moved
back towards the 1.2020 as the New York
morning ended. USD/CAD tested around the 1.2530 level after weaker December
retail data came in below expectations for the largest decline since 1991.
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