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Thursday March 5, 2009 - 16:58:20 GMT
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Forex Blog - US Market Update

Today 11:24am EST/04:24pm GMT

US Market Update

Dow -200 S&P 500 -20 Nasdaq -40

- US equity indices extended yesterday's late sell off in the pre-market this morning, with all three major indices opening down around 1.5% a piece. A heavy load of news is buffeting markets, with China's lack of confirmation of a fresh stimulus package (expectations of more Chinese stimulus jolted markets upward yesterday), marginal same-store sales numbers, employment data, ratings warnings on BoA and Wells Fargo from overnight, and big rate cuts in Europe are presenting a very complicated picture this morning. Note that the weekly initial and continuing employment claims were a hair better than expected, yet revisions were slightly worse.

- Shares of GE have steadily declined over the course of 2009, a trend that has greatly accelerated in the wake of the company's dividend cut. Rumors and speculation that the ratings agencies will cut GE's coveted AAA rating have been rife since late February; yesterday PIMCO's Bill Gross went as far as to say that the big decline in GE shares show the market has already priced in a downgrade, noting that any ratings cut would force certain institutional holders to limit their exposure to the company. Yesterday fresh rumors that GE needs to raise capital to shore up GE Capital made the rounds. This was promptly refuted by the company itself, yet overnight the WSJ reported that investors fear the company could face large losses on GE Capital's $637B balance sheet, particularly on assets such as commercial real estate and loans in Eastern Europe. This morning GE's CFO gave a long, candid interview on CNBC, insisting that the speculation about GE Capital is overdone and affirming rather adamantly that the unit needs no additional capital. Shares of GE were up 5% in early trading.

- Ford launched a significant debt restructuring plan yesterday afternoon, in which it hopes to retire more than $10B of outstanding debt, including debt-to-equity swaps. Moody's responded by lowering Ford's probability of default rating and also cutting the rating on its secured revolving credit facility. Fitch said the offers do not affect Ford's issuer default rating at CCC. GM officially disclosed in its annual report filing that its auditor sees significant doubt regarding the company's ability to continue as a going concern. GM also disclosed it expects to receive additional loans of up to $7.7B or more from the DOE, as had also been discussed in prior months. GM responded in the mid morning by stating the auditor's claims were 'not a big deal'. Bondholders at GM are due to speak with the Obama administration later totday. Shares of Ford lost up to 5% in the early going, before popping back into the black. GM is down 15%.

- Moody's put various ratings for Bank of America and Wells Fargo on review for possible downgrade yesterday afternoon. For WFC-12%, Moody's noted that the pressures on the bank's capital position make a multi-notch downgrade likely for its financial strength rating. For BAC-6%, Moody's said the review was prompted by concern that capital ratios could deteriorate in 2009 from their already low levels due to the need to take high loan loss provisions and absorb additional charges for its capital market exposure. Note that speculation is circulating that Citi will be removed from the Dow Jones Industrial average.

- Wal-Mart is doing quite well this morning, with shares up 4% in the wake of February same-store sales and a dividend hike. BJ's just managed to keep same-store sales positive, while Costco and Target reported declines. Department store names disclosed yet another month of steep y/y monthly sales declines, with high-end names Saks and Nordstrom falling 15% and 26%, respectively. Apparel sales were dismal as well, although youth-oriented names Aeropostale and Hot Topic showed even bigger y/y sales increases than in January. By far the biggest same-store sales decline (-30%), was at Abercrombie; shares of ANF are down more than 12%.

- In currencies, three events are driving the price action in the European and US sessions, including China and the two European rate decisions. The greenback was initially bid up following Chinese Premier Wen's opening address to a nine-day legislative conference. Wen failed to disclose any additional stimulus spending, although he reaffirmed that China can hit its ambitious 2009 GDP target at 8%. Across the pond, the Bank of England continued its easing cycle, cutting its key rate to its lowest level ever at 0.50%. The BoE also took the unprecedented step of printing money to purchase £75B in assets, Including Gilts. European fixed-income futures surged on the news, led by June Gilts, probing the 123 handle after opening around 118.85. The UK yield curve flattened significantly in the aftermath of the quantitative easing announcement.

- The ECB cut rates by 50bps to 1.50% as expected but Trichet noted that the decision was reached by consensus and not unanimous. Currency dealers noted that perhaps there was dissent on both sides of the 50bps move. The ECB hinted it still has to room lower its key interest rates, depending on future ECB staff projections lowering GDP and inflation projections for 2009 and 2010. The ECB staff now forecasts 2009 GDP growth in a range of -3.2% to -2.2%, compared to their prior view of -1.0% to 0.0%, with 2010 revised to -0.7% to +0.7% from a 0.5% to 1.5% prior. Staff revised 2009 inflation lower by a full percentage point, to 0.1 to 0.7% and 2010 inflation to a range of +0.6% to +1.4%. These inflation expectations are well below the 2.0% mandated ceiling for the ECB.

- The USD came off its best level during the mid-NY morning after US Q4 delinquencies surged to its highest level on record to 7.88% from 6.99% prior. EUR/USD failed to take out the low made earlier this week. Interbank FX liquidity was impaired due to some issues with its electronic pricing mechanism. USD/JPY encountered some turbulence with spreads between banks widening to over 30 pips from its customary 1 to 2 pips as a result of the technical issue and saw USD/JPY pair slip to 98.25 from 99.20 as a result. The Japanese exporters continue to offer USD on approach of the 100 level during the European morning.



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