- The plunging equity valuations of the GSE's continue to exhibit a stranglehold over US stock markets. The New York Times reported overnight that the Bush administration was mulling a government takeover of FNM-43% and FRE-48%, with the report speculating that a buyout could leave shareholders with nothing. The White House later declined to comment on its deliberations, noting that the best thing for the GSEs would be for Congress to enact oversight legislation. After the open, Treasury Secretary Paulson said it would be best for the government to back the GSEs "in their current form." Markets sank further in the wake of Paulson's comments. Speculation circulated overnight that any government takeover of the GSEs could lead to a downgrade of the US government's AAA sovereign ratings; both S&P and Moody's responded by saying that any takeover would not put the government's ratings in danger. Mortgage insurers MTG-15%, PMI-10% and RDN-25% are feeling the heat from GSE turbulence, while other financials are broadly weaker on the news, lead by LEH-18%, which faces lingering questions about its own solvency, and WB-7%, which Citibank said might cut its dividend by 75%. GE reported earnings largely in line with estimates and reaffirmed its FY estimates before the open; CEO Immelt said strong global markets have helped GE offset uncertain capital markets and the tough US market. Semi names AMAT, NVLS and KLAC are weak following a WSJ report on the slowdown in the chip equipment industry. The NVLS CEO was quoted in the piece as saying "we are finally getting to the point where there is enough concern about the economy that it is starting to impact people's spending habits." A report out of DRAMeXchange last night isn't helping the sector, as the industry watcher notes DRAM prices were flat in early July. Crude is hitting new highs this morning on renewed fears of an Israeli strike on Iran, pressuring the usual suspects. Airlines are swimming in red on the news CAL-11%, DAL-7%, AMR-8%, LUV-3%, lead by UAUA-13% which cut its Q2 forecast due to sizable expected charges. HPC+25% is a rare patch of sunshine after announcing it was being acquired by ASH-12% in a $3.3B stock and cash transaction. BUD+7% is up on reports that InBev has increased its offer to $70/shr from $65/shr prior. The morning's University of Michigan June reading showed the index at its lowest level since 1980, marking the third lowest reading in the history of the survey.

- Treasury futures were lower throughout the overnight session as the NYT article brought a slight sense of relief to the overall markets. Yields inched higher led by selling at the short end as some of recent flight to quality trades unwound flattening the curve. As crude ran back above $145 and shares of FNM and FRE lost another eye popping 40% heading into the open bids returned to the bond market. Yields still remain higher on the day but are moving off their highest levels as equity markets make new lows. The 10-year has inched back towards 3.85% while the two-year neared 2.5% briefly. Fed fund futures still see less than a 50% chance of a rate hike at either of the next two meetings.

- July market conditions are providing renewed volatility as traders primarily focus on the health of the global financial sector and geopolitical concerns. The USD is broadly weaker during the New York morning as financial sector concerns continue to gather steam. GSE jitters have been compounded by higher commodity prices and the renewed chatter of an imminent Israeli attack on Iranian nuclear facilities. The EUR/USD cross broke above its pre-ECB rate hike high of 1.5910 to hit fresh three-month highs. USD/JPY fell over 120 pips to test below 106 level and GBP/USD surge 180+ pips to test 1.9960 area. Oil is hitting all-time highs at $147.27 while spot Gold is touching three-month highs near $968. Safe haven buying of CHF came into force to reverse earlier losses being attributed to reports that the Federal Banking Commission of Switzerland plans to raise the capital requirements for Swiss banks. Dollar weakness being attributed to chatter that perhaps the GSE situation could eventually provoke a downgrade of US sovereign debt, despite reassurances from S&P and Moody's. The EUR/USD cross is hovering near the 169 level. Some vague dealer chatter circulating that G7 may be considering a possible intervention in the cross, perhaps via its USD components.