- Markets began the week on a positive note, opening higher after a tumultuous weekend during which Treasury Secretary Paulson threw the GSEs a lifeline, InBev and Bud at last forged a $52B merger deal and mortgage lender IndyMac failed after a run on the bank. The early sunshine is vanishing quickly, however, as the Dow and Nasdaq drop into negative territory and head lower. The market's reaction to the Treasury's GSE rescue package has been mixed FRE+4% FNM+6%: the GSEs both opened up more than 25%, erased the gains and headed into the red before recovering by mid morning; LEH followed a broadly similar trajectory, opening up 8%, falling 9% and returning to positive territory. The rest of the financial majors likewise opened higher and are trading just below even; WM and WB are exceptions, trading off nearly 15% and 9%, respectively. Selected airlines were cut at Credit Suisse overnight, including CAL-4%, UAL-4%, AAI-14% and ALK-9%. The Farnborough International Airshow opened this morning with a flurry of orders for airliner manufacturers Boeing and Airbus. EADS+5.8% expects its backlog to increase thanks to the show; BA is likewise positive on its outlook, especially after winning large orders from Dubai. However, reports circulating this morning rained on the Farnborough parade, noting that $100B+ of aircraft orders could be cancelled or delayed in the next couple of years due to high fuel prices and the condition of the airline industry, and that 20-30% of the Boeing and Airbus backlogs could be at risk. Oil fell from record highs pre-market, shrugging off comments from Venezuelan President Chavez that the PdVSA may stop oil shipments to the US if XOM is successful in freezing the financial accounts of Venezuela's state oil company. Geopolitical issues are lingering in the background, led by a London Times article stating that President Bush told Israel that he may be prepared to approve a future military strike on Iranian nuclear facilities if negotiations fail. On the strike front, Nigeria's oil union suspended its threatened strike over fuel and welfare after the government promised to address the issues, while the Brazilian strike against PBR is moving forward, closing 300-400 bpd, depending on who you ask. Elsewhere in commodities, potash names MOS and POT are strong as Citigroup notes that a sinkhole is threatening to cause delays in shipments of Russian Silvinit potash, while coal names are up as MacQuarie raises its 2009 hard and thermal coking coal price estimates by 29% and 17%, respectively.

- Treasury futures are making new highs as stocks repeatedly make new session lows late in the NY morning. The benchmark curve is steepening once again with safe haven buying in the 2-year note sending the yield back to 2.45%. The long bond is up more than 1.25 points sending its yield below 4.50%. Fed fund futures have seen the odds of a 25 basis point hike at either of the next two meetings fall below 50%.

- The dollar price action continues to center on the financial sector and the GSEs. The USD was modestly weaker during the US morning session as dealers focused on the outcome of Freddie's $3B note auction. Initial reaction of the results sent the EUR/USD above the 1.59 level to re-probe Friday's levels. Commodities are providing additional bearish USD sentiment as they move higher. Spot gold is up over $5 per oz at 970 and NYMEX crude is up $0.50 at the 145.60 area. Dealers are noting that the dollar's overall reaction has been relatively muted post FRE auction, with debate centering on who exactly owns the GSE paper in terms of both countries and institutions.

- Carry-related crosses are a touch lower as equity markets continue to reflect unease over the credit crisis. The EUR/JPY cross tested all-time highs again in Asia at 169.58, but off 50 pips from their best levels. EUR/CHF lingering below the 1.62 handle, lower by 15 pips from opening levels in Asia. CAD firmer as higher commodity prices and M&A helped to propel the USD/CAD below its 100 day mvg avg at 1.0075.