- The Dow is rebounding strongly, spurred by significant deterioration in oil prices after several disappointing Q2 earnings reports resulted weakness in European and US equity futures ahead of the NY open. Wachovia was the latest big bank to release highly negative earnings this morning, reporting an $8.9B loss (including a $6.2B goodwill charge) and pruning its dividend to $0.05 from $0.37. The bank also said it would exit the wholesale mortgage business. Wachovia's CEO put a brave face on the results, noting on the conference call that the bank is "on a strong footing" and has "done its best to be more cautious," and stated that the company is not planning on raising more stock. Markets seemed reassured by this commentary: the name fell more than 10% after the open, but has floated back to positive territory in mid morning trading. Fellow regional bank KEY is back in positive territory after falling nearly 10% on its own negative earnings; other regional banks WM, STI and RF suffered and then headed up with WB and KEY. AXP-8% reported a significant miss yesterday afternoon, providing fresh evidence that the housing crisis is starting to hit consumer credit and spending. The CFO said that the greatest credit impact in the US has been in places where housing prices have fallen the most, but that spending is slowing down across the board. Other credit card names V, MA, DFS and COF fell 4-6% on the open, though most are recovering somewhat (unlike AXP) in early action. The Nasdaq is off its worst levels, but is below yesterday's close, weighed down by the conservative outlooks at SNDK -24% and AAPL -8% After yesterday's close SNDK-25% missed estimates and cut guidance while AAPL-10.7% reported declining GMs and slashed guidance and GMs for the coming quarter. On the conference call, Apple's CFO said that future product transitions would weigh on margins, and called any health problems Steve Jobs may have a "private matter." Cellular communications firm MICC-20% missed significantly, as did European cellular firms VOD and ERIC. TXN-14.3% also missed on earnings yesterday and guided lower, noting slowing demand among distributors. Airlines are taking off thanks to falling crude and smaller than expected losses at UAUA+57%, LCC+28% and JBLU+18.2%.

- The equity rebound accelerated as energy futures continued to break some key technical levels to the downside, making fresh six-week lows in oil. September crude is down close to $5 at $127. That contract is approaching the 38% Fib retracement level around $124 for the move up from February, and the 50% retracement level is just $10 below current levels. Natural gas declines are even more dramatic, with the August contract moving below $10 for the first time since April. Markets seem to be discounting little if any effect from Dolly while also testing the 200-day EMA for the first time since February. Treasury markets opened higher on the weak equities open in NY, but have since reversed into negative territory with the rebound in stocks. The benchmark curve is flatter once again with the two-year yield up close to 4% to 2.69%. The Oct fed fund future still prices in less than a 50% chance the Fed hikes rates at either of the next two meetings.

- Verbal intervention helped pull the dollar out of European lows as the New York session began. Treasury Secretary Hank Paulson reiterated his preference for a strong USD policy, noting that higher oil prices would likely prolong the economic recovery but that the level of core CPI remained manageable. The Fed's Plosser noted that the FOMC should raise rates sooner rather than later due to high levels of inflation. Plosser added that the "very accommodative" rate stance must be reversed in order to slow inflation. The IMF's Lipsky noted that the euro is now overvalued compared to its medium-term fundamentals. Some cautious comments on Asian and European growth were heard. The debate over inflationary outlook and growth continue to jockey for the underlining theme in FX. The slower economic outlook mention by the Japanese cabinet and the German wiseman during European hours helped to take oil lower as the US session began. The German wiseman saw Q2 GDP seen at -0.2% to -0.5% range, but added that positive growth would return during the H2 of the year, adding that he saw no second-round effects on inflation in the Euro Zone and that the slowing economy would keep the ECB from increasing interest rates any further.

- The EUR/USD is approaching its five-week up trend line at 1.5810 as the European equities close approached. USD/JPY continues to test its 200-day moving average at the 107.03 area. The EUR/JPY cross has been unable to penetrate alleged option barriers at the 170 level.