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U.S Market Update

Thu, Sep 4 2008, 16:26 GMT

TradeTheNews.com

- Markets are down sharply this morning in the wake of negative employment data and soft August same-store sales reports. Both the Dow and Nasdaq are -2.0% mid morning as traders are taking a decidedly cautious stance ahead of tomorrow's August non-farm payroll announcement. MER and LEH are taking hits, as both are down around 5% in early trading. Yesterday evening reports circulated that Merrill's talks with Korea Asset Management have stalled. The firm was attempting to sell bad loans to the Korean company, but negotiations have seemingly gotten hung up over price. The rumors continued regarding Lehman after the London Times reported that Tokyo Mitsubishi (unit of Mitsubishi UFJ) may join the bidding for a stake, and may even try to take control of the firm. A Mitsubishi UFJ executive later said the bank has no plans to invest in Lehman. The other major financials are under water, with the XLF-2%. BA is under pressure after its machinists union voted to reject a final three-year contract offer, although talks have been extended for another two days. Some analysts say a strike at could cost the company about $150M/day in lost revenue. CIEN-24% is hurting after slashing its revenue outlook for the coming quarter due to order delays among large customers; the company noted that it expects the slowdown to only last a few quarters. The news has pressured a variety of other names in or related to the space, including ALU -5% JNPR -4.5% CSCO -4% TLAB -4% and JDSU -2%. Homebuilder HOV-10% reported deeper Q3 losses than expected and said its gross margins are about half of what they were a year ago. On the other hand, TOL+2% is looking good after reporting in line with earnings estimates and beating on revenue, offering a rare positive note in housing. HRB-5% reported a bigger loss than analysts had predicted, thanks in part to loss reserves and write-downs at its banking unit. BP has come well off of early highs after announcing that it has settled the ongoing dispute over Russian oil jv TNK-BP. Terms include an IPO of as much as 20% of TNK-BP, the departure of CEO Robert Dudley and a new board, including three independent directors. EXC also opened up more than 2% but is in negative territory mid morning after authorizing a $1.5B stock buyback and tightening its FY08 EPS outlook. TEX-19% joined fellow construction equipment manufacturers BUCY and JOYG (both down 25% this week) in the doldrums today after cutting its full-year view and guiding well below estimates for the coming two quarters, noting that its profit margins are under pressure.

- August same-store sales reports were mixed, offering even more evidence that the consumer remains challenged. WMT, BJ and FRED came in ahead of estimates - WMT sales growth was nearly twice the expected figure - although all three are trading around even this morning. WMT's CEO noted that customers were skipping certain ancillary purchases and spending a greater share on staples. ZUMZ+3% was a big surprise, coming in at +0.2% versus analysts estimates of -4.5% in August, earning itself a price target raise at Wedbush and a Net Positive rating at Susquehanna. Department stores BONT, DDS and JWN are all down 2-4% after reported worse-than-expected sales declines for the month.

- It is worth pointing out that more downward pressure on commodity prices is also adding to the weight on equities. Despite October crude selling off another 1.7%, briefly trading below $107, indices are seeing little if any positive impact. Mining and oil stocks are all moving lower once again: the XAU made a fresh one-year low below 130 while the OSX is trading at levels not seen in six months. Money continues to find a home in the relative safety of the Treasury market. The 10-year yield has fallen to 3.65%, levels not seen since late spring while the two-year yield is approaching 2.20%.

- The ECB and BoE left interest rates unchanged as expected at their policy meetings this morning: the BoE held at 5.00% and the ECB voted unanimously to maintain rates of 4.25%. The ECB noted that it would remain focused on battling inflation even after slashing its economic growth forecasts for this year and next, and the current rate will certainly aid the bank in this effort. ECB staff projections lowered the GDP outlook for 2008 and narrowed the 2009 range: they now sees 2008 GDP in range 1.1-1.7% versus its forecast of 1.5-2.1% back in June, while 2009 GDP is now seen around 1.6-1.8% v 1.0-2.0% prior. On the inflation front, the ECB staff projections revised its 2008 inflation to 3.4-3.6% against its prior view of 3.2-3.6%; 2009 inflation is now seen at 2.3-2.9% v 1.8-3.0% prior. The EU's Juncker noted that he saw Euro Zone growth at 1.0-1.3% in 2008 . The ECB's Trichet reiterated that he notes US officials favor a strong USD, adding that this commentary is believed by some markets while some markets remain cautious regarding the recent drop in oil prices.

- The ECB also provided details on the "refined" collateral rules that will take effect in February, 2009. There will be a 12% haircut on asset backed securities and an add-on haircut of 5% for unsecured bank bonds.

- In currency price action, the EUR/USD cross was at session lows of 1.4440 area following the release of the July German factory orders reading. The euro did manage a minor recovery as the ECB continued to note its concern over secondary effects of inflation such as wage developments. However, the lower Euro Zone growth prospects kept the USD on firm footing. Dealers are noting some confusion with respect to the ECB's mention of haircuts on abs collateral, saying that typically the haircut goes up which tightens liquidity in practice or at least puts an additional premium on it. EUR/USD tested session lows as dealers debate the impact of the 'refined' collateral rules non euro asset currency hedges. Both IMF and EU's Juncker noted that the Euro remains overvalued against USD. Juncker noted that EUR/USD at 1.44 better reflects fundamentals compared to the 1.60 level.

- Carry-related crosses were lower as equity markets maintained a heavy tone. EUR/JPY down 190 pips at 155.40 and EUR/CHF off 70 pips at 1.5970. Lower energy prices and metals are causing CAD and AUD softness.

- European Stocks moved lowers as data and central bank speak weighed upon sentiment. The ECB noted that corporate demand for loans was slowing, but expected a gradual recovery, sees resilient global growth.

Published on  Fri, Sep 5 2008, 07:37 GMT