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U.S Market Update

Fri, Sep 26 2008, 15:55 GMT
by Trade The News Staff

TradeTheNews.com

- Markets feel as if they are on hold as Democrats and Republicans return to negotiations over the bailout plan. Indices opened lower after nothing came out of Washington overnight and did make a run at positive territory on news Republicans would be returning to the negotiating table in earnst, but the situation remains tenuous as volumes are well below normal levels. Gold posted some strong gains, rising through $900 once again on safe haven flows. Chatter of a OTC 900 call option being exercised helped prices spike before backing off; silver is up close to 1.5%. JP Morgan's government-brokered takeover of Washington Mutual and its $10.0B capital raise are in sharp focus this morning. As has been widely reported, the Office of Thrift Supervision placed WaMu in receivership with the FDIC, which rapidly sold all of its deposits and assets (not to mention some liabilities) to JP Morgan for $1.9B. Moody's affirmed JPM's ratings overnight, noting that the bank had acquired a massive amount of assets at a very low price. The news dragged down JPM's shares in the pre-market, with the name opening down more than 5%. JPM recovered quickly after the bell and is trading around even mid morning. The FDIC noted that an outflow of deposits led to its seizure of WaMu, confirming that the action was moved up after word of their plan leaked out. The FDIC warned that the list of troubled banks could grow and reiterated it would raise premiums to boost its reserves. Morgan Stanley also got hit pre-market, falling more than 12%; the name is trading around -4% mid morning. CEO Mack sent a memo to employees this morning, highlighting that a final deal with Mitsubishi was days away that could bring in $8.5-9.5B in new capital. GS and Citi are under pressure this morning, while BAC and WFC are making gains in positive territory. WB is down 18%. RIMM-25% is getting destroyed after guiding EPS below estimates for the coming quarter and saying that the quarter after that would likely see more declines. A raft of analysts downgraded the name and cut price targets overnight. NOK and AAPL are down 4% in sympathy. Merrill turned sour on machinery names, cutting price targets across the sector; DCI, ETN, IR and PCAR are down 2-3%, while CAT is in positive territory. Today's upside in metals is not helping selected mining names recover from news that China will halt iron ore imports from Vale: RIO-7%, FCX-6% and RTP-5%. The China Iron and Steel Association told members that domestic Chinese iron ore would replace imports from the company after it requested that Asian steelmakers pay the same price for ore as their European counterparts. The Baltic Dry Bulk Index posted its biggest decline ever on the more data showing a slowing global economy, taking down selected shipping stocks: DRYS-9%, EGLE-7%, DSX-7%, GNK-10%, EXM-12% and OCNF-4%. Fertilizer names are very weak after RBC cut its price target for POT-7% and AGU-12%; MOS-12% is moving lower with the other names in the sector. Results from Research in Motion foreshadow what could be a painful upcoming pre-announcement/earnings season after the Co. lowered guidance.

- Treasury prices moved higher after bailout plans seem to stall overnight. Credit markets remain gummed up but all in all have seen some slight improvement despite nothing concrete yet from Congress. The yield on the 3-month T-bill did climb back towards .9% while the US 3-month TED fell below 300 basis points. Regardless, markets are still far from functioning properly and expectations the Fed will have to step in continue to grow. Nov Fed fund future is now pricing in close to a 30% chance of 50 bp cut.

- In Washington lawmakers are gearing up for another day of negotiations over the Treasury's Troubled Asset Relief Program (TARP) after the failure of talks yesterday and the emergence of an alternative proposal from the House Republicans. Late last night, Rep. Barney Frank insisted that the Republican scheme was unworkable and that Treasury Secretary Paulson had already rejected the Republican plan. This morning Rep. Kanjorski blamed the House Republicans for ruining consensus over the bill, insisting that the White House should listen to members of its own party. Senator Shelby told CNBC that passage of the bill depends on altering its provisions, and reiterated that he was in principle opposed to the bailout. Shelby also said that he was not against letting markets open on Monday even if a bill has not been passed. Senator Reid insisted that lawmakers will remain in session as long as necessary to finish the bill, while Senator Dodd said executive pay limits and some mechanism for taxpayers to profit from the bailout (read: warrents in bailed-out companies) are non-negotiable aspects of the bill. Note that multiple sources are saying this morning that yesterday's negotiations at the White House were chaotic and disorganized.

- The greenback is maintaining a firmer tone against the European pairs but is lower against the Japanese Yen as risk aversion remains the dominant topic thanks to the stalled bailout package. The chatter on dealing desks continues to contemplate the possibility of a coordinated rate cut by G7 central banks if the bailout plan is passed. However, ECB sources noted that hopes of a coordinated rate cut were unrealistic, pointing instead to an ECB rate cut in early 2009. Several analysts revised their ECB and BoE interest rate forecasts. Citigroup sees a BoE rate cut in late 2008 versus 2009 prior, while a Barclays analyst now sees the ECB beginning its rate cut cycle in December. SocGen revised their 2009 ECB interest rate view, with interest rate cuts starting in 2009. However, IMF Leipold's noted that ECB interest rates should remain at 4.25%. The EUR/USD cross at 1.4620, lower by 40 pips from its opening levels in Asia and the EUR/JPY is down 50 pips at 154.90.

Published on  Mon, Sep 29 2008, 07:04 GMT