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U.S Market Update

Tue, Sep 30 2008, 15:32 GMT

TradeTheNews.com

• - Indices are rebounding from Black Monday redux as buyers step in to snap up stocks on hopes that a fresh bailout deal can be hammered out soon. But the House's rejection of the financial bailout bill yesterday continues to loom over credit markets, inspiring a degree of panic among lenders. Libor rose the most ever, climbing 431 basis points to a record high of 6.88%, while Euribor also hit record highs at 5.05%, leaving central banks as virtually the only providers of cash to markets. Congressional leaders are talking about trying to bring the bailout legislation back to the table, although Thursday now appears to be the earliest date for a new vote in the House. Some discussion has circulated about the Senate taking action on Wednesday. The S&P/CaseSchiller came in slightly below estimates, while the September consumer confidence reading came in well above estimates-some observers even credited the index with sparking today's rally. The major financials are up 10%, with the exception of Goldman and Morgan Stanley, which are only up 4%. Wachovia, which is still trading at this point, has risen 50% this morning. The Wall Street Journal provided its blessing to the Citigroup/Wachovia deal, noting that that the acquisition of the troubled bank increases Citi's odds of survival thanks to an extra $450B in US deposits. Fitch placed Citi's IDR on watch negative last night, threatening to downgrade the banks ratings if asset quality problems keep escalating. Sovereign Bancorp is up 70% today, after loosing about the same amount in the stampede yesterday; the name was upgraded at multiple firms overnight. It's a similar story at NCC, which is off its best level at +40% after losing 70% on Friday and Monday. HUN+70% is spiking after decisively winning its running legal battle with Hexion over their merger deal. Leading tech stocks are also strong after yesterday's sell-off, with RIMM+7%, AAPL+5% and MSFT+4%. Commodities are attempting to rebound from yesterdays drubbing led by Nov crude which has gained roughly 2% for much of the morning. Precious metals have come under some pressure from a soaring Greenback: gold -1.4%, silver -4.4% and platinum -6%.

• - Ahead of the open credit markets remained the central focus. Fed funds opening at 7% made it clear that the bailout no vote and the month & quarter end have exacerbated the already heightened stress in the system. Overnight LIBOR fixings jolted the markets even more. But as equity markets have consolidated with a strong rebound at the open and firm mid-morning trading, credit markets seemed areseeming to hold it together. Fed funds have returned to 2.5% while the three-month US TED spreads have improved. Fed fund futures had been pricing in nearly a 75% chance of a 50 bp cut early, but that percentage has moved back below 50%. The US curve is noticeably flatter with the two-year yield rising some 12.5% to 1.86%.

• - The USD has surged in the New York morning in "one-way traffic" as month-end and quarter-end demand drives steady buying of the greenback. Dealers have been commenting that the dollar is set up for its biggest quarterly gain against the pound since September 1992 when George Soros "broke the Bank of England." The EUR/USD cross is testing fresh two-week lows below the 1.4100 area while USD/JPY has climbed into the 106 neighborhood. Dealers are also noting President Bush's calm performance this morning when discussing yesterday's bailout defeat and his assertion that this is not the end of the legislative process. Market sentiment regarding potential European rate cuts has gained some momentum. JPMorgan sees an ECB interest rate cut cycle beginning in December, calling for rates at 2.75% by the end of 2009. Credit Suisse revised its Swiss National Bank interest rate view, forecasting two rate cuts in 2009.

• - The IMF released its update on global currency reserves for Q2 this morning. The dollar's share declined to 62.5% q/q from 63.0% prior, while the euro's portion rose to 27% from 26.8% prior. The yen's reserve status increased to 3.4% from 3.1% prior. The IMF noted that total global reserves held by governments increased to $7.0T.

• - The carry-related pairs failed to respond to calmer equity markets. EUR/JPY is holding below its 200-week moving average of 150.50 and EUR/CHF is marginally higher at 1.5755. USD/CAD was back above the 1.06 level as CAD shrugged off the better GDP data for July. CAD price action highly correlated to metals movement as gold dropped over $32 per oz to $875.

Published on  Tue, Sep 30 2008, 16:06 GMT