U.S. Market Update

Dow -106 S&P -9 NASDAQ -5

U.S. markets opened lower pressured by another disappointing earnings report from a major financial institution. American International Group reported another large loss and took roughly $15B in new writedowns; while coincidently overseas the DAX was under some pressure after Allianz reported results below expectations and indicated further writedowns could not be ruled out. AIG also said they would be raising another $12.5B in an equity offering. The WSJ noted that well the credit crunch may be easing on Wall Street; it appears to be tightening elsewhere citing recent announcements by regional banks and insurers to raise fresh capital. Equity markets also continue to face the gale force headwind of rising energy prices. June crude traded to another all time high briefly above $126 a barrel. The entire complex continues to be driven by front month heating oil which has added another 2.25%. Stocks have exhibited notable resiliency post the NY open led by the financials despite the AIG news. The XLF gapped lower on the open but has since rallied to gain more than 1% on the day. CC is trading up more than 10% after announcing the hiring of Goldman Sachs to help explore strategic alternatives, and Carl Icahn indicated in a SEC filing he is ready to by CC if necessary. Commodity related stocks are under some pressure. June gold futures moved sharply lower around the London PM fix as chatter circulated that it was artificially pressured by the expiration of an $880 strike option. The contract is now down 1% at $874 after trading as high as $890 in the overnight. XAU-2.6% The OSX is off 1.5%. Refinery stocks are looking to end what has been another rough week at fresh multi-year lows. VLO -2.5% SUN -1.6% TSO -6.3% Treasury markets were again the beneficiary of the lower equity markets as trader risk aversion was rearing its head in the early going. U.S. yields opened the floor session on their lows and have steadily drifted higher as equity markets have tried to hold in. The 10-year yield is holding right at the 3.75% level while the July fed fund future has inched a little higher. That contract has seen the odds of another 25 bp cut at the next FOMC meeting tick as high as 24%.

In currencies, Risk aversion returned to the front burner as concerns over the financial sector health resurfaced following AIG's earnings after the bell on Thursday. The carry-related currency pairs exhibit a high degree of volatility during the session as equities were broadly lower and fixed-income futures were bid up. Dealers also noticed that the sentiment for the USD turned less positive following the ECB rate decision and press conference yesterday. EUR/USD approached the 1.55 during the latter part of the European morning, but the USD managed a slight recovery to 1.5440 area following the 'improved' trade balance data for the month of March. FX dealers noted the improvement was largely the result of US imports declining, suggesting slower consumer spending. Imports dropped by 2.9% M/M, the most since Dec 2001. Also chatter that the oil components breakdown suggests much less transactions outside of energy. The GBP/USD pair broke below the 1.9500 support level adding to potential downside pressure. Dealers suggested they are seeing EUR/USD entering a phase of consolidation, noting that a 1.5350-1.5650 trading range would be a probability. Dealers noting that the spread in the US-German 2-year note is widening from its lows seen earlier this week. The 2-year spread back to -150bps reading and helping the Euro rebound against recent lows the USD. Dealers are also noting that with oil approaching fresh record highs near the $126 level and equity weakness resurfacing (led by financials) the recent USD bullishness trend was perhaps premature. Commodity related pairs were mixed as USD/CAD is firmed by 80 pips to1.0090. Apr employment data for Canada was mixed with a better net change headline number of 19.2K, but a higher unemployment rate of 6.1%. AUD/USD is off 30 pips at 0.9414. Emerging market currencies such as ZAR, TRY and ISK have also come under pressure. Implied Volatility has found a floor and is increasing, the VIX has moved back above 20 level again.

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