U.S. Market Update

DJIA -0.5% Nasdaq -0.7% S&P500 -0.4%

Markets fell from the open this morning on new highs in the price of oil and darkening consumer confidence. Generic crude oil futures rose more than $3 in morning trading; Goldman Sachs raised its price forecast for oil in the second half of 2008 to $141/bbl from $107/bbl. Homebuilders showed strength at the open on April housing starts, which climbed more than 8% m/m, but were still seen at a 17-year low. Homebuilders TOL, KBH and PHM opened higher but were all seen losing ground in mid-morning trading. Several large retailers were feeling the effects of recent earnings and quarterly same-store sales reports this morning. JWN also moved higher after beating EPS estimates, in the face of a negative Q1 sales, and tepid EPS and SSS guidance. ANF was up slightly after a volatile morning; ANF bested analysts' EPS estimate and reported positive sales for the quarter. Meanwhile KSS was trading down nearly 5% after earnings. Numerous healthcare names released updates on their cancer drugs ahead of the American Society of Clinical Oncology (ASCO) meeting in Chicago at the end of the month; DNA and LLY were the biggest winners this morning from the news.

In currencies the dollar was consolidating against the majors for most of the trading day until the mid-US morning. The EUR/USD finally broke above the 1.5430 to 1.5530 hourly consolidation range. Weaker US data and higher commodity prices continue to weigh upon USD sentiment, however. Michigan Consumer Confidence hit its lowest level since June 1980, while the inflation component hit a 16-year high at 5.2%. Financial market stress continued to bubble over as Oppenheimer's Whitney noted that the US consumer situation is growing worse every month on the credit front. FDIC's Bair said he expected a second wave of “credit stress,” which would likely mean more delinquencies in construction, commercial, and consumer debt. The USD was also hampered by rumors that the April non-farm payroll report could see “significant” downward revisions; dealers were digesting chatter saying that April payrolls suggested a -151K reading against the actual release -20K back on May 2nd.

German DIW Chief Economist Dregner noted that the ECB is likely to leave interest rate unchanged in 2008 and to begin raising rates in 2009. Lehman is currently forecasting an ECB rate cut in December.

The JPY was off its best levels following the better GDP data for Japan release during the Asian session. Some risk aversion crept back into the market as higher oil prices weighed upon sentiment in equity markets. USD/JPY probed the 104.00 area, before consolidating. EUR/JPY at mid portion of its session trading range as continued hawkish ECB speak on inflation and firmer equity markets helped move this cross back above the 162 level.

Commodity-related currencies are also firmer with USD/CAD retesting below parity at 0.9980, and the AUD/USD hit a 24 year high at $0.9559. Gold retook the $900 level for the first time in a month and Oil hit fresh all-time highs above the $127 level. In addition, the Mexican Central Bank left its overnight rate unchanged at 7.50%, as expected

June Bunds +35 ticks at 113.54; June Gilts at 40 ticks at 107.51

European equity markets saw earlier gains erode as the respective close approached. Euro Stoxx 50 flat after being up over 1% at 3,862; FTSE +0.8% at 6,304; CAC 40 +0.4% at 5078 and DAX +1.1% at 7156.

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