U.S. Market Update

Dow +132 S&P +8.25 NASDAQ +18.6

Markets opened higher for a second day in a row, boosted by the strong preliminary GDP numbers and a move lower in energy prices. The GDP reading showed the US economy grew more than expected in the second quarter, surpassing the 3% level. Crude rose steadily overnight, reaching $120.50 just before the open before falling off again as traders focused on Gustav. However October crude has slipped lower, losing roughly 2% in mid-morning trade, providing another boost for stocks. Energy majors are up slightly, with the exception of BP and RDS.A, both of which have significant operations in the Gulf. Royal Dutch announced this that is working to evacuate all personnel from its Gulf operations, while BP is pulling non-essential workers. FRE and FNM opened strong again as markets digested the latest GSE news. Yesterday after the close, FNM's board shook up management (while also reiterating its commitment to CEO Mudd), dismissing the CFO, chief business officer and chief risk officer. Analysts have registered their deepening unease over the firm: Lehman cut its FY08 EPS estimates to -$3.29 from -$1.00, while Merrill said it believes senior executive changes will do little to bolster confidence in FNM and reiterated its underperform rating. The monoline and mortgage insurers are surging after MBIA reached at deal to reinsure $184B portfolio of investment-grade US public finance credits, gaining unearned upfront premiums of about $741M in the process. MBI +25% ABK +17% PMI +7% MTG +14% RDN +7%. JAS and TIF are the retail winners today, with both names up around 10% after beating estimates and guiding higher for the year. TIF said on its conference call that the current economic conditions are not dampening substantial store expansion opportunities, noting that it would grow its worldwide store base by 13% this year. MW+6% after barely surpassing the Street, while the firm guided lower for the coming quarter and the year. KIRK+2% lost less than expected in Q2. Both DSW-5% and WSM-10% beat estimates, but the former offered tepid guidance and the latter guided well below estimates for next quarter and slashed its FY08 outlook. Online gaming firm GA-12% is loosing ground after only reporting in line, leading Roth Capital to cut the firm to a hold. Fuel cell maker FCEL-15% is down sharply after reporting a larger-than-expected loss in the quarter, while alternative power equipment firm ENEL-2% is under pressure despite reporting and guiding well above estimates. Investors are not enthusiastic about VRX-5%'s collaboration deal with GSK for Retigabine.

Treasury prices are lower on the better GDP data and firmer equity markets, but the 10-year yield is having a hard time breaking above 3.80%. There has been more aggressive selling at the short end of the curve which has narrowed the benchmark spread to 143 basis points. Nevertheless, the January fed fund future contract is now pricing in less than a 30% chance of a FOMC rate hike during the remainder on 2008.

The USD remains steady in the New York session. Higher oil prices initially weighed upon sentiment thanks to Gustav before crude retreated and a larger than expected build in natural gas inventories offset concerns about potential supply disruptions. The US Q2 preliminary GDP also helped, coming in above estimates, although dealers noted that improvement in GDP came mainly from net upward revisions to exports and downward changes in imports. The US continuing claims data was at its highest level since November 2003, with EUR/USD at session lows near the 1.4725 handle, down 25 pips from its opening levels in Asia. The current spread between US and German two-year notes stands at 176bps. The USD/JPY is unchanged at 109.45, as is USD/CHF at 1.0950.

The pound remains softer against its major pairs, down 70+ pips from its Asian open. The GBP/USD trading below 1.8300 for further two-year lows. GBP weakness was highlighted by comments from BoE dove Blanchflower, who noted that inflation should fall in the medium term and warned that the bank is currently behind the curve since the UK economy is already contracting.

Commodity-related currencies moved off their earlier strength as oil and gold came off session highs. USD/CAD is back above the 1.05 handle while AUD retraces from its approach of 0.87.

European fixed income futures in the lower quarter of its session trading range as equity markets rally. Sept Gilts up 5 ticks at 109.43 while the Sept Bunds lower by 17 ticks at 113.94.

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