U.S. Market Update

Dow +497 S&P +51 NASDAQ +101

Stock markets are rebounding around the world after last week's carnage, with European Bourses headed for closiing at session highs up 8-10%. US indices are reacting enthusiastically to the announcement of multiple financial rescue initiatives in Europe and elsewhere around the world, with the DJIA surging more than 5.5% points. However, market participants remain cautious as it remains to be seen whether this is the beginning of some real traction for stocks or just a typically vicious bear market rally. Various industrial metals that were hit very hard last week are bouncing back including steel, nickel, and copper. Global mining names are recovering some as well, with RTP +12%, RIO+12% and BHP+10% just a few of the names making big gains this morning. Energy futures are also gaining back some ground after last week's plunge, with crude is trading up more than $3 around $81/bbl. Over the weekend, Goldman cuts its 2008 crude oil price estimate to $70 from $115 and its 2009 estimate to $107 from $125, citing the slowing economy, even noting prices could fall to $50. As late as 8/20, Goldman was saying crude would return to the $149 level by the end of the year. Goldman analysts Jeffrey Currie and Giovanni Serio said "We clearly underestimated the depth and duration of the global financial crisis and its implications on economic growth." Morgan Stanley and Mitsubishi UFJ sealed their deal over the weekend, with MUFG acquiring $7.8B of perpetual non-cumulative convertible preferred stock with a 10% dividend and a conversion price of $25.25 per share, and $1.2B perpetual non-cumulative non-convertible preferred stock with a 10% dividend. Overnight the New York Times reported that the US government has offered to protect MUFJ's investment in the firm under pressure from the Japanese government. MS was up nearly 50% in early trading; selected major financials opened higher on this news as well as the Treasury's pledge to take equity stakes in troubled banks, with GS+8%, BAC+7% and C+7% mid morning. JPM-2% is moving lower in the absence of any particular news. Much commentary circulated in the media over the weekend regarding merger talks between GM and Chrysler, with discussion indicating that Chrysler owner Cerberus Capital was considering swapping Chrysler's automotive operations for GM's remaining 49% stake in GMAC (Cerberus owns the other 51% of GMAC). In addition, GM is accelerating previously announced production cuts. Both GM and F are up more than 26% in early trading. Additional rounds of big share buybacks are being announced by leading companies facing historically low share prices, with ABT+6% ($5B buyback, 6.5% of market cap), LTD+2% ($250M buyback, 5.7% of market cap), INT+15% ($50M buyback, 9.8% of the market cap) and PWRD+15% ($100M buyback, 10% of market cap). Various names took the opportunity to report preliminary quarterly numbers or update guidance ahead of their official releases, including PFG, TSO, RE and WMI, all of which are up 10-20%. AFFX-20% is underwater after telling investors that revenues would be well below estimates in their preliminary earnings release.

Global markets returned this morning with government assurances that deposits would be insured and banks would be able to lend money with greater confidence. With the biggest package of assistance announced to far outside of the US, Germany said it would provide as much as €500B in loan guarantees to help bolster its banking system, €80B to re-capitalize banks and €20B to cover potential loan losses. In comments that were echoed by many other European officials, the ECB's Weber noted that the German rescue plan provided a solid foundation to stabilize markets. Credit markets greeted the bailouts with cautious optimism, with three-month dollar libor falling by 70 basis points to 4.75%. Note that there was no overnight dollar libor today due to the Columbus Day holiday in the US. Confidence is also being aided by renewed liquidity operations in which the Fed and other world central banks will offer as much dollar funding as required. The Fed, ECB, Bank of England and Swiss National Bank will hold one-week, one-month and three-month dollar auctions at a fixed interest rates. Again the credit swaps greeted the moves with cautious optimism as dealers noted that the three-month USD rate remains some 325 basis points above Fed target rate of 1.50%.

The EUR/USD cross was a touch firmer from its opening levels in Asia. The euphoria of the banking sector bailout remains clouded with concerns over future economic prospects. On the European growth front, the German Institutes lowered their 2009 GDP forecast to 0.2% from 0.7% prior view and the inflation at 2.3%. Carry-related currency are modestly firmer as EUR/JPY trades at 137 area and EUR/CHF is steady at 1.5375. The GBP did snap back from its recent bout of weakness following the announcement of the UK bailout package. The GBP/USD is up almost 300 pips at 1.7230 and the GBP/JPY is up 275 pips at 175.40.

European fixed-income futures were softer as equity markets exhibited strong gains. Dec Bunds down 90 ticks at 114.52 and Dec Gilts off 167 ticks at 110.20. The UK and German yield curves were flatter from their close last Friday. US Bond markets are closed but the 10-year note future is down more than a full point as money finds its way out of government bond markets and into stocks both here and across the pond.

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