U.S. Market Update

Dow -59 S&P -11 NASDAQ +2

The unremitting, disheartening economic news hammered US equity markets in the early going. The DJIA, S&P 500 and Nasdaq all traded at fresh multi-year lows. Indices are well off their worst levels and seen green, but around 10am the S&P 500 was 50% below its high in October, 2007, while the Nasdaq and DJIA were hitting levels last seen in early 2003. The latest bout of risk aversion was inspired by a toxic combination of deflation fears, Congressional inaction on the GM bailout, surging unemployment claims hitting highs last seen in 1982 and a plunging Philly Fed index to lows from 1990. The VIX rose above 80 for the first time in three weeks while Treasury yields moved to historic lows on the short end. The equity weakness is hitting commodities. Front-month crude briefly broke the $50 handle before the open, while copper is making three-year lows and aluminum is at four-year lows.

The major financial names are suffering. Just after the open Goldman briefly traded briefly below its 1999 IPO price of $53/shr, Citibank is trading below $5/shr down 20% and JP Morgan is down 10% after earlier hitting lows of -18%. Before the open Saudi Prince Alwaleed made a vote of confidence in Citi's recently announced restructuring plans, boosting his stake to 5% from about 4.3% prior. Alwaleed said he believes Citi is taking "all the right steps," and that its banking model is a "long-term winner." Overnight the Wall Street Journal took a closer look at Citi's move to reclassify $80B of off balance sheet assets, noting that the move has unnerved investors given that the holdings involved aren't garden-variety securities but rather tricking things like CDOs.

In other equity news, GE was down more than 10% in early trading after FT Deutschland reported that the company was holding talks with sovereign wealth funds in Singapore and China about a taking stakes. A GE spokesperson said that GE had no plans to raise additional capital through Asian funds, flatly contradicting the story. GM and Ford continue to loose value, with GM briefly trading below $2. GMAC filed its application to become bank holding company submitted its application for TARP funds today. Interesting there was also an IPO this morning, the first seen on US markets since early August. Grand Canyon Education (LOPE) opened for trading at $10/shr, below the initial pricing of $12.

A raft of leading US retailers reported third-quarter results yesterday and this morning that were on the whole not as bad as expected, although many are cutting their view for the future. Yesterday after the close The Limited, Gymboree and Hot Topic all beat earnings estimates; encouragingly only The Limited cut any guidance, bringing its EPS view for FY08 into line with already diminished analyst estimates. Bon-Ton's loss was smaller than expected, although it expects a much bigger loss for the year than projected. Buckle, Gamestop, Perry Ellis, the Children's Place and Wet Seal reported more or less in line with analysts' estimates; only Gamestop cut guidance. PERY+35% and GYMB +22% are making big gains, while all the rest expect GME and HOTT are making respectable gains in early trading.

The Swiss National Bank surprised currency traders with a big inter-meeting move, cutting rates in half with a 100 bps ease. The SNB said the surprise move was necessary as prices have fallen in both oil and raw materials at a rate that could put inflation below 2% as early as at the end of this year. More growth concerns are coming to the fore elsewhere in Europe, with Germany's Bundesbank noting a "marked slackening" of market dynamics in Q4. In the US, the unemployment claims data provided no relief, with the four-week moving average of 506K at its highest level since 1982. Continuing Claims came in at their highest level since 1982. EUR/USD tested back below the 1.25 level on chatter the ECB could announce a rate change at an scheduled non-policy meeting, but the pair moved back towards the 1.26 area as the morning wore on and expectations of a intra-meeting cut waned. The ECB has hinted that it would likely cut rates at its December policy meeting, but need the next series of staff projections to confirm the move. The USD and JPY kept a firm tone as equity markets hit multi-year lows just after the open. Commodity currencies will remain vulnerable on the back of the lower energy and basic metal prices. USD/CAD is testing the 1.28 level and AUD/USD is probing toward the 0.618 area.

In fixed income, US Treasury yields continue their move lower on safe-haven buying as global equity weakness continued overnight. The market saw a record low on the 2-year yield, now seen trading below 1%l. The 10-year yield declined below the 3.15% to levels not seen in 5 years. Dealers are noting that the 2YR-10YR spread has narrowed further to +220 bps, which is around a half-percent under its Oct peak. Jan Fed Fund futures forecasting 40% chance of a 75bps rate cut by end of 2008.

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