U.S. Market Update

Dow +56 S&P +4.3 NASDAQ +6.5

Early trading this morning has been volatile once again, with US indices opening higher, sagging into the red and then rallying back to positive territory. The relentless selling in shares of Citigroup continues to weigh heavily on markets, dragging down most of the rest of the financial sector with it. Early stock strength was partially attributed to chatter/hope of coordinated Central Bank action before Thanksgiving as well as rumors C could be broken up. Front-month crude is made fresh lows below $49 while gold has rallied some $40 amid the heightened anxiety in the financials. US Treasury markets are attempting to digest the astronomical move in yields seen yesterday. Yields have rebounded with the 2-year back above 1% and the long bond bouncing from all-time lows to trade back near 3.7%.

Citigroup pressure has mounted steadily on shares of the world's largest financial services organization all week, with the selling rising to a fever pitch yesterday and this morning. Citi's shares broke $5.00 an hour after the open on Thursday; they broke $4.00 not long after the open this morning. On Thursday evening, CNBC's Charlie Gasparino said Citi was possibly looking for merger partners, including Goldman, Morgan Stanley and State Street. The Wall Street Journal later reported that Morgan Stanley was not talking to Citi about a merger, although Morgan has not confirmed or denied the reports. This morning the New York Times wrote that Citi is not looking to split up the company, citing sources. The story quoted senior executives as saying that the company is financially strong and has ample financing opportunities, noting that few buyers would be willing to pay the asking price for Citi's most valuable assets. Shares of Citi have dropped as much as 25% in early trading. JP Morgan is also under pressure this morning, with its shares down more than 10% after filing a mixed security shelf. Morgan and Goldman are holding up around even, while Wells Fargo is down 5%. In an attempt at optimism, Pimco's Mohammed El-Erian told CNBC that banks continue to function well despite recent events.

Quarterly reports from leading IT firms Dell and Brocade provided further evidence of softness in the tech sector. Dell missed on the top line but beat on the bottom line in its Q3 report yesterday after the close. The company said it believes global IT demand will remain weak in the medium term, warning that it sees continuing charges from the realignments and layoffs needed to grapple with the situation. Asian growth held up for Dell in the quarter, with profit almost doubling and shipments up 29%, with future cost cutting in Asia likely to be minimal. Brocade beat on the top line and missed on the bottom line, and guided slightly below estimates for FY09. Brocade's CEO was upbeat on the conference call, noting that he sees plenty of opportunities. Solar name CSIQ missed big on earnings and slashed its outlook for the coming quarter and the year. The firm's CEO said that uncertainties financing coupled with softening solar demand has forced the company to focus on short-term goals to preserve cash and minimize risk.

The Gap held things together in Q3, reporting in line with consensus estimates, and even managed to maintain its outlook for FY08. High-end apparel retailer Ann Taylor showed it was already feeling the heat in Q3, reporting a significant loss for the quarter thanks to restructuring costs (earnings were break-even ex charges) and same-store sales -19.4%. The company refrained from offering guidance for the fourth quarter or the year, euphemistically noting that it “expects the competitive environment to remain highly promotional” and gross margin to remain under significant pressure. Consumer staples names Heinz and Smucker are not doing badly in the downturn, with Heinz beating earnings estimates and Smucker besting revenue targets. Both firms reaffirmed their full-year guidance. While cautioning that conditions remain challenging, Heinz's CEO bluntly pointed out the advantages of slowdown for the company, stating that more people are eating at home. Smucker reported a nearly 20% y/y rise in US retail revenue.

The greenback was mildly weaker on Friday but maintained its overall tone of consolidation as the week ended. The dollar's moves are extending its consolidation in a 1.24-1.28 range after hitting lows at 1.2330 back on Oct 27. While US equities have been making multi-year lows in the latter part of the week, the EUR/USD has been unable to follow their lead for the last 16 sessions. A Citigroup analyst noted that the ECB was likely to cut interest rates to 1.0% during 2009, down from the prior view of 2.0%. The analyst added that it was possible that the ECB could cut interest rates to zero in 2009.

The ECB's Trichet echoed numerous other central bankers in discussing the Euro Zone in comments out overnight. Trichet said that some countries have more room than others for easing rates, while some countries have no room to cut at all. He added that the real economy was slowing coupled with diminishing upside risks to price stability, and affirmed that the ECB would take recent record-low European PMI data as well as the most recent ECB staff projections into account for upcoming rate decisions, seeming to not rule out cutting rates the bank's Dec 4th conclave.

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