U.S. Weekly Wrap-Up

Equity markets ended on a down note after another week of resilience, absorbing bad news and climbing the wall of worry in the face of ever more expensive oil. The overall tone remains positive however, as equities predict a short downturn in the economy and a recovery in the second half of 2008, and as the deal environment showed improvement over the last several days.

Despite a sell off on Friday precipitated by a 28-year low in the University of Michigan Consumer Confidence, equity markets gained for the week: the DJIA rose 1.9%, the Nasdaq composite gained 3.4%, and the S&P500 was up 2.7%. Markets opened the week by shaking off a profit warning from Fedex, which cut its FY forecast due to the rapid rise in fuel costs. This was followed by a disappointing earnings result from Deere that shaved 10% off of its stock price, but did little to put a dent in the broader farming machinery market. Industrial Production data also disappointed this week, showing a drop of 0.7% for the month of April (vs. -0.3%e). On the bright side, April headline and core CPI were reported a tenth of a percent below expectations, while Housing Starts and Building Permits exceeded expectations, though they remained near two-decade lows.

Several high-profile merger deals added to the positive tone in the market. Clear Channel (CCU) resolved a dispute with bankers that would allow its LBO to go ahead at a reduced price. Hewlett-Packard announced the acquisition of EDS at a 30% premium, sending the computer services sector higher this week. CNET agreed to be taken over by CBS in a $1.8B deal, while CVC made a $650M offer to acquire the Tribune Company's Newsday assets. Yahoo appears to be back on the block as Carl Icahn disclosed a stake and his plans to launch a proxy battle to replace the board with his cohorts.

The relentless march of the energy complex highlighted the action in a volatile week for commodities, as crude ended up fractionally and heating oil futures rose another 2%. A bulldozer accidentally punctured a Nigerian oil pipeline on Thursday, sending crude higher that morning, though the futures quickly sold off later that day in expiration-related volatility. Crude was pushing higher again Friday despite an announcement from the Saudi oil minister that his country is in the process of increasing production by 300K barrels per day to meet the shortfall from disruptions in other countries. The US Department of Energy also chimed in Friday, stating it would halt the fill of the SPR for the rest of the year. Nevertheless, crude took out the $127 level by the end of the week.

The strength in the energy complex helped push the dollar lower this week, after the greenback gained ground in the prior three weeks. Commodity strength fueled a rise in the Canadian and Australian dollars: the CAD got back to parity with the USD, and the AUD hit a 24-year high against the USD. Gold, in turn, took its cue from dollar weakness and surged back above $900 for the first time since April 24th.

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