Weekly Market Wrap Up

In a week where the US stock market closed out its worst year since the 1930's, indices have rallied providing a glimmer of hope heading into the first real week of 2009. Markets have shrugged off an all time low in the December consumer confidence figure as well as an ISM manufacturing reading that was the lowest since the spring of 1980. The Dow closed above 9K for the first time since early November with all three of the major US indices up 6% or more for the week. Volumes remained substantially below normal due to the holiday schedule, with many participants likely waiting until Monday to end their vacations. Regardless of attendance the VIX has gained a foothold below 40 for the first time since September. Treasury yields have moved out to highs not seen since the Fed cut rates on Dec 16th, and buyers have returned to the oil market.

Early in the week stock trade was dominated by news surrounding Dow Chemical and the pending takeover of Rohm & Haas. Over the weekend Kuwait terminated a $17B joint venture with Dow, placing the pending $78/share takeover of ROH in jeopardy. ROH dipped below $50 initially as analysts said they saw the stock moving into the $20's if the deal ends up getting terminated. As the week passed it has become more likely that it would be nearly impossible for DOW to walk away completely and thus ROH shares have rebounded back to the mid $60s on speculation that the deal could at least be renegotiated.

General Motor's financing arm GMAC was thrown a lifeline when late Monday when the US Treasury confirmed they would be purchasing $5B in preferred shares under GMAC's new status as a bank holding company. This was in doubt, as the Govt and GM had remained silent over the weekend after the debt exchange condition expired the previous Friday. Though GM's stock has moved little from where it finished last week's trade just above $3.50, spreads on the corporate bonds have come in dramatically. Adding to hopes of some kind of recovery in the auto market, Tuesday GMAC said they would immediately resume auto financing loans and modify its credit criteria to a minimum credit score of 621 compared to the 700 prior.

Geopolitics has been an overriding concern throughout the week, highlighted by the news out of Gaza. Over the weekend Israeli airstrikes targeted government installations within Gaza in retaliation for repeated rocket attacks from Hamas after the expiration of the prior truce agreement. Both sides continued rhetoric throughout week with Israeli forces building on the border for possible ground operations. The news sent crude above $40 on Monday and oil has since added to those gains finishing out the week up more than 20% above $46. Also on traders' radar but to a lesser extent is the ongoing situation between the Ukraine and Russia. Eerily similar to 2006 Russia has shut off natural gas supplies to the Ukraine's Naftogaz over unpaid bills which in turn could threaten the largest natural gas pipeline into Europe. Front month natural gas looks to end the week above $6.

The reversal in Treasury prices seen in the final hours of 2008 extended into a full-fledged selloff to open up 2009. The long end of the curve has seen yields move out to their highest levels in more than 2 weeks. The long bond yield has moved above 2.8% while the 10-year is testing 2.4%. Prices have been moving lower and yields higher since Wednesday's release of weekly initial jobless claims that was well below consensus estimates.

In currencies; safe haven flows dominated the early part of the week as Mid-East tensions took center stage, providing a boost for the Swiss Franc. Global recession concerns continue to linger as evident by S. Korean Industrial production, which endured its steepest m/m drop since 1987, and the steepest y/y drop in data back to 1980. European central bankers issued cautious remarks on their outlook for 2009 with ECB's Hurley noting that he saw extremely weak global growth.

Dealers noted that the price action was best described as 'whipsawed' as wide ranges characterized the illiquid market conditions associated with year-end. Dealers noted that fundamental rationale remained in the background, as 'stop-hunts' were the constant theme. Currency trade continued to focus around the GBP/related crosses. Dealers pondered sustainability of the upside momentum on the EUR/GBP cross as it tested 0.98 for fresh all-time highs. The EUR/GBP cross-experienced its first down session since late Nov with dealers attributing the swift decline to technical factors, thin year-end conditions, and emerging from overbought conditions. The BOE's quarterly credit condition report noted that continued tightening was likely in both Household and corporate lending in Q1 2009.

Russia devalued the Rouble for a 12th time within a 7 week period and the countries Gold and FX Reserves fell to $438.2B, down $12.6B w/w

The Gulf CooperationCouncil.agreed on the final monetary union pact with the subsequent agreement to be signed by Dec 12, 2009. Reminder: One of the GCC's main objectives was to establish a common currency by 2010.

Looking back at the price action for 2008; the GBP/USD pair fell by 27% for its worst annual performance since 1972 for the GBP. The USD endured its largest drop against the JPY since 1987 with a 19.2% drop. The USD/JPY opened the year at 111.65 and ended around the 90.25 level. The CNY had its largest annual gain since the peg was removed with a 7.1% gain against the USD in 2008 compared to 6.9% gain in 2007. The month of Dec saw the CNY appreciate by 0.9%

The Euro celebrated the 10th anniversary of its existence. The WSJ commented that Europe would have suffered more from the financial crisis of 2008 due to currency devaluations and wildly diverging interest rates had it not been for the single currency.

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