U.S. Market Update

Dow -119 S&P -15.4 NASDAQ -16.1

Indices remain under pressure with money continuing to cash out of financials as decliners lead advancers by a 3:1 margin on the NYSE. The XLF approached its lows for the year led by MER -6% which was forced to change the conversion rate on certain convertible securities. Thornburg Mortgage disclosed a letter from JP Morgan confirming it failed to meet certain margin calls, triggering cross defaults. Small mortgage stocks have taken a beating as TMA is one step closer to bankruptcy. NLY -21% ANH -20% IMB -7.5% MFA -12% CMO -24% Even a brief pre-market rumor that the US government was preparing to step in and explicitly back the GSEs could not provide any momentum, and when it was subsequently denied losses accelerated. FNM -9% FRE -7% Retailers February SSS figures generally kept the pressure on the group as results or expectedly soft and on top of that few offered little in the way of a near term outlook. WMT +1.4% did buck the trend and later raised guidance, spurring a little hope for the low-end consumer space which piggy backed weekly jobless claims that fell by some 20K. A flight to safety continues in the bond market with the futures at or near session highs. The yield on the two-year has dropped to 1.51% and the benchmark spread has widened towards 210 basis points. Commodity futures have seen some profit taking but losses are again being mitigated by continued weakness in the Greenback. Crude has bounced back into positive territory holding near $104.50. April gold is trying to hold the $980 mark and copper remains near $3.95 after ticking above $4 overnight. Platinum and Palladium are down 3.75% and 6.75%, respectively, but off of their worst levels.

In currencies the duel theme of risk aversion and inflationary concerns remained the primary catalyst for price action. The USD remains near all-time lows set earlier in the session against the Euro and CHF pairs. EUR/USD is trading at 1.5350 and USD/CHF at 1.0290 ahead of the European close. Carry-related pairs focused on continued credit market concerns. Various financial companies continue to report notices of default on loans or the inability to meet margin calls. A draft EU letter stressed that more and larger write downs from Q4 could be forthcoming, adding that prolonged market turmoil is likely to hit the real economy. The NY Fed noted that it did hold roundtable discussions on the topic of risk at a Feb 19 meeting with other global financial regulators. USD/JPY trades at 103.10, EUR/JPY at 158.40 and EUR/CHF at 1.5795. The safe-haven theme was also prevalent in fixed-income as the US, UK and German Yield curves continued to steepen as money flowed into the short end of the curve. Both the Bank of England and ECB left their interest rates unchanged, as expected. However, ECB staff projections heightened inflationary concerns, as they raised their 2008 Euro Zone CPI estimate to the 2.6-3.2% range versus a prior forecast of 2.0% made just a few weeks ago. The ECB staff also guided the 2008 Euro Zone GDP growth outlook to 1.3-2.1% versus a 1.8% prior view. ECB chief Trichet noted that upside risks to price stability remain over medium term, but that economic fundamentals remain sound. The ECB reiterated its standard mantra that anchoring CPI expectations remains its top priority.

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Posted in: Economy,Finance and Investment,Forex