US Market Week Wrap Up

A heightened sense of deja vu seized markets this week, with each new day seeming to bring back the same old bad news. The dollar continued to chalk up all-time lows against leading currencies, financials plunged further into crisis and commodities reached new all-time highs. The biggest story of the week came on Wednesday as Ambac announced its long-anticipated refinancing plan, which initially boosted indices but ultimately disappointed many observers with a total value of $1.5B that was seen as too little to cover the troubled insurer's potential liabilities.

There were some glimmers of good news in economic data early on in the week, with the February ISM Manufacturing Index meeting expectations on Monday and February Non-Manufacturing ISM data beating expectations on Wednesday. The week saw the first negative reading ever for the monthly ADP jobs report, later confirmed the February non-farm payrolls contracting by 63K. Interestingly, the unemployment data was lower than expected, at 4.8% versus the 5.0% estimate, but the drop was attributed to a reduction in the workforce due to more discouraged people giving up on looking for work.

Equity markets continued downward all week. The week's biggest notable loser was Thornburg Mortgage, losing almost all of its value after disclosing a letter from JP Morgan confirming it failed to meet certain margin calls, triggering cross defaults. February SSS figures generally kept the pressure on retailers as results confirmed a soft retail environment.

On Monday, April crude broke above its all-time inflation adjusted high of $103.76. As the US dollar continued to lose ground during the week, commodities maintained upward momentum: crude moved above $106, gold nearly reached $1,000, and natural gas moved above $10 for first time since Jan 2006.

On Tuesday, the BoC became the first major foreign central bank to react to the weakening US economy by lowering interest rates by 50 basis points to 3.50%. BoC cited clear concerns over the possibility that the US economic slowdown could be longer and deeper than previously thought, noting that further rate cuts would be due to US economic situation. Meanwhile, the ECB and BoE kept rates on hold, with ECB President Trichet coy about reacting to the US economy, stating that ECB had not even discussed cutting interest rates.

On Friday morning the Federal Reserve made another show of support for the credit market, raising the two March Term Auction Facilities to $50B each, up from $30B and extended the auctions for six more months. The Fed also announced a new 28 day repo. This dispelled rumors during the overnight session that suggested that the Fed might announce another inter-meeting cut. Flight to safety continued in the bond market on Thursday and Friday, with the two-year yield ending the week at just above 1.5%. The April Fed fund futures contract is now fully pricing in a 75 basis point cut.

For the week, the Nasdaq composite index dropped 2.5% on the week, retesting its January lows. The DJIA and the S&P 500 each fell about 3%.

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