U.S. Weekly Wrap-Up

The 4th of July trading week was brief but action packed as the DJIA closed out its first half down 15%, oil continued its climb and the ECB raised rates for the first time in over a year. The high price of energy continued to impact the economy as the highflying coal, steel and fertilizer segments began loosing their shine, while the long-suffering financials continued to slide (with the notable exception of CIT and Lehman). GM's better than expected June sales figures rallied markets back to highs on Tuesday, but the next day pessimism about the auto industry and the economy sent GM back to five-decade lows. BA announced further delays to its 787 Dreamliner program, while VZ released pricing for the 3g Apple iPhone, including a (considerably more expensive) contract-free option. For the week, the DJIA was down 0.5%, the Nasdaq composite dropped 3%, and the S&P500 fell 1%.

Oil continued to hit record highs all week long, finishing up above $145/bbl. The week was marked by heartburn inducing news out of the Middle East as Iran and the West traded belligerent rhetoric over the Islamic Republic's nuclear program. Over the weekend press reports were circulating that US covert operatives may already be in Iran paving the way for an attack on the country's nuclear weapons program. On Sunday a senior Iranian Revolutionary Guard commander commented that Iran would close the Strait of Hormuz if it were attacked, prompting a US official promising to prevent Iran from closing the route. On Tuesday a former Israeli Air Force general told Der Spiegel that Israel would not stand by while Iran builds nuclear capabilities, prompting the Iranian Oil Minister to note that any attack on Iran would lead to a disruption in oil exports from the Middle East. Commentary had cooled somewhat later, as a UK diplomat and even President Bush emphasized that diplomacy was the preferred method for resolving the conflict with Iran. Multiple commentators were out saying that oil would hit $150/bbl, starting with the UAE oil minister and ending with Russian President Medvedev.


Financials had a rough week, starting with a raft of negative rumors swirling around Lehman, dragging down the bank's share price and prompting the bank to doll out significant mid-year bonuses to calm employees and reassure investors. LEH ended the week 10% above its Monday open. CIT announced it would divest its home lending business and manufactured housing portfolio for a combined total of around $1.8B, helping the name to rise nearly 10% on the week. But elsewhere rumors continued to circulate regarding potential profit warnings from major US and European commercial banks.

The week's economic data was largely viewed in a positive light, with the exception of the ADP employment report. The June ISM manufacturing reading crossed into positive territory for the first time since January. The May construction number was slightly less negative than expected. The June employment reading showed US employers cutting jobs for the sixth month in a row, although investors have been encouraged by the fact that the number came in nearly even with expectations. The ADP jobs report certainly has not helped the overall feel after showing the largest a loss of nearly 80K jobs with the service sector is showing its first decline since 2002.

U.S. Treasury markets made little headway for the shortened week, but did manage to consolidate gains made following the FOMC meeting. The 10-year yield remains below 4% while the curve continues to get steeper. Friday's session saw the long bond trade off close to half a point while the 2-year was bid higher sending its yield towards the key 2.50% level. Fed fund futures markets still see little chance the Fed hikes at the next meeting while the odds of a 2.5% fed funds rate by this the middle of this fall have nearly been priced out. Corporate bond desks spent much of the week focusing on the action in General Motors. Continued deterioration in the industry fundamentals and a 50-year low in the stock stoked speculation the Co. could eventually face bankruptcy. Though default swaps were seen recovering some with the stock price late Friday as analysts differ on the actual likelihood of a GM's liquidity crisis; most agree that with roughly $200B of notional auto/finance debt in the markets a dislocation within the sector will weigh heavily on the high yield market.

The dollar drifted lower throughout the week ahead of the ECB interest rate decision and hit fresh 10-week lows against the euro as the pair trended above the 1.5850 level. The USD continued to see verbal intervention, including from some fresh sources. The president of OPEC president noted that a stable USD would calm the oil markets, while the Chinese prime minister called on US to take action to stabilize the dollar. Various Euro Zone officials continue to note concern over inflationary expectations, with the EU's Almunia noting that the euro FX rate is "a little overvalued" compared to other currencies, adding that the Euro Zone needs a clear position on FX, which it currently lacks.
On Thursday session, the USD firmed following the ECB's first interest rate hike in 13 months. The ECB duly noted that the rate decision was taken to prevent second-round inflationary effects, as expected. Currency dealers debated whether the rate hike was a "one-off" measure or the beginning of a series of interest rate increases to stem inflationary expectations. Trichet noted that the most recent data confirmed weakness in mid 2008, but reiterated that Euro Zone fundamentals remain sound with a strong Q1 GDP being impacted by the weaker Q2 GDP. He also announced that the ECB has "no bias on interest rates" for the time being. Dealers concluded that the lack of the words "heightened alertness" and "vigilance," plus the bias comment indicated a pause in interest rate hikes going forward.

The EUR/USD ending the shortened US week just above the 1.5700 level. The GBP recovered from earlier losses following UK Construction PMI data that confirmed further housing sector woes for jolly old England. However, the GBP/USD pair continues hold below its 200-day moving average at 1.9977.

Trade The News Staff
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