U.S. Market Update

- Dow -208 S&P -23.4 NASDAQ 39

Indices are sliding on continued disappointing economic data and concerns regarding the financial sector. A worrisome Q4 earnings report from AIG got the ball rolling in the wrong direction again. Downgrades in BCS and RBS overnight along with news a UBS analyst increased estimates for worldwide losses related to the financial crisis only added to the pressure heading toward the US open. Inflation continues to remain a concern with the Y/Y PCE Deflator coming in at 3.7% and monthly raw materials prices rising 3.4%, but it is clear growth concerns remain the focus. The Feb Chicago Purchasing Managers Index had its lowest reading since late 2001. The weakness in equity markets has again coincided with a flight to quality in the bond market. The 2-year yield has fallen below 1.7% and the 10-year hovers around 3.56%. Expectations for a more aggressive Fed have crept into the Fed fund futures market. The April contract is now projecting roughly 60% odds of a 75 basis point cut at the next meeting, while the July contract is now pricing in a 40% chance the fed funds rate drops below 2% by this summer. Names being hit post earnings reports include: DELL -2% AIG -7.5% DECK -10% HANS -6% BGFV -15% MENT -9% LIZ -4% VIA.B -4% MYE -13% The run-up in commodity prices is taking a hiatus with crude, gasoline, and copper futures trading slightly lower while silver, gold, and heating oil manage marginal gains.

In currencies the theme of risk aversion maintained to influence the price action as continued jitters within the financial sector is causing a new wave of unwinding of carry-related pairs. The monoline insures added fuel to the fire that started with the AIG earnings reports, after press reports that the Ambac bailout has encountered a "significant snag" over last couple days, while MBIA noted that it sees added material mark-to-market losses in January. The iTraxx Crossover index inched back above the 600 bps level to re-approach its all-time high of 615bps. ECB's Gonzalez-Paramo reiterated the view that it could take some time before the liquidity crisis disappears completely. EUR/CHF is lower by 100 pips at 1.5865 during the session. Overall, the USD remains on the defensive as February ends, but off its worst levels for the session. Oil and gold are both are off their all-time highs seen during the Asian session. EUR/USD hit fresh all-time highs above the 1.5239, while USD/CHF tested the 1.0425 level. USD/JPY tested near three-year lows of 103.63, but the USD was able to gain against the GBP as recent UK economic data points to a BOE rate cut at its March MPC meeting. EUR/GBP tested all-time highs at 0.7679 during the European morning. European equity market near session lows while fixed-income instruments were firmer. March gilts +86 ticks at 110.25, March bunds at 117.00 +95 ticks. Euro Stoxx 50 -1.8% at 3,715, FTSE 100 index -1.3% at 5,888, CAC 40 index -1.5% at 4,790 and DAX -2.1% at 6,716

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