U.S. Market Update

Dow -147 S&P -20 NASDAQ -33.7

Indices opened and moved lower this morning as oil resumed its upward march, topping $133/bbl overnight. The climbing cost of crude is seen hitting various industries, as RCL-5% was cut overnight at Morgan Stanley. F-4% was still sinking after lowering its outlook yesterday; last night, Ford's CEO declined to say when or whether the company will set a revised profit target. Meanwhile, the US Department of Transportation reported this morning that vehicle miles traveled in March fell 4.3% y/y, representing the first drop in the month since 1979. GM opened lower after reporting that the American Axel strike had further impacted operations, cutting production by 230K units in Q2, with a pretax EPS impact of $1.8B. Several major retailers reported after the close yesterday, painting a broadly mixed to positive picture. FL+10.8% after beating revenue estimates, HIBB+6.8% after guiding significant SSS improvement in May and ZUMZ+5.2%. PSUN-11.7% was the exception, with the company cutting its SSS and earnings guidance. CA+6.3% came in under estimates but guided strong for FY09 (garnering a price target hike at RBC). In M&A news, BUD+8% after the Financial Times reported that the Belgian brewing giant was working on a $46B bid for the company; CNBC's Faber later reported that sources were saying BUD had no interest in answering any potential bid amicably. AGL+30% after announcing it had signed a merger agreement with LEH-4% for $22/shr.

Bond markets are benefiting from the softened equity markets and the better-than-expected headline April US existing home sales data. It is worth noting the figures did reveal April's supply rose to a 22-year high above 11 months, which may have added to the pressure in stocks. The 10-year yield has slipped back below 3.85% after testing 3.95% during yesterday's session.

The USD continued its soft tone in the session as higher commodities continued to weigh on sentiment. The dollar was unable to gain any momentum as growth in European service and manufacturing industries slowed in May. US existing home data was above expectations, but the rise in inventory remains a concern. The spread between the US-German two-year notes continues to widen at -172 bps from -150 a few days back. The JPY was broadly firmer as the BoJ expressed worries on inflation as oil prices continue to rise. In addition, Japan's top economic advisory panel urged diversification in the state-run pension fund. JGB futures were sharply lower overnight as chatter that pension monies would flow out of bonds into equities. Dealers were paying close attention to a downward sloping trendline in EUR/JPY cross that is currently place at the 164.70 approach. A break above would open upside momentum in the cross. Commodity-related currencies are slightly firmer with USD/CAD at 0.9850 and AUD/USD at 0.9615 Thin market conditions will prevail on Monday with both the US and UK on holiday.

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