Trade the News Market Internals Update at 14:00ET

Dow -101 S&P -3.5 NASDAQ +21

***Economic Data***

– (US) ICSC/GS weekly chain store sales w/e Oct 1st: +0.1% w/w; +3.7% y/y
– (BR) Brazil Aug Industrial Production M/M: -0.2% v -0.1%e; Y/Y: 1.8% v 2.2%e
– (RU) Russia Sept Consumer Prices M/M: 0.0% v -0.1%e v -0.2% prior; Y/Y: 7.2% v 7.2%e; CPI YTD: 4.7% v 4.7%e
– (RU) Russia Sept CPI Core M/M: 0.5% v 0.4%e; Core YTD: 5.1% v 4.6% prior
– (MX) Mexico Sept Consumer Confidences: 92.4 v 93.9e
– (US) Redbook Retail Sales w/e Oct 1st: +4.1% y/y; Sep MTD: -0.1% v Aug
– (SI) Singapore Sept Purchasing Managers Index: 48.3 v 49.0e; Electronics Sector Index: 47.2 v 47.6e
– (DE) Denmark Sept Foreign Currency Reserves (DKK): 490.3B v 475.7B prior
– (US) Aug Factory Orders: -0.2% v 0.0%e
– (EU) ECB drained €160.5B vs. €160.5B Targeted in 7-day Term Deposit Tender

– Tanking European equity indices dragged US stocks lower in the premarket this morning, putting the S&P500 officially in bear market territory, off more than 20% from its April 29th 2011 high. Speculation continues to swirl that European officials are negotiating bigger haircuts for private holders of Greek government debt, but there is no clarity about when the next tranche of aid will be released for Greece. French-Belgian bank Dexia is teetering on the edge of a funding crunch. Overnight some analysts said they were looking to the early November G20 summit for a possible coordinated move to restore global confidence. In Washington, Fed Chairman Bernanke is testifying before Congress’s Joint Economic Committee. Bernanke said that so far Operation Twist has equaled a 50 bps cut in Fed funds and that he is expecting a 20 bps reduction in rates from the measures. He also reiterated that the Fed is ready to take more steps to aid the US economy, although he urged lawmakers to join the Fed in taking action. US equity indices have bounced dramatically off the lows led by the NASDAQ, and chatter of asset allocation trades is rampant after a sharp reversal in debt markets. The US long bond sold off nearly three points from the highs of the day while high yield debt markets rallied. The US 30-year yield has backed up towards 2.8% while the HYG briefly tested 2010 lows before snapping back above $80.

– Shares of the leading US banks have tumbled this morning as trouble at Belgian bank Dexia and the Morgan Stanley downgrade spook investors. Shares of Dexia trading in Europe fell 10% yesterday after Moody’s said it was reviewing the bank for a downgrade because of problems it may have getting funding in difficult markets. This morning shares of Dexia are down approximately 20% as financial press sources game out the amount of funding needed to keep the bank afloat, with a figure of around €95B in short-term loans seen as needed. Note that Dexia is a major player in the $2.9T US market for municipal debt. Here in the US, second-tier ratings agency Egan-Jones downgraded Morgan Stanley’s rating to A from A+, citing uncertainty about MS’s French bank exposure and level of derivatives exposure. While June results were good, Egan-Jones estimates MS’ French bank exposure is at $39B (57% of equity of $68B and 150% of market cap of $26B). CDS costs on Morgan Stanley surged by almost 60bps to over 640bps in the wake of the move, hitting their highest levels since Oct 2008.

– A light US economic calendar did not provide any relief in FX price action as continued risk aversion sentiment overwhelmed the markets. The USD hovered around 9-month highs against various European and commodity currency pairs. Note that there has been chatter making the rounds that the SNB may increase the EUR/CHF floor from the initial level. Recall that There was talk recently that the SNB might raise the floor to 1.25.

***Looking Ahead***

– 11:00 (EU) EU Aide Laitenberger speaks at Think Tank
– 11:30 (US) Treasury to sell 4-Week Bills
– 11:45 (EU) ECB member Constancio
– 12:00 (GE) German Chancellor Merkel speech at Regional CDU Conference in Magdeburg
– 16:00 (BE) Belgium PM meeting on Dexia
– 16:30 (US) Weekly API Energy Inventories
– 17:00 (CO) Colombia Sept Producer Price Index M/M: No est v -0.1% prior; Y/Y: No est v 5.2% prior

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