The overnight session was quiet all around, especially on the European equity front. After the close in the US, Baxter (BAX) announced after the close that GAMMAGARD S/D and GAMMAGARD LIQUID met its primary and secondary endpoints in patients with mild-to-moderate Alzheimer's disease. Elsewhere, JP Morgan’s European small/mid-cap strategy team cut the utilities to underweight from overweight.

Looking at the newspapers, according to the Financial Times the Royal Bank of Scotland (RBS) is mulling a rights issue. The report cites people familiar with the matter. The Wall Street Journal reported overnight that regulators are expected to settle with ex-Fannie Mae (FNM) executives. The reported settlement would involve 3 former Fannie senior executives (Franklin Raines, Timothy Howard and Leanne Spencer) over their alleged roles in an accounting scandal in 2004. The terms of the settlement were not disclosed. The Financial Times reported overnight that Deutsche Bank (DB) and other investment banks may develop a clearing house for the credit derivatives market. The plan specifically involves developing a scheme that would only allow institutions with strong capital bases and credible trading histories to clear trades in the CDS markets with a central counter-party. The goal of the proposal is to ensure that members of this clearing house would be more protected from the risk of a trader or investor failing to meet their obligations. The Times wrote overnight that, according to Morgan Stanley, home prices will fall by 15% over the next 2 years and push 1/10 of homeowners into negative equity

Action in the energy markets was quiet overnight as crude oil came off of its recent highs. The Wall Street Journal noted overnight that the Brazilian government may increase its royalty rates for oil companies. The government is studying how to change the rules for the oil sector and some officials say there is a consensus that the government needs to raise its take from the industry, but what is unresolved is how. The change is expected to impact Petrobras (BPR), StatoilHydro (STO), Exxon Mobile (XOM), BG Group [BG.UK] and Galp Energia.

In fixed income the Financial Times wrote overnight that the U.K. will probably issue tens of billions of pounds in bonds to fund the Bank of England's plan to help U.K. banks raise cash. The central bank is working on a program to accept mortgage-backed securities as collateral for government bonds for up to three years, the newspaper said. The bailout plan could be worth as much as £50B though details are still being worked out according to the article. LandSource Communities Development, according to the Wall Street Journal is negotiating the possible restructuring of $1.24B in loans followings its failure to make required payments. The partnership involves the California Public Employees' Retirement System, which is one of the nation's largest pension funds, and Lennar Corp (LEN) Moodys overnight cut certain sub-prime RMBS issued by Nomura (NMR). In total 91 tranches were cut. BNP Paribas updated its ECB interest rate action forecast overnight, and now sees an ECB rate cut in December. BNP Paribas previously saw a rate cut in June.

Comments from Central Bank officials and the like slowed from earlier in the week. In Asia the Bank of Japan cut its view on the overall economy for the second consecutive month in its monthly economic assessment, while the government lefts its view unchanged for the second consecutive month. Bank of Japan Governor Shirakawa said that Japan's economic growth is slowing on higher energy costs, adding that he expects financial market stability to continue. Shirakawa also said that CPI will continue to follow a positive trend. In New Zealand, Finance Minister Cullen, said overnight that the outlook for NZ economy in 2008 is "challenging" Elsewhere the ECB's Weber said overnight that he sees average inflation rate of 3.0% in 2008; must act if second round inflationary effect emerge. A Spanish Housing Ministry official said overnight that he sees housing prices stabilizing around the inflation rate

In currencies, the USD was mixed against the majors in a session that lacked any impetus. The EUR/USD consolidated within the 1.5870 to 1.5950 range despite continued hawkish speak from ECB members. Recent verbal intervention continues to cap the EUR from testing the 1.60 handle. The JPY is softer as Dealers note that the degree of risk aversion appears to be waning. Dealers are citing the recent corporate earnings from several US banks and brokerages over the past few session as one factor. Dealers are also noting good demand for the $1B in real estate bonds issued by LEH and UBS as a possible sign of stabilization.

Looking ahead, the US session is void of economic data. There are however a number of notables expected to report earnings in the pre-market, including Citigroup (C), Caterpillar (CAT), Honeywell (HON), Manpower (MAN), Schlumberger (SLB), and Xerox (XRX).

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John J. Phillips IV

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