- Markets are down sharply this morning in the wake of negative employment data and soft August same-store sales reports. Both the Dow and Nasdaq are -2.0% mid morning as traders are taking a decidedly cautious stance ahead of tomorrow's August non-farm payroll announcement. MER and LEH are taking hits, as both are down around 5% in early trading. Yesterday evening reports circulated that Merrill's talks with Korea Asset Management have stalled. The firm was attempting to sell bad loans to the Korean company, but negotiations have seemingly gotten hung up over price. The rumors continued regarding Lehman after the London Times reported that Tokyo Mitsubishi (unit of Mitsubishi UFJ) may bid for a Lehman stake, and may even try to take control of the firm. A Mitsubishi UFJ executive later said the bank has no plans to invest in Lehman.

The other major financials are under water, with the XLF-2%. BA is under pressure after its machinists union voted to reject a final three- year contract offer, although talks have been extended for another two days. Some analysts say a strike at could cost the company about $150M/day in lost revenue. CIEN-24% is hurting after slashing its revenue outlook for the coming quarter due to order delays among large customers; the company noted that it expects the slowdown to only last a few quarters. The news has pressured a variety of other names in or related to that space. ALU - 5% JNPR -4.5% CSCO -4% TLAB -4% JDSU -2% Homebuilder HOV-10% reported deeper Q3 losses than expected and said its gross margins about half of what they were a year ago. On the other hand, TOL+2% after reporting in line with earnings estimates and beating on revenue, offering a rare positive note in housing. HRB-5% reported a bigger loss than analysts had predicted, thanks in part to loss reserves and write-downs at its banking unit. BP has come well off of early highs after announcing that it has settled the ongoing dispute over Russian oil jv TNK-BP.

Terms include an IPO of as much as 20% of TNK-BP, the departure of CEO Robert Dudley and a new board, including three independent directors. EXC also opened up more than 2% but is in negative territory mid morning after authorizing a $1.5B stock buyback and tightening its FY08 EPS outlook. TEX-19% joined fellow construction equipment manufacturers BUCY and JOYG (both down 25% this week) in the doldrums today after cutting its full-year view and guiding well below estimates for the coming two quarters, noting that its profit margins are under pressure.

August same-store sales reports were mixed, but offered even more evidence that the consumer remains challenged. WMT, BJ and FRED came in ahead of estimates - WMT sales growth were nearly twice the expected figure - although all three are trading around even this morning. WMT's CEO noted that customers were skipping certain ancillary purchases and spending a greater share on staples. ZUMZ+3% was a big surprise, coming in at +0.2% versus analysts estimates of -4.5% in August, earning itself a price target raise at Wedbush and a Net Positive rating at Susquehanna. Department stores BONT, DDS and JWN are all down 2-4% after reported worse-than-expected sales declines for the month.

- It is worth pointing out that more downward pressure on commodity prices is also adding to the weight on equities. Despite Oct crude selling off another 1. 7%, briefly trading below $107; Indices have seen little if any positive impact. Mining and oil stocks are all moving lower once again. The $XAU made a fresh 1-year low below 130 while the OSX is trading at levels not seen in 6-months. Money continues to find a home in the relative safety of the Treasury market. The 10-year yield has fallen to 3.65%, levels not seen since late spring. The 2-year yield is approaching 2.20%

- The ECB and BoE left interest rates unchanged as expected at their policy meetings this morning: the BoE held at 5.00% and the ECB voted unanimously to maintain rates of 4.25%. The ECB noted that it would remain focused on battling inflation even after slashing its economic growth forecasts for this year and next.

The current rate will certainly aid the bank in this effort. ECB staff projections lowered the GDP outlook for 2008 and narrowed the 2009 range: now sees 2008 GDP in range 1.1% to 1.7% versus its forecast of 1.5% to 2.1% seen back in June; 2009 GDP in the range of 1.6% to 1.8% v 1.0% to 2.0% prior. On the inflation front, the ECB staff projections revised its 2008 inflation to a range of 3.4% 3.6% against its prior view of 3.2% to 3.6%; 2009 Inflation is now seen between 2.3%-2.9% versus 1.8% to 3.0% prior view. EU's Juncker noted that he saw EuroZone growth at 1-1. 3% in 2008 .

- ECB's Trichet reiterated that he notes US officials favor a strong USD; adds that it is believed by some markets but remained cautious regarding the recent drop in oil prices

- The ECB also provided details on 'refined' collateral rules that will take effect in Feb 2009. There will be now a 12% haircut on asset backed securities and Haircut add-on of 5% for unsecured bank bonds.

- In currency price action the EUR/USD was at session lows of 1.4440 area following the release of Jul German Factory orders. The Euro did manage a minor recovery as ECB continued to note concern over secondary effects of inflation such as wage developments.

However, the lower Euro-Zone growth prospects kept the USD on firm footing. Dealers note some “confusion” around with respect to ECB's mention of haircuts on abs collateral. Dealers note that typically the haircut goes up which in practice tightens liquidity or at least puts an additional premium on it. EUR/USD tested session lows as dealers debate the impact of the 'refined' collateral rules non euro asset currency hedges. Both IMF and EU's Juncker noted that the Euro remains overvalued against USD. Juncker noted that EUR/USD at 1.44 better reflects fundamentals compared to the 1.60 level.

- Carry-related crosses were lower as equity markets maintained a heavy tone. EUR/JPY down 190 pips at 155.40 and EUR/CHF off 70 pips at 1.5970. Lower energy prices and metals are causing CAD and AUD softness.

- European Stocks moved lowers as data and central bank speak weighed upon sentiment. The ECB noted that corporate demand for loans was slowing, but expected a gradual recovery, sees resilient global growth.