U.S. Morning Call for Friday, October 10, 2008
Oct 10, 2008

Overnight Global News

• The European DJ Stoxx 50 this morning is sharply lower by -7.89%. The sharp sell-off in US stocks seen late yesterday sparked heavy selling overseas today. Asia-Pacific stocks today closed sharply lower across the board: Japan -9.62%, Hong Kong -7.19%, China -4.43%, Australia -8.34%, Singapore -7.34%, Bombay -7.07%. Trading was disrupted in several countries today due to selling pressure. Russian exchanges delayed the opening today, Iceland's stock trading remains closed until Monday, Austria had a temporary circuit-breaker trading halt today, and Thailand had a 30-minute circuit-breaker trading halt after a 10% decline.
• GE reported favorable earnings news this morning as its Q3 EPS report was in line with the consensus and the company said it was on track to meet its most recent full-year guidance. Morgan Stanley is down 4% today after Moody's said it may cut Morgan Stanley's credit rating.
• The inter-bank lending market remains frozen with the 3-month dollar Libor rate rising 7 bp to 4.82%, although the overnight dollar Libor rate fell sharply by 262 bp to 2.47%. The TED spread today fell 1 bp to 422 bp. The Libor-OIS spread rose 11 bp to 365 bp.
• US trade balance Today's Aug US trade deficit is expected to narrow moderately to -$59.0 billion from the 1-1/2 year high of -$62.2 billion in July. The US trade deficit has generally been moving sideways for the past two years due to the fact that the two major factors affecting the deficit have mostly offset each other, i.e., the high value of US oil imports versus strong demand for US exports. However, those pressures have shifted in the past several months, with the value of imports now falling due to lower oil prices and weaker demand for imports from US consumers. At the same time, US exports are also starting to drop due to slower overseas growth. The bottom line is that those shifting forces will cause the trade figures to be volatile and difficult to predict over the near-term. The big impact of strong export demand can be seen in the US trade deficit ex-petroleum, which has narrowed by more than $20 billion in the past 2 years to the current level of -$18.8 billion. That is the narrowest ex-petroleum deficit in at least the last 8 years since the data series began. If it were not for the huge American appetite for foreign oil, the US trade deficit problem would be on its way towards being solved. However, there is no prospect on the horizon for the US to cut its oil imports, aside from a recession-related drop in demand. Oil prices are falling, which is also a step towards cutting the dollar-value of US oil imports. Still, oil prices remain very high from an historical perspective near $86. Therefore, the US appetite for foreign oil will continue to cause a big US trade deficit, which in turns undercuts the dollar on a long-term basis.
• US import prices Today's Sep import price index is expected to fall sharply by 2.8% m/m, adding to the 3.7% m/m decline seen in August. On a year-on-year basis, Sep import prices are expected to ease to +12.2% y/y from +16.0% y/y in August and the record high of +21.3% seen in June. Import prices are of course falling due to the crude oil prices, which have plunged by about $60 in the past four months. Nevertheless, import prices, excluding petroleum, are also likely to decline sharply in coming months as raw materials prices fall and as importers are forced to cut prices to support demand. In fact, US import prices ex-petroleum in August eased slightly to +7.5% from the 20-year high of +7.8% posted in June 2008. While inflation used to be one of the Fed's major concerns, the inflation outlook has now been thrown out the window as a monetary policy criterion since a serious recession likely looms and since the Fed and the Treasury are preoccupied with saving the global financial system.

Overnight U.S. Stock News

• December S&Ps this morning are trading -20.40 (-2.24%) as the selling pressure continues from fund redemptions and from uncertainty about the outlook for the economy and earnings. The US stock market yesterday tried to rally early but plummeted in the early afternoon and ended on the day's low (Dow -7.33%, S&P 500 -7.62%, Nasdaq Composite -5.47%). The S&P 500 Index and the Dow Industrials both fell to 5-1/3 year lows yesterday.
• Bearish factors for stock prices yesterday included (1) the 31% plunge in General Motors to a 58-year low and the 22% dive in Ford to a 28-year low on speculation the ongong credit crunch will further hurt already-weak US auto sales and as Standard & Poor's said it may cut GM's debt deeper into junk levels, (2) the jump in the Chicago Board Options Volatility Index to an all-time high of 63.92, which indicates the extraordinary level of fear and panic in the marketplace, and (3) the frozen inter-bank lending markets with the dollar Libor rate rising to a 10-month high of 4.75% and the Euribor euro rate staying at a record high of 5.39% as banks continue to hoard cash and are unwilling to lend, threatening to grind global economies to a halt and raising concerns of a worldwide recession.
• Bullish factors for stock prices yesterday included (1) the continued sell-off in crude oil prices to an 11-1/2 month low, (2) a possible thaw in the short-term money markets after the state of Massachusetts was able to sell $750 million of short-term notes and California's governor said he may be able to sell $4 billion in short-term notes in order to pay monthly bills, and (3) the Treasury's possible plan to backstop banks by directly injecting capital, which would offer quicker relief and could be implemented as soon as the end of this month

Today's U.S. Market Focus

• December 10-year T-notes this morning are trading +1 tick. The T-note market, which would normally be trading higher on today's lower trade in S&Ps, is still smarting from the Treasury's surprise sale of $20 billion in T-notes. December T-note prices yesterday added to Wednesday's sharp losses and closed -1-13/32 points at a 2-month low. Bearish factors for T-note prices yesterday included (1) supply pressures with the $20 billion of reopened 10-year T-notes auctioned yesterday as part of the Treasury's emergency plan to relieve shortages of Treasury collateral and failed trades, (2) the action by the state of Massachusetts in being able to sell $750 million of short-term notes and California's governor saying he may be able to sell $4 billion of short-term notes to pay monthly bills, a sign that federal actions to thaw credit markets are beginning to work, and (3) speculation that there may be quite a significant amount supply of Treasuries coming to market in the near-term in order to fund the myriad of programs the Treasury is implementing to relieve the frozen inter-bank lending markets. Bullish factors for T-note prices yesterday included (1) the rise in weekly continuing unemployment claims to a 5-1/4 year high (+56,000 to 3.659 million), (2) the larger-than-expected increase in Aug wholesale inventories (+0.8 versus expectations of +0.4%), and (3) flight-to-safety as the stock market plunged to 5+ year lows.

• The dollar is mixed this morning. The dollar/yen is down -0.85 yen as the sharp sell-offs in global stock markets today spur the exit of carry trades and yen-buying. The euro/dollar is down -0.47 as investors hoard dollars with the sharp global stock market sell-off today. The dollar index yesterday closed mildly higher. Bullish factors for the dollar yesterday included (1) the drop in the British pound to a 2-3/4 year low against the dollar on speculation the BOE may have to continue cutting interest rates as home prices in England contracted for the eighth straight month, and (2) the Treasury's plan to buy stakes in a number of US banks within weeks to help alleviate the credit crisis. Bearish factors for the dollar yesterday included (1) the rise in continuing weekly unemployment claims to a 5-1/4 year high, and (2) the prediction by CIBC World Markets that the euro is "long overdue" for a rebound against the dollar and may rise to $1.40 before resuming its slide.
• November crude oil prices this morning are trading -$4.31 a barrel and November gasoline is trading -8.96 cents a gallon. The main bearish factor this morning is the sharp global stock market sell-off, which will cause more pain for investors and consumers the world-over, thus dampening fuel demand. November crude oil prices yesterday moved lower and closed -$2.36 a barrel at an 11-1/2 month low and November gasoline closed -0.025 cents a gallon. Bearish factors for crude oil prices yesterday included (1) speculation that the coordinated interest rate cuts by the world's largest central banks may be insufficient to prevent a prolonged global recession, (2) continued weak US energy demand as US fuel use over the past four weeks averaged 18.7 million bpd, the lowest in 9-1/4 years, and (3) the action by UBS in lowering their 2008 fourth quarter price forecast for crude oil by 15.2% to $106 a barrel from a previous forecast $125 a barrel and lowering their 2009 price estimate by 12.5% to $105 a barrel from $120 a barrel. Bullish factors for crude oil prices yesterday included (1) the announcement of an emergency OPEC meeting in Vienna on Nov 18 to discuss the impact of the financial crisis on crude oil prices, and (2) comments from OPEC President Khelil that OPEC is "very likely" to cut oil production at its next meeting because prices have fallen "dramatically."

Today's U.S. Earnings Reports

Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): GE-General Electric (BEST earnings consensus $0.45 per share), PGR-Progressive (0.34), HST-Host Hotels & Resorts (0.07), JBHT-JB Hunt Transport Services (0.42)

Global Financial Calendar