U.S. Morning Call for Monday, October 6, 2008

Overnight Global News

• The European DJ Stoxx 50 this morning is trading -5.23% on increased concern about the credit crisis in Europea. Asia-Pacific stocks today closed sharply lower: Japan -4.25%, Hong Kong -4.97%, China -5.12%, Taiwan -4.12%, Australia -3.30%, Singapore -5.61%, South Korea -4.20%, Bombay -5.78%. The credit credit expanded globally over the weekend as European leaders ruled out any pan-European action and as investors and savers try to flee to less-risky investments. On the brighter side, the 3-month Libor rate today fell 4 bp to 4.29% from Friday's peak of 4.33% and the 3-month Euribor rate rose only 1 bp to a new record of 5.34%. Russian stocks fell 15% today and the Russian stock markets halted trading again. Bank of America, Merrill Lynch and Goldman Sachs are all down more than 3% this morning in European trading.
• In weekend European bank rescue news, both Fortis and Hypo Real Estate Holding AG both required revamped rescue plans after the initial plans from a week earlier didn't work. The Belgium and Netherlands governments over the weekend implemented a deal where BNP Paribas, France's largest bank, will take control of most of Fortis. Germany, Sweden, Austria and Denmark all took action today or over the weekend to extend bank deposit guarantees and try to prevent depositor runs on banks. In the UK, the Royal Bank of Scotland is down 11% and Barclay's is down 8% after newspaper reports that the UK government may make capital injections into UK banks, which would protect the banks but could dilute current shareholders.
• Market focus The markets this week will focus on (1) whether the Fed and the Treasury can halt the panic in the banking system now that the $700 billion rescue bill has passed and the end-quarter statement date has passed, (2) the banking situation in Europe which remains tense as European leaders over the weekend pledged to rescue their own nations banks as necessary but were unable to agree on any pan-European rescue plan, (3) the US stock market which is now worried about the state of the US economy and earnings and failed to rally on the Houser passage last Friday of the rescue package, (4) the T-note market where the market is assessing the state of safe-haven demand for Treasury securities and the likelihood of near-term Fed easing, (5) talk about the possibility of a coordinated central bank easing if the banking situation continues to deteriorate this week, (6) the dollar which has rallied sharply in the past two weeks due to dollar hoarding during the crisis and the weakening economic situation in Europe, and (7) oil prices which have fallen fairly sharply in the past two weeks due to the banking crisis and fears about the possibility of a global recession.
• US Calendar On this week's US economic calendar, Tuesday brings comments by Fed Chairman Bernanke, the minutes of the Sep 16 FOMC meeting, and Aug consumer credit (expected +$5.8 billion). Wednesday brings Aug pending home sales (expected 1.1%), and the Treasury's auction of 10-year inflation-protected T-notes. Thursday brings weekly initial unemployment claims (expected 22,000), Aug whole inventories (expected +0.4%), and Sep ICSC chain store sales. Friday brings the Aug US trade deficit (expected narrower at -$59.0 billion vs -$62.2 billion in July), and Sep import prices (expected 2.5%). The interest rate and currency futures markets will close early this Friday ahead of next Monday's Columbus Day holiday.
• Banking crisis The overnight dollar Libor rate late last week eased to pre-crisis after Tuesday's end-quarter statement date, which was an encouraging sign that inter-bank lending was starting to ease up. However, banks are still basically refusing to lend to each other for any significant length of time as seen by last Friday's continued rise in the 3-month dollar Libor rate to an 8-month high of 4.34%, up 154 bp from the 2.80% area that prevailed before the string of banking crises began about 3 weeks ago. The 3-month dollar Libor rate is now 366 bp above the federal funds target rate, which is by far the tightest situation since the mortgage and banking crisis originally began in July 2007. The markets will continue to closely watch inter-banking lending rates as a proxy for when banks start to become more confident and start lending to each other again, as opposed to the current situation where banks are relying on the Fed for much of their short-term funding needs.
• Fed policy The market last week boosted the odds for Fed easing by about another 25 bp as the banking system continued to freeze up and talk grew about the possibility of an emergency Fed rate cut or even a coordinated rate cut between the Fed, ECB, Bank of England, and other major central banks. The market is now fully discounting a 50 bp Fed rate cut to 1.50% either before or at the next FOMC meeting on Oct 28-29. The market is discounting a maximum 40% chance of an overall 75 bp rate cut to 1.25% by January 2009. The market then expects the Fed to starting raising the funds rate target back to 2.00% by October 2009.

Overnight U.S. Stock News

• September S&Ps this morning are trading sharply lower by -31.40 points (-2.83%). Bearish factors include sharply lower overseas stocks, the spreading credit crisis in Europe, and concern about the US economy after last Friday's weak US payroll report. The US stock market last Friday couldn't hold an early rally and sold off into the close (Dow -1.50%, S&P 500 -1.35%, Nasdaq Composite -1.48%).
• Bearish factors for stock prices last Friday included (1) the weaker-than-expected Sep non-farm payroll report which showed that job losses continuing for the ninth straight month and increased the odds that the US is headed for a recession, (2) pessimism that the financial-rescue package by Congress won't be enough to unlock the credit markets and keep the US economy from further deteriorating, (3) the ongoing credit squeeze which caused the Libor euro rate to soar to a record high of 5.33% as inter-bank lending remains non-existent and threatens to grind the global economy to a halt, and (4) the prediction by Goldman Sachs that the US economy will enter a recession "significantly depper" than previously forecast.
• Bullish factors for stock prices last Friday included (1) the 58% surge in Wachovia after Wells Fargo outbid Citigroup for Wachovia, (2) speculation that the Fed may lower interest rates as early as this month as the economy continues to falter, and (3) the overall sell-off in commodity prices which plunged to a 1-year low with gasoline prices falling to an 8-1/2 month low as weakening demand for commodities should alleviate inflation concerns.
• The battle between Citgroup and Wells Fargo over buying Wachovia will continue this week after a New York state court judge extended Citigroup's exclusivity agreement with Wachovia.

Today's U.S. Market Focus

• December 10-year T-notes this morning are trading +29.5 ticks as the credit crisis expanded globally. December T-note prices last Friday closed +16 ticks. Bullish factors for T-note prices last Friday included (1) the larger-than-expected fall in Sep nonfarm payrolls (-159,000 versus expectations of -105,000) as US payrolls have now contracted for the ninth straight month, (2) the drop in weekly hours in the Sep unemployment report to the lowest level (-0.1 to 33.6 hours) since records began in 1964, (3) the prediction by Goldman Sachs that the US economy will enter a recession "significantly deeper" than previously forecast, prompting the Fed to cut interest rates by at least 100 bp, and (4) fears the the ongoing liquidity squeeze may grind the US economy to a halt after California's governor told the US Treasury that California and other states may need emergency loans if credit-market turmoil continues to impede their access to financing. Bearish factors for T-note prices last Friday included (1) a slightly better-than-expected Sep ISM non-manufacturing index (-0.4 to 50.2 versus expectations of -0.6 to 50.0) and (2) the Congressional approval of the $700 billion financial-rescue package.

• The dollar this morning is mixed. The euro/dollar is sharply lower by 1.72 cents as the credit crisis expanded in Europe. The dollar/yen is sharply lower by -2.08 yen as the yen soars on the further exit of yen-carry trades. The dollar index last Friday rallied to a 13-month high before falling back and closing slightly lower. Bullish factors for the dollar last Frirday included (1) a continued hoarding of dollars by global financial institutions as the worldwide credit crunch persists, and (2) the recommendation by Morgan Stanley that investors should sell the euro as the ECB signaled it may lower borrowing costs for the first time in five years. Bearish factors for the dollar last Friday included (1) the weaker-than-expected US jobs report for Sep which showed employment contracting for the ninth straight month, and (2) expectations that the Fed will have to cut interest rates in response to the economic shock hitting the US economy.
• November crude oil prices this morning are trading -$3.93 a barrel and November gasoline is trading -7.61 cents a gallon on continued long liquidation pressure and concern about weaker global economic growth. November crude oil prices last Friday closed -$0.09 a barrel and November gasoline closed -2.67 cents a gallon. Bearish factors for crude oil prices last Friday included (1) continued strength in the dollar which shot up to a 13-month high, reducing the demand for crude oil as an inflation hedge, (2) pessimism that the US government's bank-rescue package will keep the US economy from falling into recession, thus further curbing energy demand, and (3) carry-over weakness from gasoline prices which fell to a 10-month low on demand worries. A bullish factor for crude oil prices last Friday was OPEC's production cut in Septembery by 330,000 bpd, or 1%, according to the Middle East Economic Survey.

Today's U.S. Earnings Reports

Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): N/A (BEST earnings consensus $0.00 per share)

Global Financial Calendar