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Overnight Global News

• The European DJ Stoxx 50 this morning is trading -2.50%. Bearish factors include weaker-than-expected orders from ABB (the world's largest power grid builder) and a guidance cut by Daimler. Asia-Pacific stocks today generally closed sharply lower: Japan -2.46%, Hong Kong +3.55%, China +0.08%, Taiwan -2.72%, Australia -4.37%, Singapore -4.14%, South Korea -7.20%, Bombay -3.92%. The gloom continued in overseas trading today after RealtyTrac reported that Q3 US foreclosure filings rose +71% y/y. In addition, Amazon.com is sharply lower by 13% today in European trading after reducing its Q4 guidance late yesterday. On the brighter side, Sweden's central bank today cut its key repo rate by 50 bp to 3.75%, the second cut in two weeks. New Zealand's central bank today cut its key rate by 100 bp to 6.5%.
• Interbank lending rates were mixed today, halting the sharp daily declines that have been seen for the past two weeks. The 3-month dollar Libor rate was unchanged at 3.54% today. The 3-month dollar Libor rate has fallen sharply from the peak of 4.82% posted on Oct 10, but is still well above the 2.82% level that prevailed before the banking crisis began in mid-September. The 3-month Libor rate should actually be 50 bp lower than pre-crisis levels (i.e., near 4.32% considering that the Fed on Oct 8 cut the funds rate by 50 bp to 1.50%). The overnight dollar Libor rate today rose +9 bp to 1.21%, but remains below the 1.50% funds rate target. The Libor-OIS spread fell 2 bp to 251 bp. The 3-month Euribor today fell 1 bp to 4.92% from 4.93% on Wednesday.
• The latest dominos to run into trouble in the global credit crisis are entire countries. Iceland was an early victim of the crisis, but there is now a growing list of countries lining up at the IMF seeking relief packages. The list of countries that are running into trouble include Argentina, Pakistan, Hungary, Ukraine, and Belarus. The credit default swap rate on 14 emerging market governments rose sharply today by 320 bp to 9.9% as the markets raised the risk assessment of defaults by emerging market countries.
• Claims Today's weekly initial unemployment claims report is expected to show a small increase of +6,000 to 467,000, reversing part of last week's 16,000 decline to 461,000. Last week's decline brought the series down from its 7-year high, but initial claims are still in the upper reaches of the peaks seen during recessions in the past two decades. Meanwhile, weekly continuing claims are expected to fall 11,000 to 3.700 million, reversing part of last week's +40,000 surge to 3.711 million. Last week's level of continuing claims was a 5-year high and was only mildly below the 25-year high seen during the 2000-03 recessionary period. The US labor market is likely headed for a sharp drop-off as businesses panic from the credit crunch and start to scale back on production and employee head counts to brace for a potentially steep recession. Payrolls have fallen every month this year and are likely to continue to drop into at least early 2009. Payrolls in September fell by 159,000, the largest monthly decline since 2003, and an even steeper decline is likely for October when the credit crisis peaked. The US unemployment rate is currently at a 5-year high of 6.1% and appears likely to easily rise above the peak of 6.4% seen during the 2000-03 recessionary period and perhaps even challenge the previous peak of 7.8% posted in connection with the 1990-91 recession. The post-war record high for the US unemployment rate is 10.8% posted in 1982.
• US house prices Today's Aug OFHEO US house price index is expected to fall 0.5% m/m, adding to July's decline of 0.6% m/m. The index has now fallen by a total of 5.8% from the record high of 225.1 posted in April 2007. OFHEO's house price index is far out of sync with other home price indicators and anecdotal data, which indicates that US home prices have fallen by some 20% from the peak thus far. Most observers are calling for a further decline of at least 5 or 10%, considering the latest shock from the credit crisis, a potentially steep recession, and the rising tide of foreclosures

Overnight U.S. Stock News

• December S&Ps this morning are trading -1.70 points, consolidating after yesterday's sharp decline. The US stock market yesterday closed sharply lower (Dow -5.69%, S&P 500 -6.10%, Nasdaq Composite -4.77%).
• Bearish factors for stock prices yesterday included (1) a global equity market sell-off after BOE Governor King said the UK is probably in recession and after Argentina took steps to try to stave off a default on its debt, (2) comments from Minneapolis Fed President Stern that financial markets "remain unsettled" despite the actions from the Fed in the last 14 months, (3) the prediction from Barclays Capital that losses in the $1.2 trillion CDO market may spark the next wave of writedowns as downgrades of corporate CDOs force investors to boost capital, and (4) a continued cut in earnings estimates as the market now expects an 11% drop in Q3 earnings, the fifth straight quarter of declining profits.
• Bullish factors for stock prices yesterday included (1) the eighth straight day of declines in the interbank lending market with the overnight dollar Libor rate falling to a 4-1/3 year low, a sign the credit crisis is continuing to recede, (2) the drop in crude oil prices to a 16-month low and the overall plunge in commodity prices to a 2-year low, and (3) expectations that the Fed will lower the funds rate by at least 25 bp at next week's FOMC meeting.

Today's U.S. Market Focus

• December 10-year T-notes this morning are trading -0.5 ticks. December T-note prices have rallied every day this week and closed yesterday +24 ticks at a 2-week high. Bullish factors for T-note prices yesterday included (1) flight-to-quality as equity markets worldwide tumbled on concern that the global economic slowdown is deepening and that emerging market countries are running into problems, (2) comments from Minneapolis Fed President Stern that financial markets "remain unsettled" despite the Fed's efforts in the past 14 months to maintain stability, and (3) the prediction from Barclays Capital that investors are taking losses of up to 90% in the $1.2 trillion market for collateralized debt obligations (CDOs) which may spark the next wave of writedowns as downgrades of corporate CDOs will force investors to boost capital reserves. A bearish factors for T-note prices yesterday was the eighth straight day of declines in interbank lending rates with the overnight dollar Libor rate sliding to a 4-1/3 year low and the two-year interest rate swap spread falling to below 100 bp for the first time since Lehman Brothers collapsed last month, a sign that credit markets are slowly returning to normal.
• The dollar is mixed this morning with the dollar/yen down -0.33 yen and the euro/dollar down -0.35 cents. The dollar index yesterday continued this week's surge and closed at a 1-3/4 year high. Bullish factors for the dollar yesterday included (1) the plunge in the British Pound to a 5-year low against the dollar after BOE Governor King said the UK is probably in recession, increasing the chances of futher BOE rate cuts, (2) the sell-off in the euro to a 1-3/4 year low against the dollar on market expectations of further ECB interest rate cuts, (3) continued flight-to-safety into the dollar from emerging-market currencies as Argentina tries to stave off a default on its debt, and (4) the prediction by Citigroup that US investors have repatriated about $60 billion of the nearly $1 trillion in foreign stocks and bonds purchased since 2003, leaving an "enormous pool of capital" that may flow back into the US and bolster the dollar.

• December crude oil prices this morning are trading +$1.39 a barrel and December gasoline is trading +2.23 cents a gallon. December crude oil prices yesterday tumbled and closed -$5.43 a barrel at a 16-month low and December gasoline closed -11.65 cents a gallon at a 20-month low. Bearish factors for crude oil prices yesterday included (1) continued weak demand as US fuel consumption during the past four weeks was down 8.5% from a year ago, (2) the surge in the dollar index to a 1-3/4 year high, (3) the larger-than-expected increase in crude oil supplies in yesterday's DOE inventory report (crude +3.18 million bbl versus expectations of +2.65 million bbl), (4) Morgan Stanley's forecast that global oil demand will fall to as low as 83.5 million bpd in the second quarter of 2009 from 85.7 million bpd in the third quarter of this year, and (5) comments from Libya's top oil official that the oil market is "flooded" with crude and an OPEC cut of 1 million bpd won't be sufficient to stem the decline in prices

Today's U.S. Earnings Reports

Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): MSFT-Microsoft (BEST earnings consensus $0.47 per share), UPS-United PArcel (0.89), MO-Altria Group (0.44), LLY-Eli Lilly (1.02), BMY-Bristol-Myer Squibb (0.42), UNP-Union PAcific (1.30), BNI-Burlington Northern (1.69), SO-Southern (1.02), CELG-Celgene (0.38), DOW-Dow Chemical (0.58), AFL-Aflac (1.00), RTN-Raytheon (0.96), TMO-Thermo Fisher (0.76), CB-Chubb (0.99), BEN-Franklin Resources (1.47), STI-Suntrust Banks (0.61), NOV-National Oilwell Varco (1.30), ZMH-Zimmer Holdings (0.89), JCI-Johnson Controls (0.73), EPD-Enterprise Products Partners (0.51), PCU-Southern Copper (0.56), DO-Diamond Offshore Drilling (2.23), ECL-Ecolab (0.55), JNPR-Juniper Networks (0.29)

Global Financial Calendar