U.S. Morning Call for Thursday, October 9, 2008
Oct 09, 2008

Overnight Global News

• The European DJ Stoxx 50 this morning is trading mildly higher by +0.39% on the global rate cuts yesterday and today and on some bottom-fishing by investors attracted by extremely low valuations. European banks today are sharply higher on short-covering and optimism about yesterday's 50 bp rate cut to 3.75% by the ECB. In addition, ECB President Trichet said yesterday that he can't rule out more rate cuts. The ECB today also provided unlimited loans to banks at a rate no higher than 3.75%. UBS is up +7% today and Deutschebank is up +8%. Royal Bank of Scotland is up +18% this morning on a Citibank upgrade on the UK bank sector to "neutral" from "underweight," although RBS remains down 43% on the week. Russian stocks are up +17% today, more than reversing yesterday's 14% decline and leading to some hopes of a recovery in emerging market stocks.
• There were rate cuts today in South Korea, Taiwan and Hong Kong today, which followed yesterday's US-European rate cuts and the rate cut by China. Asia-Pacific stocks today closed mixed: Japan -0.50%, Hong Kong +3.31%, China -1.36%, Taiwan -1.45%, Australia -1.53%, Singapore +3.40%, South Korea +1.02%.
• Claims Today's weekly unemployment claims report is expected to show a decline of 22,000 to 475,000 following last week's small increase of +1,000 to a 7-year high of 497,000. Meanwhile, weekly continuing claims are expected to climb +17,000 to 3.608 million, adding to last week's +48,000 increase to a 5-year high of 3.591 million. The unemployment claims figures have been pushed higher in the past few weeks by Hurricanes Gustav and Ike. However, there is significant upward pressure on unemployment claims from the credit crisis, which is causing businesses to lay off workers in response to the drop-off already seen in economic activity and to prepare for a tough road ahead. The recent September unemployment report was weak with a 159,000 decline in payrolls, which brought the total 9-month string of payroll declines to a total of 760,000. The unemployment rate in September was unchanged at 6.1%, but will certainly be headed higher in the next few months to likely exceed the peak from the last recession of 6.3% but hopefully stop well shy of the peak of 7.8% seen after the 1990-91 recession.
• Chain store sales Today's Sep ICSC chain store sales report is expected to fall to +1.4% y/y from the August level of Aug +1.7% y/y. Today's report will provide some early indications of how consumers reacted to the credit crisis, although the crisis did not really hit the public's attention until the middle September when Treasury Secretary Paulson went to Congress to ask for the $700 million rescue package. The markets will therefore be much more worried about October retail sales, which are likely to fall off a cliff as the situation blew up into a full-fledged banking and stock market crisis

Overnight U.S. Stock News

• September S&Ps this morning are trading +14.70 on positive IBM earnings news and some increased optimism that the financial crisis could start settling down after yesterday's coordinated rate cut by the Fed, ECB and other central banks, and today's rate cuts by several countries in Asia. The US stock market yesterday whipsawed several times in a volatile session before closing lower (Dow -2.00%, S&P 500 -1.13%, Nasdaq Composite -0.83%). The S&P 500 Index and the Dow Industrials both fell to 5-year lows yesterday.
• Bearish factors for stock prices yesterday included (1) the 3% drop in the S&P 500 Financials Index to its lowest level since 1997 on concern the the US is headed into recession as the credit crisis drags on, (2) comments from Treasury Secretary Paulson that more banks may fail despite the passage of the $700 billion package to shore up financial firms, (3) the 8.9% drop in Ford and 8.6% fall in GM after both US automakers were downgraded to "sell" from "hold" by Citigroup because of "declining global credit conditions," and (4) the sell-off in insurance companies after MetLife, the largest US life insurer, plunged 27% when it said Q3 profit tumbled 48% and that it plans on raising capital by selling 75 million shares.
• Bullish factors for stock prices yesterday included (1) the unprecedented coordinated action by the Fed, ECB and four other central banks in cutting their benchmark interest rates by 50 bp and signaling they are prepared to take further steps to stem the worst financial crisis since the Great Depression, (2) the narrowing of the spread between the rate on 10-year interest-rate swaps and Treasury yields, which if it continues, would signal an easing of pressures in the inter-bank lending market, and (3) comments from Treasury Secretary Paulson that he's considering plans to pump more capital into US financial institutions and said the Treasury, Federal Reserve and the FDIC will "use all their authorities to promote the process of repair and recovery and to contain risks to the financial system that might arise from problems at individual institutions."
• IBM is sharply higher by +6.3% after reaffirming its full-year profit forecast of $8.75 late yesterday. In addition, IBM reported its earnings in the latest quarter at $2.05 per share, which was higher than the analyst consensus of $2.01.

Today's U.S. Market Focus

• December 10-year T-notes this morning are trading -15.5 ticks on higher S&Ps. December T-note prices yesterday sold-off sharply and closed -2-6.5/32 points. The main bearish factor for T-note prices yesterday was supply pressure with the emergency action by the US Treasury in auctioning $20 billion in reopened 10-year T-notes yesterday and auctioning another $20 billion today to "address upcoming borrowing needs and further enhance liquidity in the Treasury market" as failed trades rose to a record $3.545 trillion during the week ended Sep 24 due to the scarcity of Treasuries in the open market as demand for US government debt has soared because of the financial crisis. Other bearish factors yesterday included (1) worries that the coordinated central bank rate cuts yesterday could lead to inflation down the road, and (2) the unexpected jump in US pending home sales for Aug to the biggest m/m gain in 6-3/4 years (+7.4% m/m versus expectations of -1.3% m/m). Bullish factors for T-note prices yesterday included (1) the prediction by the IMF that the world's advanced economies next year will grow at the slowest pace since 1982 with US CPI growth easing to +1.8% in 2009 from +4.2% this year, and (2) concern that the coordinated interest rate cuts by the Fed, ECB and four other central banks yesterday will fail to calm the turmoil in global financial markets and keep demand high for the safety of Treasuries.
• The dollar/yen is sharply higher by +1.62 yen on short-covering after the global rate cuts provided some support for stocks to slow down the exit of yen carry trades. The euro/dollar is slightly higher by +0.18 cents this morning. The dollar index yesterday ended the day weaker. Bearish factors for the dollar yesterday included (1) the rally in the yen to a 6-1/4 month high against the dollar as equity markets worldwide tumbled and yen carry trades were unwound, and (2) the unexpected rise in German Aug industrial production to its largest m/m gain (+3.4% m/m) in 15-years. Bullish factors for the dollar yesterday included (1) the unexpected gain in US pending home sales for Aug, and (2) the prediction from the Ifo Institute that economic growth in the Euro-Zone won't start expanding again until the first quarter of 2009.
• November crude oil prices this morning are trading +0.35 cents a barrel and November gasoline is trading +0.78 cents a gallon with support from the more stable environment after yesterday's rate cuts. November crude oil prices yesterday moved lower and closed -$1.11 a barrel at a 10-month low and November gasoline closed -3.30 cents a gallon at a 1-year low. Bearish factors for crude oil prices yesterday included (1) the much larger-than-expected increases in crude oil and gasoline inventories in yesterday's weekly inventory report (crude oil +8.12 million bbl versus expectations of +2.5 million bbl and gasoline +7.17 million bbl versus expectations of +1.5 million bbl), (2) the prediction from the Center for Global Energy Studies that oil prices may drop to below $80 a barrel by the end of the year because of weakening demand and could fall even further next year, and (3) the assertion by Goldman Sachs that crude oil prices may fall further as refiners sell off their stockpiles because the credit crunch is impeding their ability to hold inventories and that crude oil prices may fall as low as $75 a barrel if there is a global recession. Bearish factors for crude oil prices yesterday included (1) the weaker dollar, and (2) the statement by Libya's top energy official that OPEC may meet next month to discuss the impact of the financial crisis on oil markets, increasing speculation of possible OPEC production cuts

Today's U.S. Earnings Reports

Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): RPM-RPM International (BEST earnings consensus $0.54 per share), ISCA-International Speedway-A (0.71)

Global Financial Calendar