U.S. Morning Call for Tuesday, October 14, 2008
Oct 14, 2008

Overnight Global News

• The European DJ Stoxx 50 this morning is up +5.88% and S&Ps are up another 2.86% (+29.10 points) as the market likes the emerging details of the US Treasury's $250 billion plan to inject capital into US banks and guarantee bank debt for 3 years. Bank stocks are sharply higher in Europe today. Citigroup is up 7%, Deutsche Bank is up 12%, Barclays is up 11%, and Goldman Sachs is up 5.5%. Asia-Pacific stocks today closed mostly higher to add to Monday's sharp gains: Japan +14.15%, Hong Kong +3.19%, China -2.56%, Taiwan +5.40%, Australia +3.70%, Singapore +2.50%, South Korea +6.10%, Bombay +1.54%. Japan's Nikkei index rallied +14.15% today since it was playing catch-up to sharp global stock market gains on Monday when the Japanese stock market was closed for a public holiday.
• The US government will reportedly inject $250 billion in capital into US financial institutions in a non-voluntary plan that will boost their Tier 1 capital and reduce their leverage to more comfortable levels. The US government will receive preferred shares in a deal that is similar to Warren Buffett's investment in Goldman Sachs several weeks ago, although it is not clear at this point whether the Treasury will receive warrants. Treasury Secretary Paulson is scheduled to discuss the plan at a press conference at 8:30 AM this morning, which will also be attended by Fed Chairman Bernanke and FDIC Chairman Sheila Bair. The Treasury will reportedly inject $125 billion in the largest US banks as follows: $25 billion to Citigroup, JPMorgan and Bank of America/Merrill, $20 billion to Wells Fargo, $10 billion to Goldman Sachs and Morgan Stanley, and $3 billion to State Street and Bank of New York. The remaining $125 billion will go to smaller US banks. The US government will also guarantee banks' newly issued unsecured senior debt for 3 years, thus ensuring that banks will be able to roll-over their funding for at least the next 3 years.
• Libor rates fell again today for the second day in a row in a sign that interbank lending may be starting to flow again. The overnight dollar Libor rate fell to 2.18% from 2.47%. The 3-month dollar Libor rate fell by 12 bp to 4.64%. The TED spread today fell 12 bp to 445 bp and the Libor-OIS spread fell by 15 bp to 339 bp

Today's U.S. Market Focus

• December 10-year T-notes this morning are trading +6 ticks. December T-note prices last Friday ended the abbreviated session little changed and up +0.5 tick. Bearish factors for T-note prices last Friday included (1) indications that the US and Europe were latching onto plans sufficient to address the credit crisis, and (2) speculation that investors sold Treasuries in order to raise cash for margin calls as the stock market tumbled to a 5-1/2 year low in early trading. Bullish factors for T-note prices last Friday included (1) the larger-than-expected decline in the Sep import price index (-3.0% m/m versus expectations of -2.8%), (2) Standard & Poor's assertion the state of California's credit rating may be cut if it isn't able to borrow $4 billion it needs to pay monthly bills, and (3) flight-to-safety as the stock market plunged to 5-1/2 year lows.
• The dollar is mixed today with the dollar/yen up +0.81 yen and the euro/dollar up 1.58 cents. The dollar index yesterday sold off and closed sharply lower. Bearish factors for the dollar yesterday included (1) the plan by European leaders in guaranteeing bank debt and injecting capital into banks, (2) the action by the Fed in offering unlimited dollars to the ECB, BOE and SNB and their domestic banks to help restore confidence and reduce short-term money market rates, and (3) the sharp drop in short-term money market rates, reducing the demand for dollars for funding among financial firms. A bullish factor for the dollar yesterday was the weakness in the yen with investors flocking into yen carry trades as global stock markets rallied sharply on the European plan to guarantee bank borrowing.
• November crude oil prices this morning are trading +$2.87 a barrel and November gasoline is trading +$7.84 cents a gallon as sentiment improves on the global economic outlook. November crude oil prices yesterday closed +$3.49 a barrel and November gasoline closed +11.06 cents a gallon. Bullish factors for crude oil prices yesterday included (1) the coordinated effort by the European Union nations in committing $1.8 trillion to guarantee bank loans to stabilize the banking system which led to a sharp rally in global stock markets, and (2) the sell-off in the dollar. A bearish factor for crude oil prices yesterday was Goldman Sachs's cut in its fourth quarter crude oil price forecast to $75 per barrel from a previous forecast of $110 and its cut in its year-end price target to $70 a barrel from $115 with the warning that "should the financial and evolving economic crisis cut deeper into demand, the oil market could fall as low as $50 a barrel."

Today's U.S. Earnings Reports

Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): JNJ-Johnson & Johnson (BEST earnings consensus $1.12 per share), PEP-Pepsico (1.08), INTC-Intel (0.34), DNA-Genentech (0.88), CSX-CSX Corp. (0.93), GWW-WW Grainger (1.53), LLTC-Linear Tech (0.45), ALTR-Altera (0.30), SVU-Supervalu (0.69), CBSH-Commerce Bancshares (0.66), ADTN-Adtran (0.35), PII-Polaris Industries (1.10), RLI-RLI (0.97)

Global Financial Calendar