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Overnight Global News

• The European DJ Stoxx 50 this morning is down -1.94% at a 1-month low and March S&Ps are down -7.60 points (-0.87%). Asia-Pacific stocks closed mostly higher today with Japan +0.29%, Hong Kong +0.27%, China +4.21%, Taiwan -0.24%, Australia +0.89%, Singapore +0.16%, South Korea +1.34%, India +3.30%. European stocks are lower for the sixth consecutive day as the banking sector drags down the market with Deutsche Bank, Germany's biggest bank, trading down 7% after reporting a Q4 loss of 4.8 billion euros ($6.3 billion) and HSBC Holdings Plc, Europe's largest bank by market value, tumbling 8.3% after Morgan Stanley predicted it will have to raise as much as $30 billion and cut its dividend in half and that the bank's profit is likely to fall "sharply" this year and won't recover until 2011 at the earliest. Rounding out the negative banking sector news, Exane downgraded UniCredit (down 3.5%), Italy's largest bank by assets, and smaller rival Banco Poplare (down 3.8%) to "underperform" from "neutral." Mining companies are lower today as well with Citigroup downgrading Anglo American (down 2.4%) and Xstrata Plc (down 4.1%) to "hold" from "buy," as well as several other smaller mining firms. Siemens AG is down by over 6% today after Merrill Lynch downgraded Europe's largest engineering company to "neutral" from "buy" after saying Q1 orders dropped "significantly." The Russian ruble fell to a nearly 6-year low against the dollar today as Russia's central bank devalued the ruble for the third time in four days and as the government's dispute with Ukraine over gas shipments remains unresolved. On the positive side, Toshiba and Fujitsu, Japan's second largest personal computer maker, gained more than 5% each as the companies neared an agreement to combine their hard-disk drive businesses and the UK government said today it will guarantee 21.3 billion pounds ($31 billion) of bank loans to small and medium-sized companies in order to keep credit flowing during the recession.
• Mortgage apps  The latest overall weekly MBA mortgage applications index rose +15.8% to a 5-1/2 year high with the purchase sub-index down -14.1% and refinancing sub-index surging +25.6% to a 5-1/2 year high as homeowners continue to cash in on the recent plunge in mortgage rates. The purchases sub-index, however, is just above the recent 8-year low and remains at a depressed level that indicates lackluster home buying activity. The 30-year mortgage rate in the week ended January 1 fell by another 4 bp to a new record low of 5.10%. The 30-year mortgage rate has plunged by 136 bp since mid-October mainly because of the Feds recent program of buying mortgage securities and the debt of Fannie/Freddie.
• Import prices Todays Dec import price index is expected to fall sharply by 5.3% m/m and 9.7% y/y, adding to the plunge seen in November of 6.7% m/m and 4.4% y/y. Import prices were up +21.4% y/y as recently as July 2008, and have now completely reversed course to show a 4.4% y/y decline in November. Import prices are dropping sharply mainly due to lower crude oil prices. However, import prices excluding petroleum are also dropping sharply, providing some good inflation news for the Fed and the markets. Import prices ex-petroleum were up only +2.4% y/y in November, which was sharply below the 20-year high of +7.8% seen in July 2008. Import prices are dropping due to the sharp drop in commodity prices and finished goods priced due to weak demand.
• Retail sales  Todays Dec retail sales report is expected to show a decline of 1.2% overall and 1.4% excluding autos. That would add to the sharp decline seen in November of 1.8% overall and 1.6% ex-autos. On a year-on-year basis, US retail sales in November fell by 7.4% y/y, which was a record low in the history of the series which goes back to 1993. Excluding auto sales, US retail sales were down by 2.9% in November. US consumer spending has plunged in the wake of the banking crisis that began in mid-September and the subsequent melt-down in the stock market. US consumers have sharply cut back on spending to prepare for what is likely to be a long and severe recession with sharply higher levels of unemployment.
• Business inventories  Todays Nov business inventories report is expected to show a decline of 0.5%, adding to the 0.6% decline seen in October. Businesses are trying to cut inventories to stay ahead of the sharp drop in demand, thus preventing their inventories from building up too much. The business inventory-to-sales ratio in the past several months has soared to a 5-1/2 year high of 1.34 months from the record low of 1.23 months seen in June 2008. The sharp rise in inventories puts pressure on businesses to sharply cut back on new orders and to slash prices on existing inventory to try to bring their inventory levels back down to more manageable levels.

Overnight U.S. Stock News

• March S&Ps this morning are down -7.60 points ahead of an expected weak US retail sales report for December. The US stock market yesterday gyrated between gains and losses throughout the day and finally closed mixed (Dow -0.30%, S&P 500 +0.18%, Nasdaq Composite +0.50%).
• Bearish factors for stock prices yesterday included (1) comments from Fed Chairman Bernanke that "Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system," (2) continued pessimism over US company earnings after Alcoa, the largest US aluminum producer, slumped -5.1% after reporting its first quarterly net loss in 6 years on reduced demand for aluminum and warning that the recession could weaken demand further this year, (3) the widening of the US budget deficit to a record -$485.2 billion for the first quarter of the 2009 fiscal year as the government used taxpayer money to shore up the financial system by purchasing stakes in banks, and (4) the prediction from TrimTabs Investment Research that US companies may make more stock available for trading this year after 5 years of declines which may hurt stock prices as stock float will be "flat to higher" this year after declining by $500 million in Q4 2008.
• Bullish factors for stock prices yesterday included (1) a continuing thaw in interbank lending markets as the 3-month dollar Libor rate declined 7 bp to a 5-1/2 year low of 1.09%, (2) a rally in energy producers as crude oil prices rose for the first time in the last six sessions, (3) the 1.8% gain in the KBW Bank Index as it climbed for its first time in five days as JPMorgan Chase rallied 5.8% after saying it was moving its earnings announcement to Jan 15 from Jan 21, and (4) the decline in the S&P 500's valuation to less than 15.5 times reported earnings, the cheapest level since 1991.

Today's U.S. Market Focus

• March 10-year T-notes this morning are down -6 ticks. March T-note prices yesterday gave back some of Monday's gains and closed down -3.5 ticks. Bearish factors for T-note prices yesterday included (1) the biggest monthly decline in the US trade balance in 12 years as the Nov trade balance shrank to a 5-year low (US Nov trade balance -$40.4 billion versus expectations of -$51.0 billion), which is positive for GDP growth in Q4, (2) the unexpected rise in the Jan IBD/TIPP economic optimism index (+0.4 to 45.4 versus expectations of -1.0 to 44.0), and (3) the prediction from RBS Greenwich Capital that rate-lock selling will keep bond prices in the short-term under pressure as a possible $6 billion in debt is issued by US corporations and will be hedged by selling Treasuries. Bullish factors for T-note prices yesterday included (1) comments from Fed Chairman Bernanke that fiscal stimulus won't be enough to spur an economic recovery, stoking expectations the Fed may begin purchasing Treasuries in an attempt to stimulate the economy, and (2) the action by Standard & Poor's in affirming its AAA sovereign rating on the US saying the outlook is stable as a rise in fiscal risk and fiscal deterioration caused by the recession and credit crunch is expected to be temporary.
• The dollar this morning is slightly weaker with the dollar/yen +0.11 yen and the euro/dollar +0.38 cents. The dollar index yesterday closed higher for the third straight session at a 1-month high. Bullish factors for the dollar yesterday included (1) the larger-than-expected decline in the Nov US trade balance to a 5-year low which is supportive for Q4 US GDP, (2) the prediction from UBS that the euro will fall to $1.20 by year-end as the ECB "comes under pressure" to cut interest rates and risk-averse investors seek the safety of US Treasuries, and (3) the unexpected rise in the Jan IBD/TIPP US economic optimism index. Bearish factors for the dollar yesterday included (1) the drop in the 3-month dollar Libor rate to a 5-1/2 year low, signaling reduced emergency demand for dollars, and (2) comments from Fed Chairman Bernanke that it is "difficult to say" when US job losses will stop and that the timing and strength of a global economic recovery "are highly uncertain."

• February crude oil prices this morning are trading up +$1.20 a barrel although February gasoline is down -0.89 cents a gallon. Crude oil prices shot higher today after the Qatari Oil Minister said the right price for oil is $70 a barrel. February crude oil prices yesterday rebounded from a 2-week low and closed up +$0.19 a barrel and February gasoline closed up by +6.48 cents a gallon. Bullish factors for crude oil prices yesterday included (1) comments from Saudi Oil Minister Ali al-Naimi that his country will make deeper production cuts than those announced at OPEC's meeting in December after saying Saudi February crude production will be "lower than the target," in an attempt to bolster oil prices, and (2) carry-over strength from gasoline prices which are supported by speculation that refinery shutdowns for planned maintenance will reduce gasoline inventories. Bearish factors for crude oil prices yesterday included (1) the rally in the dollar index to a 1-month high, (2) China's report that its crude oil imports rose +9.6% in 2008, the slowest pace in 3 years, and a sign of weakening demand, (3) comments from Qatar's Energy Minister that OPEC doesn't need to cut production again "so far" and that no emergency cartel meeting is planned due to slumping crude prices, (4) the prediction from Barclays Capital that oil prices may fall further due to the global recession and that global demand will probably decline more this year compared to last, and (5) the action by the EIA in cutting its crude oil price forecast for this year by 15% to $43.25 a barrel from an estimated $51.17 a barrel in December as recessions in the US, Europe and Japan reduce global energy demand. Expectations for today's weekly DOE inventory report are for a +2.5 million bbl increase in crude oil inventories, a +1.85 million bbl climb in gasoline stockpiles, a +1.1 million bbl rise in distillate inventories and a -0.4 decline in the refinery capacity rate to 84.2%.

Today's U.S. Earnings Reports

Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): XLNX-Xilinx (BEST earnings consensus $0.32 per share), PPDI-Pharmaceutical Product Development (0.44), CLC-Clarcor (0.54)

Global Financial Calendar