U.S. Morning Call for Wednesday, October 8, 2008
Oct 08, 2008

Overnight Global News

• Global central banks at about 7 AM ET this morning announced a coordinated 50 bp rate cut. The Fed, ECB, Bank of England, Bank of Canada and Swiss and Swedish central banks all cut their benchmark rates by 50 bp. The central banks released a joint statement in which they said that "The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminised further the upside risks to price stability." The statement added that "Some easing of global monetary conditions is therefore warranted." It was particularly encouraging that even the ECB went along with a 50 bp rate cut. China joined the action by cutting its benchmark lending rate by 27 bp.
• In other positive news today, the UK government today implemented a 50 billion pound ($87 billion) bank rescue package that involves an offer to inject capital into RBS, Barclays and at least six other UK banks and about 250 billion pounds of loan guarantees to refinance debt. In addition, the Bank of England is making up to 200 billion pounds of liquidity available. UK bank stocks initially dropped sharply on the news since there was no announcement on which banks would take capital and the level of dilution was thus unknown. HSBC, however, said it has no plans to use the government's rescue program.
• European stock markets recovered somewhat from steep early losses on the coordinated rate cut. As of about 7:15 PM ET, the European DJ Stoxx 50 was down -2.48%, the FTSE 100 was down -0.20%, and the DAX was down -1.95%. The situation was ugly in the Asian stock markets today prior to the rate cut news: Japan -9.38%, Hong Kong -8.17%, China -3.78%, Taiwan -5.76%, Australia -4.99%, Singapore -6.61%, South Korea -5.27%, Bombay -3.14%. Russia and Indonesia closed their stock markets earlier today after the indexes fell more than 10%.
• Pending home sales Today's Aug pending home sales report is expected to show a decline of 1.3%, adding to the decline of 3.2% m/m seen in July. On a year-on-year basis, pending home prices fell -6.5% in July, which was a substantial improvement from the record low of -23.9% seen in December 2007. The pending home sales report measures the change in home sales contracts and generally leads to existing home sales within one to two months, thus providing some leading information on the existing home sales series. However, today's report for August will have little economic significance given that the market is mainly worried about how far home sales fell in September once the credit crisis began. Ford's CEO said that auto sales plunged in September as if there had been a natural disaster, which means that the same thing almost certainly happened to home sales as well.

Overnight U.S. Stock News

• December S&Ps overnight traded as much as 40 points lower and were down about 15 points this morning when the central bank rate cut was announced. The S&P 500 responded to the rate cut news by rallying sharply by 50 points and then settled back somewhat. Dec S&Ps were up 6.60 points at 7:20 AM ET. The US stock market yesterday closed sharply lower (Dow -5.11%, S&P 500 -5.74%, Nasdaq Composite -5.80%). The S&P 500 Index and the Dow Industrials both dropped to 5-year lows yesterday.
• Bearish factors for stock prices yesterday included (1) the prediction from the IMF that global growth is headed for a "major downturn" next year with a recession in the US "looming," growth in western Europe "weakening markedly," and activity in Japan "cooling rapidly," (2) Citigroup's cut in its forecast for the S&P 500 Index this year by 23% to 1200, citing the global credit crisis, (3) the 26% fall in Bank of America after it cut its dividend in half and said it plans to sell $10 billion in stock to brace for an extended recession, (4) the rise in the VIX volatility index, a gauge of how much investors pay for insurance against stock-price declines, to a record 53.68 on fears that the credit crisis is worsening, and (5) the prediction from the IMF that the world's major banks may need $675 billion in fresh capital over the next several years to recover from a credit crisis that show few signs of abating thus far.
• Bullish factors for stock prices yesterday included (1) the action by the Fed in creating a special fund to purchase US commercial paper to alleviate the credit crunch that threatens to cut off a key source of funding for corporations, (2) the minutes of the Sep 16 FOMC meeting in which policy makers said "inflation risks appear to have diminished" because of lower commodity prices, a stronger dollar and greater economic "slack," (3) the 8.5% jump in Advanced Micro Devices after the computer-chip maker said it plans to spin off some plants as part of an investment from the Abu Dhabi government of up to $8.4 billion, and (4) indications from Fed Chairman Bernanke that the Fed is prepared to slash interest rates as the credit freeze threatens the US economic outlook.
• Alcoa late yesterday reported weaker than expected earnings growth and announced a halt to its stock-purchase program.

Today's U.S. Market Focus

• December 10-year T-notes this morning are trading +9 ticks, supported by the Fed's rate cut but undercut by the recovery rally in stocks. December T-note prices yesterday retreated from Monday's 2-week high and closed -26.5 ticks. Bearish factors for T-note prices yesterday included (1) the action by the Fed in announcing it will buy commercial paper in an attempt to unfreeze short-term lending markets, (2) the action by the UK government in investing $79 billion in its three largest banks to bolster capital depleted by mortgage-related losses, and (3) the Fed's Term Auction Facility (TAF) $150 billion auction of three-month loans, as banks and securities firms bid on only $138.1 billion of the $150 billion offered, a sign that demand for cash is being met by the Fed's aggressive liquidity programs. Bullish factors for T-note prices yesterday included (1) comments from Fed Chairman Bernanke that the Fed "will need to consider whether the current stance of policy remains appropriate," as the ongoing financial turmoil meant the outlook for economic growth had "worsened" in recent weeks as the availability of credit to banks, consumers and busineses has threatened to dry up completely, (2) the minutes of the Sep 16 FOMC meeting as Fed officials said "inflation risks appeared to have diminished" because of a stronger dollar, lower commodity prices and greater economic "slack," and (3) the prediction by Citigroup that recent increases in the Libor rate may boost homeowner defaults by 10% on resetting adjustable-rate mortgages, contributing to a "vicious cycle" in the credit crunch.
• The euro rallied on some short-covering after today's rate cut news and is up +1.19 cents. The dollar/yen is down -1.19 yen as the yen saw strength on the exit of carry trades and the Fed's rate cut. The dollar index yesterday gave back some of Monday's gains and closed lower. Bearish factors for the dollar yesterday included (1) comments from Fed Chairman Bernanke that the Fed is prepared to cut interest rates as the credit freeze hurts the US economic outlook, (2) the action by the Fed in creating a special fund to backstop the commercial paper market in an effort to ease the credit squeeze, and (3) the prediction from the IMF that global growth is headed for a "major downturn" next year as a recession in the US is "looming" and US economic growth grinds to a halt. Bullish factors for the dollar yesterday included (1) continued safe-haven status of the dollar as the credit crunch continues with money-market rates at or near all-time highs as banks continue to hoard cash, and (2) the action by Morgan Stanley in lowering its euro target versus the dollar to $1.30 by year-end versus a previous forecast of $1.40 per dollar and for the euro to fall to $1.25 by the end of 2009 versus a prior forecast of $1.32, citing "cross-border risk reduction" as Europe's banking sector will continue to weigh on the euro.
• November crude oil prices this morning are trading -$2.61 a barrel and November gasoline is trading -6.71 cents a gallon as the market continues to fret about global economic growth. November crude oil prices yesterday recovered some of Monday's sharp losses and closed +$2.25 a barrel. November gasoline closed +0.37 cents a gallon after recovering from a 1-year low. Bullish factors for crude oil prices yesterday included (1) comments from OPEC President Khelil that the cartel will take "appropriate measures" to stabilize markets, hinting at an OPEC production cut, (2) the weaker dollar, and (3) comments from Libya's top energy official that OPEC should cut output after prices fell to 8-month lows in the wake of the credit crisis. Bearish factors for crude oil prices yesterday included (1) the action by the US Energy Department in cutting its 2008 price and demand forecast for crude oil to $112 a barrel, down 3.3% from last month's forecast of $115.81 a barrel and for US oil demand to average 19.8 million bpd this year, down from last months's forecast of 20.07 million bpd, and (2) the prediction from Goldman Sachs that a sustained rally in crude oil prices is unlikely because of concern demand will weaken and that Goldman's fourth quarter crude oil pice forecast of $120 a barrel is vulnerable to "downside" risk. Expectations for today's weekly DOE inventory report is for a +2.5 million bbl increase in crude oil inventories, a +1.5 million bbl increase in gasoline stockpiles, a -900,000 bbl decline in distillate supplies and a 5.9 point surge in the refinery capacity rate to 78.2% as more refineries come online after being shutdown from recent hurricanes

Today's U.S. Earnings Reports

Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): MON-Monsanto (BEST earnings consensus -$0.11 per share), COST-Costco Wholesale (0.92), SGR-Shaw Group (0.71)

Global Financial Calendar