• European stocks are trading lower today as record fuel prices have depressed airlines and automakers and as concern about the housing sector has hurt companies involved in construction. US and European stocks were also undercut by this morning's weaker-than-expected earnings report from Bank of America. However, Asia-Pacific stocks are trading higher on carry-over support from last Friday's sharp US rally: Japan +1.63%, Hong Kong +2.17%, China -0.15%, Taiwan +0.10%, Australia +3.14%, Singapore +1.48%, South Korea +1.70%, Bombay +1.57%.

• The Bank of England today announced a new facility that allows banks to swap AAA-rated mortgage-backed securities for government bonds, thus allowing banks to get tradeable securities back into their portfolios. The nominal size of the facility was announced at $100 billion, although BOE Governor Mervyn King said there is no arbitrary limit on the size of the facility and "it could well go higher." The BOE's facility is similar to the Fed's facility and should help alleviate bank trading and funding problems, though not balance sheet weakness since the banks will still own the mortage-backed securities they temporarily exchange with the BOE.

• Market attention this week will continue to focus on the state of the credit crunch and banking crisis, this week's peak schedule of Q1 earnings reports, oil prices, and comments by US and European central bank officials on monetary policy. The Bank of Canada on Tuesday is expected to announce a 50 bp rate cut to 3.00% to address economic spillover weakness from the US.

• This week's key US economic news includes Tuesday's March existing home sales (expected 1.6%), Thursday's March durable goods orders report (expected +0.1%), Thursday's March new sales report (expected 0.8%), and Friday's final-April US consumer confidence index (expected +0.8 from early-April). The US Treasury sells 5-year TIPS Tuesday, 2-year T-notes on Wednesday, and 5-year T-notes on Thursday.

• Q1 earnings? This will be the peak week for Q1 earnings with 157 of the S&P 500 companies due to release. Next week will also be busy at 111 companies, but the schedule then tails off quickly. The analyst consensus is that earnings for the S&P 500 companies will fall sharply by 14.6% in Q1, which is much worse than expectations at the beginning of the quarter on January 1 for a +5.7% increase in earnings, according to Thomson Reuters. Analysts at the beginning of Q1 obviously had no idea of the extent of the massive losses that the S&P 500 financial sector would incur in Q1 (which so far totals $24 billion according to Thomson Reuters).

• The financial sector is of course the main culprit in the S&P 500 earnings collapse in Q1, with Financial sector earnings in Q1 expected to plunge 67%, according to Thomson Reuters. Without the financial sector, the earnings picture for the S&P 500 looks much better with an expected +6.7% increase in Q1 earnings, thanks mainly to a +28% increase in Energy sector earnings. Taking out the extreme Financial and Energy sectors, S&P 500 earnings are expected to show a small +1.9% increase, indicating rather a rather flattish underlying earnings picture. Not surprisingly, the Consumer Discretionary sector is expected to be the second weakest sector with a 15% decline earnings due to the recessionary economic conditions and the plunge in US consumer confidence.

• Fed policy? The market last week sharply curbed expectations for Fed easing by 25 bp through summer and by more than 50 bp for next year. The market last week became more confident that the worst might actually be over for the banking system crisis, although the credit crunch is likely to continue for business and individuals who are having more difficulty obtaining loans and are struggling with variable rate mortgage resets. The market is now expecting only a 25 bp easing to 2.00% at next week's FOMC meeting on April 29-30. The market for this summer is now only discounting a maximum 22% chance that the Fed will cut further to 1.75% during this cycle. The market is then expecting the Fed to start raising the funds rate target from the expected level of 2.00% during the second half of 2008 to 2.50% by May 2009, indicating that the market is expecting a recovery in the US economy by the first half of 2009.

• June S&Ps this morning are trading -3.30 points due to Bank of America's weaker-than-expected results this morning, ongoing concerns about record oil prices, and nervousness ahead of this week's peak for Q1 earnings reports. The US stock market last Friday rallied sharply (Dow +1.81%, S&P 500 +1.81%, Nasdaq Composite +2.61%).

• Bullish factors for stock prices last Friday included (1) an improved view of Q1 earnings after stronger than expected earnings reports from several key companies, (2) Friday's 18% rally in Google after the company reported strong earnings driven by overseas growth and higher click advertising, (3) the 6.2% rally in Intel which was driven by strong earnings and Intel's statement that the weak economy is so far not depressing chip demand, which supported the overall tech sector, (4) strength in the financial sector driven by stronger-than-expected earnings and continued ideas that the worst might be over from the banking crisis, and (4) strength in oil company stocks as crude oil rallied to a new record high.

• Bearish factors for stock prices last Friday included (1) the negative implications of the new record high in oil prices for US consumer spending and for corporate earnings, and (2) last Friday's sharp rise in US interest rates, and (3) the sharply reduced expectations seen last week for Fed easing in coming months.

• Schlumberger (SLB) is trading +0.5% higher at $102.36 in European trading this morning after Morgan Stanley raised its rating to "overweight" from "equal-weight" and raised its target price to $135 from $125.

• Bank of America (BAC) was up 1.9% in European trading this morning after a Financial Times report that BofA plans to sell part of its stake in China Construction Bank Corp to shore up its capital. However, Bank of America fell back and is now down about -1.7% after reporting Q1 earnings this morning of 23 cents, which was well below the consensus of 41 cents.

• National City Corp (NCC) may show some strength today on newswire reports that Ohio's largest bank may get a $6-7 billion capital injection from Corsair Capital LLC to shore up its capital.

• Dell (DELL) may show some weakness this morning after a negative weekend Barron's article said that the stock isn't a bargain despite the 31% drop in the past two years because a turnaround is not assured.

• UAL Corp (UAUA) may show some strength today after weekend news that United Airlines plans to increase business travel fares and ticket-change fees to help offset the cost of higher fuel

Today's U.S. Market Focus

• June 10-year T-notes this morning are trading +9 ticks on lower US and European stocks and some short-covering after the sharp recent losses. June T-note prices last Friday closed -7 ticks and posted a very sharp overall sell-off of 2-02 points for the week. Bearish factors last Friday included (1) the sharp rally in the US stock market last Friday which reduced credit market flight-to-quality concerns and caused a flow of capital from the credit market to stocks, (2) last Friday's sharp rally in the banking sector which indicated substantially reduced market concerns about US banking system health, (3) the substantial cut in expectations for Fed easing with the market now expecting only a 25 bp rate cut at next week's FOMC meeting, (4) supply pressure ahead of this week's Treasury auctions, (5) the sharp 2-day 17 bp rise in the 3-month dollar Libor rate to 2.91% after the British Banking Association threatened to bank any member banks that were deliberating reporting artificially low interbank rates to the BBA for the calculation of Libor rates in an attempt to reduce their borrowing costs, and (6) technical long liquidation pressure.

• The dollar is trading lower this morning with the dollar/yen is down -0.47 yen and the euro/dollar up +0.09 cents. The dollar index rallied moderately last Friday and closed +0.33 points at 72.012. The dollar/yen rallied to a new 2-month high and closed +0.55 yen at 102.26 yen. The euro/dollar fell moderately last Friday from the recent record high to closed -0.91 cents. Bullish factors for the dollar last Friday included (1) the improved dollar interest rate differential situation with the surge in the 3-month dollar Libor rate late last week and sharply reduced expectations for Fed easing, (2) last Friday's sharp rally in the US stock market, and (3) the improved view of the US banking sector on ideas the worst may be over for the banking crisis.

• May crude oil prices this morning are trading +16 cents after OPEC reiterated that it would not raise production in response to record prices. May gasoline this morning is trading slightly lower by -0.07 cents. May crude oil prices last Friday closed sharply higher by +$1.83 per barrel at $116.69 and posted a new record high of $116.80. May gasoline prices last Friday closed +3.15 cents at 298.93 cents, posting a new record high. Bullish factors include (1) the sharp US stock market and ideas that the US recession may be shallower than earlier thought, (2) US Energy Secretary Samuel Bodman's statement that the US government will continue to buy crude oil for the Strategic Petroleum Reserve even with oil prices above $100 per barrel, (3) continued comments from OPEC officials that OPEC is unwilling to boost oil production despite record high prices, and (4) continued technical buying with the new record high. Bearish factors last Friday centered on the recovery in the dollar.

Today's U.S. Earnings Reports

Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): MRK-Merck (BEST earnings consensus 0.85 per share), BAC-Bank of America (.46), LLY-Eli Lilly (.96), HAL-Halliburton (.64), TXN-Texas Instruments (.44), WFT-Weatherford (1.01), ROH-Rohn & Haas (.89)

Global Financial Calendar