Morning Call for Wednesday, December 23, 2009

Overnight Developments

• The European DJ Stoxx 50 this morning is up +0.76% and Mar S&Ps are up +3.80 points, both at 14-1/2 month highs. Global stock markets are all higher on the last full day of trading in Europe and the US before the Christmas holiday. The dollar and Treasuries are little changed ahead of the Treasury's announcement later today on the size of next week's auctions of 2-year, 5-year and 7-year T-notes. Technology stocks in Europe are higher led by a 1.7% jump in Infineon Technologies after UniCredit Markets & Investment Banking reiterated its "buy" recommendation on Europe's second-largest chipmaker after Infineon raised its sales forecast yesterday. Mining stocks were higher as the price of copper climbed and Maurel & Prom jumped 4.2% after the French company whose units explore for oil and operate cable-laying ships said its exploration well in Gabon was successful. Undercutting the bullish euphoria was the unexpected decline in Nov French consumer spending (-0.1% m/m and +3.2% y/y), as consumers still remain hesitant to spend due to fears of rising unemployment.

• The Asian markets today closed higher with Hong Kong up +1.12%, China +0.94%, Taiwan +0.58%, Australia +0.75%, Singapore +0.63%, South Korea +0.50%, India +3.23%. Japanese markets were closed for the Emperor's Birthday. India's exporters surged and led India's stock market to a 3% gain after India's Finance Minister said the economy may accelerate at a faster pacec. China's Shanghai Composite Index closed higher and rebounded from yesterday's 1-3/4 month low after the PBOC reaffirmed plans to keep a "moderately loose" stance for 2010 and to restrict credit for industries with excess capacity, as it released its final policy statement for the year. Citic Securities, China's biggest listed brokerage, predicts that that China's growth may surge to as much as 12% next year led by a rebound in exports and domestic spending. Overnight U.S. Stock News

• March S&Ps this morning are trading up +3.80 points and posted a new 14-1/2 month high. The US stock market yesterday rose for a third day as it finished moderately higher (Dow Jones +0.49%, S&P 500 +0.36%, Nasdaq Composite +0.67%). The S&P 500 Index posted a 14-1/2 month high while the Nasdaq Composite climbed to a 15-1/2 month high. Bullish factors included
(1) carry-over strength from a rally in European stocks after Moody's Investors Service cut Greece's credit rating one level to A2 from A1, which eased concerns that a steeper downgrade was looming that would have made Greek debt ineligible as collateral at the ECB,

(2) a rally in homebuilders after Nov existing home sales rose by 7.4% to their highest level in 2-3/4 years of 6.54 million units (versus expectations of +2.5% to 6.25 million),

(3) indications that the health of the US economy is improving after the cost to protect US corporate bonds from default fell to its lowest level in almost 2 years, and
(4) strength in technology stocks after Jabil Circuit surged 14% when it raised its profit projections.

• Bearish factors included

(1) the unexpected downward revision to Q3 US GDP to 2.2% from +2.8%,

(2) the unexpected 5 point decline in the Dec Richmond Fed manufacturing index to an 8-month low of -4, (3) a drop in insurance stocks after a report from Verisk Analytics said that US property and casualty insurance sales fell -5% y/y in Q3, the tenth consecutive quarter of year-over-year declines, as the recession weakened demand for home and auto insurance, and

(4) the jump in the 10-year T-note yield to a 4-1/4 month high of 3.760% as increased evidence the economy is improving indicates that the Fed may be closer to ending its extraordinarily accommodative policy stance.• Schlumberger (SLB) gained 1.3% in pre-market trading after the world's largest oilfied-services provider was upgraded to "overweight" from "equal weight" at Barclays, which cited the company's "financial strength, deep management and a product line that benefits more than most from increased exploration activity."

• Red Hat (RHT) jumped 5.7% in European trading after the company reported Q3 adjusted EPS of 17 cents a share, beating analysts' estimates of 16 cents, and its CEO said demand for its products is reviving, especially in North America Today's U.S. Market Focus

• March 10-year T-notes this morning are trading down -2 ticks . Mar T-note prices yesterday moved lower for the third straight session as they closed down -13 ticks at a 1-3/4 month low of 116-075. The 10-year T-note yield rose to a 4-1/4 month high of 3.760%.

Bearish factors yesterday included (1) reduced safe-haven demand for Treasuries after the S&P 500 Index surged to a 14-1/2 month high,

(2) a continued steepening of the yield curve after the difference between the yield on the 2-year and 10-year Treasury notes widened to a record 286 bp as investors seek a higher yield on longer-term Treasuries on speculation an accelerating economic recovery will fuel inflation and dampen demand for huge Treasury issuance, and

(3) the larger-than-expected increase in Nov existing home sales which rose to their highest level in 2-3/4 years (+7.4% to 6.54 million versus expectations of +2.5% to 6.25 million).

Bullish factors yesterday included (1) the unexpected downward revisio n in US Q3 GDP to 2.2% q/q annualized from 2.8%, and

(2) the unexpected 5-point decline in the Dec Richmond Fed manufacturing index to an 8-month low of -4 (versus expectations of +3 to 4).

• The dollar index this morning is slightly weaker with the dollar/yen -0.04 yen and the euro/dollar +0.10 cents. The dollar index yesterday surged to a 3-1/2 month high and closed higher for the sixth consecutive session.

Bullish factors included

(1) the fall in the euro to a 3-1/2 month low against the dollar on concerns that the euro's stability could be jeopardized if budget concerns that decimated Greek bonds spread to larger European economies such as Spain,

(2) the drop in the yen to a 1-3/4 month low against the dollar on speculation that the BOJ will increase its quantitative easing efforts in order to combat deflation, which would weaken the yen, and

(3) the prediction from Nordea Markets that the dollar may gain as much as 6% to 1.35 per euro "over the next few weeks" as signs the US economy is recovering prompts investors to "unwind" short positions in the dollar.

Bearish factors for the dollar yesterday included

(1) the unexpected downward revision to US Q 3 GDP, and

(2) the rally in the S&P 500 Index to a 14-1/2 month high, which reduces the safe-haven demand for the dollar.

• February crude oil prices this morning are trading up +26 cents a barrel and Feb gasoline is +0.85 cent a gallon. Feb crude oil yesterday traded weaker into late morning when it reversed direction and rallied into the close to settle up +$0.68 a barrel. Feb gasoline closed up +1.90 cents a gallon.

Bullish factors included

(1) the rally in the S&P 500 Index to a 14-1/2 month high, which indicates economic optimism that may lead to an increase in energy demand,

(2) the forecast by WSI for colder-than-average weather in northwest Europe in the three months through March, which may lead to increased demand for heating fuels in Europe, and

(3) the statement from China's commerce ministry that China should increase imports and reserves of strategic resources in 2010, which may signal stronger Chinese demand for crude oil in the coming year.

Bearish factors included

(1) the surge in the dollar index to a 3-1/2 month high,

(2) the unexpected sharp downward revision in Q3 U S GDP, which raises concern about the health of the economy and energy demand, and

(3) comments from OPEC Secretary General Abdalla el-Badri that oil projects that were delayed by last year's price slump are coming back "one by one," which may lead to an increase in global crude production. Expectations for Wednesday's weekly DOE inventory report are for crude oil supplies to fall -1.7 million bbl, gasoline inventories to climb +1.0 bbl.
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