Morning Call: Speculation that the global recovery will extend into next year is leading world stock markets higher; Mar S&Ps up +4.20 at a 14-3/4 month high.

Overnight Developments

• The European DJ Stoxx 50 this morning is up +0.28% and Mar S&Ps are up +4.20 points, both rising to 14-3/4 month highs. Most global stock markets are higher today and are being led by gains in basic-resource companies and energy producers. Treasuries are weaker ahead of today's $42 billion 5-year T-note auction and the dollar index slid to a 1-week low, although profit-taking in most commodities from their recent rallies has them trading lower today. ECB Council member Marko Kranjec said in an interview on TV Slovenija that "the year 2010 will be a difficult year, though the economy will be growing."• The Asian markets today closed mostly higher with Japan up +0.04%, Hong Kong +0.09%, China +0.64%, Taiwan -0.05%, Australia +1.13%, Singapore +0.49%, South Korea -0.76%, India +0.24%. Asian mining companies led a rally today on speculation of increased metals demand from China and on labor strife in Chile's copper industry. Limiting gains in the Asian markets was weakness in Japanese bank stocks that closed lower on concerns they may have to raise more capital after Sumitomo Mitsui Financial Group fell 2.8% when it said it was considering a stock sale to raise more funds.

Overnight U.S. Stock News

• March S&Ps this morning are trading up +4.20 points and posted a fresh 14-3/4 month high. The US stock market yesterday rallied early but shed most of its gains and closed the day slightly higher (Dow Jones +0.26%, S&P 500 +0.12%, Nasdaq Composite +0.24%). The S&P 500 Index posted a 14-3/4 month high, the Dow Jones posted a 15-month high, and the Nasdaq Composite posted a 15-3/4 month high.

Bullish factors included:
(1) carry-over support from a rally in European and Asian stock markets after China on Dec 25 raised its 2008 GDP estimate to 9.6% from 9.0% and said this year's quarterly figures will improve, while Japan's Cabinet Office said its economy will expand for the first time in three years in the fiscal year starting April,

(2) strength in retailers after the report from MasterCard Advisors' SpendingPulse said US retail sales rose an estimated +3.6% this holiday season from last year due to stability in consumer spending and as retailers held less inventory whi ch led to fewer unexpected markdowns,

(3) a rally in energy producers after crude oil climbed to a 5-week high, and (4) the prediction from the chief economist at Barclays Capital that the US economy will expand by 3.5% in 2010 and turn in its best performance since 2004 as consumer spending picks up and companies increase investment.

• Bearish factors included

(1) interest rate concerns which weakened banking and financial stocks after the yield on the 10-year T-note rose to a 4-1/2 month high of 3.85% and fueled speculation that higher borrowing costs will stifle the economic recovery,

(2) weakness in airline stocks after President Obama asked the Homeland Security Department to review airport screening capabilities, which may lead to changes in procedures that increase security costs for the airlines, and

(3) a pessimistic business forecast from Burlington Northern Santa Fe, which according to Barron's, may mean US industrial activity will be less robust in 2010 than many on Wall Street anticipate.

Today's U.S. Market Focus

• March 10-year T-notes this morning are trading down -5 ticks ahead of today's $42 billion 5-year T-note auction. Mar T-note prices yesterday slumped for the sixth consecutive session and settled down 6.5 ticks at 115-165. TYH posted a 4-1/2 month nearest-futures low and the 10-year T-note yield rose to a 4-1/2 month high of 3.85%.

Bearish factors yesterday included
(1) reduced safe-haven demand for Treasuries after the S&P 500 Index climbed to a 14-3/4 month high,

(2) the prediction from Morgan Stanley that the yield on the 10-year T-note will rise to 5.5% next year as the US faces increased competition from other debt issuers which will spur investors to demand higher yields as the Fed ends its $1.6 trillion asset-purchase program,

(3) weak demand for the Treasury's $44 billion 2-year auction, which had a bid-to-cover ratio of 2.91 compared with the 2.96 average at the last 10 auctions and weak foreign demand after indirect bidders purchased only 34.8% of the auctio n compared with the 45% average of the last 10 auctions, and

(4) supply pressures ahead of Tuesday's $42 billion 5-year T-note auction. A bullish factor yesterday was the prediction from Goldman Sachs that the yield on the 10-year T-note will drop to 3.25% next year as unemployment in the US averages 10.3% and hinders the economic recovery.

• The dollar index this morning is weaker and trading at a 1-week low with the dollar/yen +0.06 yen and the euro/dollar +0.68 cents. The dollar index yesterday ended a lackluster session by closing -0.101 points at 77.633.

Bearish factors yesterday included
(1) the larger-than-expected increase in Nov Japan industrial production, which was positive for the yen, and

(2) the prediction from Brown Brothers Harriman & Co. that the recent strength in the dollar is a "head fake" and is due to short-covering and is not the start of a bullish trend.

Bullish factors included

(1) a possible increase in demand for US assets after the chief economist at Barclays Capital predicted that the US economy will expand by 3.5% in 2010 and turn in its best performance since 2004, and

(2) an improvement in the dollar's interest rate differentials after the yield on the 10-year T-note rose to a 4-1/2 month high of 3.85%.• February crude oil prices this morning are trading down -39 cents a barrel and Feb gasoline is -0.37 cent a gallon. Feb crude oil yesterday rallied and closed 72 cents higher. Feb gasoline closed up 0.21 cents a gallon. Feb crude posted a 5-week nearest-futures high and Feb gasoline posted a 3-week high.

Bullish factors included

(1) the weaker dollar,

(2) the prediction from Shanghai Securities that China's 2010 energy demand may rise by 3.6% y/y,

(3) the jump in the S&P 500 Index to a 14-3/4 month high which signals increased confidence in the US economy that may lead to an improvement in energy demand, and

(4) the prediction from Weather Derivatives that the current cold weather will raise US consumption of heating fuels by 6.7% in the next seven days. A bearish factor was the -4.5% y/y drop in Nov Japan crude oil imports, which signals weakened energy demand in the world's second-largest economy. Expectations for Wednesday's weekly DOE inventory report are for crude oil stockpiles to fall -2.2 million bbl, gasoline inventories to rise +1.0 million bbl, distillate supplies to fall -2.25 million bbl, and the refinery capacity rate to rise +0.2 to 80.2%.

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