Morning Update

IBM Gives Gift to the Street

Following six straight days of declines, investors are hoping that the string of losses that has cumulated in the worst sell-off since 1987 will come to an end today. Stocks are starting the session on an upbeat note after IBM provided guidance that comforted shell-shocked traders, and jobless claims were pretty much in line with forecasts, but credit markets remain in disarray. Elsewhere, Walgreen withdrew its bid to buy Longs Drug Stores, and Treasuries are mixed. Overseas, Asia's response to the rate cuts was lukewarm, while European stocks are higher.

Jobless claims drop

Weekly initial jobless claims fell 20,000 to 478,000, above the Bloomberg forecast of 475,000. The four-week moving average increased 8,250 to 482,500, and continuing claims rose 56,000 to 3,659,000. The Labor Department said that roughly 17,000 claims were related to the hurricanes. Wholesale inventories will be released at 10 a.m. ET and are forecast to rise 0.4% in August.

Held hostage by Libor

The two-year swap spread is rising again, suggesting that risk remains extremely high, but the giant safety net that the Fed and Treasury have crafted to support the wounded credit markets are helping to keep the financial system afloat. Banks in Europe, as evidenced by the extremely high Libor rate, remain on the defensive and continue to hold on to cash.

It is especially disappointing to see the three-month Libor rise after central banks cut rates by 50 bp yesterday. And because some business loans and many adjustable rate mortgages in the US are tied to the Libor rate, the rise will probably put added stresses on consumers and could offset some of the easing by the Fed over the past year if the rate stays elevated. Treasuries are mixed, with sizeable losses in the short and middle of the yield curve, but the 30-year bond is slightly higher.

Europe posting solid gains

Stocks in Europe are well off the early highs but remain up over 1% amid the general feeling that the 14% decline over the past three days may have been too quick of a sell-off. Steel and mining companies, which have been hit hard during the steep decline, are leading the rally, while IBM's reassuring outlook is also aiding sentiment and boosting tech service shares. ArcelorMittal (MT $33), the world's biggest steelmaker, is also lending support to the broader market after reaffirming second-half profit guidance, easing concerns about demand in emerging economies, even though growth has stalled in the US, Japan, and Europe. And the Dutch bank Dexia (DXBGF $12) is up sharply after the French and Belgium governments said they will guarantee any borrowings by the struggling bank for at least the next year. At the end of September, the bank received a state-backed 6.4 billion euro capital infusion.

In Russia, stocks are up over 10% after trading was quickly halted following steep losses. The government said that it will soon start pumping cash into banks from the nearly $200 billion pledged by the government stem the crisis that has shaved almost 70% off the value of the market since May. Unlike the contagion in 1998, when the country had little cash, foreign reserves total $546 billion. In Iceland, however, the situation remains dire after regulators took over the nation's largest bank and the prime minister warned of a national bankruptcy. Stock market operator Nasdaq OMX Iceland said trading on the exchange will be suspended until Monday. The nation's three-largest banks, whose assets total roughly 10 times the country's GDP, are now owned by the government.

Lackluster response to rate cuts in Asia

Despite the coordinated rate cut announced yesterday morning, the Nikkei 225 Index in Japan was unable to rally and closed down 0.5%, the tenth decline in the last eleven days and a fresh five-year low. A larger-than-expected 14.5% drop in machinery orders added to the gloomy mood. The report is a strong proxy for business spending and the weakest reading in two years and suggests that companies are growing increasingly reluctant to spend, which could extend the period of weakness. Elsewhere around Asia, markets were mixed, but shares in Hong Kong jumped over 3%.