Morning Update

Credit strains persist

Overnight lending rates eased somewhat but the three-month Libor rate to lend in dollars rose another 6 basis points to 4.21%, indicating that credit markets remain under extreme pressure. Meanwhile, weekly initial jobless claims rose 1,000 to a seven-year high of 497,000, above the Bloomberg forecast of 475,000. The four-week moving average increased 11,500 to 474,000, and continuing claims rose 48,000 to 3,591,000. The Labor Department said that roughly 45,000 claims were related to Hurricanes Gustav and Ike. Nevertheless, the labor market remains very weak.

Factory orders for August will be out shortly after the market opens and a 3.0% decline is expected.

UBS boosts Europe, resists weakness in Asia

Stocks in Europe are staging a solid rally, with financials posting strong gains after UBS (UBS $19) eased worries that the credit crisis will keep the bottom line in the red. The largest bank in Switzerland will report a small profit in 3Q following several quarters of losses, and it has "substantially reduced" its exposure to US commercial and residential mortgages. UBS, which has had the biggest write-downs among European institutions, said it has done "reasonably well" during the turmoil of the last couple of weeks, and 2009 should be profitable. But it did not provide any details regarding outflow of funds from worried clients.

Despite the upbeat mood in Europe this afternoon, auto stocks are among the leading decliners as the credit crunch kept potential buyers away from showrooms last month. Mining companies are also lagging, and copper, a key industrial metal and a good gauge of worldwide industrial demand, is trading at a 19-month low. Separately, the European Central Bank held its key rate at 4.25% as expected. Although European banks were rocked this week by the credit contagion that has reached its shores, the ECB continues to focus on inflation and has separated liquidity issues from monetary policy. And its focus on inflation has come at the expense of economic activity, which has begun to contract.

Global fears outweigh Senate vote

Asian shares ended mostly lower, with the Nikkei 225 Index in Japan falling 1.9% amid growing worries that worldwide economic growth is stalling. Exporters were hit hard, with Sony (SNE $31) losing almost 6% amid fears that a possible US recession will dampen holiday sales, while Toyota (TM $84), which was battered by the credit crisis last month, fell over 3%. If the financial rescue package passes the US House, the economy is likely to return to the front burner, and weak activity and worries about impact on corporate profits may replace fears about financial stability.