Morning Update

Rising Recession Concerns

Recession fears have replaced worries about the credit markets and stocks are down sharply in the US and around the world. Oil prices continue to decline, precious metals are receding, and copper, which has dropped 50% from its peak, is trading solidly below $2 per pound, suggesting that the global economy is poised to slump. Earnings continue to flood in and were mixed, with Apple, McDonald's, Merck, and Yahoo topping the consensus profit forecasts, but the internet portal announced job cuts. Boeing, however, missed and did not issue guidance, and AT&T came up short. Treasuries continue their upward run amid expectations of further weakness and fading inflation worries.

As of 8:28 a.m. ET, the December S&P 500 Index Globex futures contract is 25 points below fair value, the Nasdaq 100 Index is 19 points below fair value, and the DJIA is 213 points below fair value. Crude oil is down $2.68 to $69.46 per barrel, and gold is down $11.50 per ounce at $756.50. The overnight LIBOR rate fell 16 bp to 1.12%, and the three-month LIBOR rate slipped 29 bp to 3.54%.

Easing credit conditions but housing slump continues

Credit conditions continue to ease as confidence is slowly restored. The drop in the overnight LIBOR rate to 1.11% suggests that banks are not only reacting in a favorable manner to the financial rescue plans but are also starting to price in a cut in the fed funds rate at the FOMC's meeting on October 29. Following the 50 basis point emergency rate cut to 1.5% earlier in the month, fed funds futures put the odds of another 50 bp reduction at near 80%. The three-month LIBOR has been slower to decline, but the rate has dropped for eight-straight sessions, and the trend is in the right direction.

There are no major economic reports out today, but in secondary economic news, the US MBA Purchase Index fell 10.9% to 279.3, a seven-year low. The recent uptick in mortgage rates, job worries, and the credit scare appear to be the culprits that are keeping potential buyers on the sidelines.

European stocks fall, dollar surges

Stocks in Europe are faltering and are down 3% and the dollar is much higher, trading below $1.30 per euro for the first time in almost two years as global recession worries re-emerge. Today's prominent losers are industry groups that would be most impacted by a recession and include metal and mining, energy, and manufacturing issues. Bank of England Governor Mervyn King acknowledged for the first time that the banking crisis that prompted the coordinated rate cuts earlier in the month will probably push the UK economy into a recession. King warned housing prices are still falling, and it may take time for normal lending levels to return. He hinted that more rate cuts are likely. The pound is down sharply versus the greenback and is trading at a five-year low.

Recession concerns pull on Asia

Bleak guidance in the US and a string of disappointing profit reports yesterday re-ignited fears that the world's largest economy has probably slipped into a recession. And Japanese stocks snapped a three-day winning streak and erased two days worth of gains as the Nikkei 225 Index fell a steep 6.8%. The rising yen and its negative impacts on the export-oriented economy added to the glum mood, with Toyota Motor (TM $72) falling 6.9%, Honda Motor (HMC $23) shedding 7.2%, and Sony (SNE $25) falling over 9%. Mazda Motor (MZDAF $3) registered a much bigger loss and fell over 13% on speculation that Ford Motor (F $2) may sell some of its stake in the Japanese automaker to raise cash. Neither firm commented. Separately, Mitsubishi UFJ Financial Group (MTU $8) lost almost 9% after the Nikkei business daily reported the bank was set to cut its profit estimate. Japan's largest bank did not comment.