Morning Update

Declines Mount

Sharp declines in Asia are igniting more selling in US and European equities as concerns mount that the global economy is poised to enter a recession. Falling demand is pressuring most commodities, including oil, while liquidations from hedge funds aggravate tenuous conditions in the financial markets. In equity news, Verizon Communications and Arch Coal topped the Street's profit estimates, CenturyTel will acquire Embarq, while several regional banks announced they will participate in the Treasury's re-capitalization program. Treasuries are up and the dollar continues to move higher against most major currencies.

As of 8:30 a.m. ET, the December S&P 500 Index Globex futures contract is 36 points below fair value, the Nasdaq 100 Index is 35 points below fair value, and the DJIA is 300 points below fair value. Crude oil is down $1.87 to $62.28 per barrel, and gold is down $7.70 per ounce at $722.60. The overnight LIBOR rate slipped 1 bp to 1.27%, and the three-month LIBOR rate fell 1 bp to 3.51%.

Fed and GDP this week

The Federal Reserve's rate decision on Wednesday and the first look at Gross Domestic Product on Thursday will probably get topping billing. Fed fund futures are almost evenly split between expectations of a 50 or 75 basis point rate reduction in the fed funds rate to either 1.0% or 0.75%, respectively. Economists surveyed by Bloomberg anticipate a 50 bp cut. Whatever the Fed does, policymakers are running out of monetary ammunition to deal with faltering output.

Traders will also be keyed in on Thursday's advance GDP report. The Street is looking for a 0.5% annualized decline amid rising fears that the economy could be entering a prolonged recession. Elsewhere, durable goods orders on Wednesday, jobless claims on Thursday, and consumer spending and the Chicago Purchasing Managers' Index on Friday will get some attention. The Chicago PMI is forecast of drop from 56.7 in September to 48.0 in October, but other measures of manufacturing have registered steeper-than-expected declines this month. And the gauge of manufacturing for the Midwest may also react very poorly to the growing problems among goods producers, including autos.

Shortly after the market opens today, new home sales will be released. Commentary from homebuilders has been decidedly negative, and economists believe sales will drop 2.2% to an annualized rate of 450,000 units in September.

Pressure on Europe continues

Further declines in commodity prices, recession concerns, and continued liquidations from hedge funds are driving stocks in Europe sharply lower, with major market indexes down over 5% in afternoon action. The unwinding of the commodity bubble continues to pummel the mining sectors, which is down 10%, but Volkswagen (VLKAY $53), is among the few winners and is up close to 80% after Porsche (POAHF $61) announced it has raised its stake to 42.6%. Germany's Ifo Index is adding to the bleak mood in Europe after the key measure of confidence fell from 92.9 in September to 90.2 in October, below the Bloomberg forecast of 91.0 and the lowest level since May 2003. The apparent recession in Europe and the financial turmoil is signaling that businesses are becoming "considerably more skeptical," according to the Ifo Institute. The poor results are likely to add pressure to the previously stubborn European Central Bank to quickly slash interest rates.

Meanwhile, the International Monetary Fund announced it has offered to lend $16.5 billion to Ukraine, which follows the recent news that the IMF will lend $2 billion to Iceland. Ukraine's rescue package is larger than many analysts had expected and is the latest indication that the extreme aversion to risk in worldwide financial markets is causing major upheavals in developing economies. In currency action, the dollar continues on its upward march against most major currencies, including the pound and the euro.

Asia falters

Pounded by the relentless rise in the yen and growing fears the worldwide economy is headed toward a recession, the Nikkei 225 Index slid 6.4% to 7,163, its lowest close in 26 years. The strong Japanese currency hit exporters again as shares of Canon (CAJ $27) lost over 10% and Toyota Motor (TM $66) slid 8%. Fears that Japanese banks may be considering moves to raise capital took a toll on the major financials. After the close, Mitsubishi UFJ Financial Group (MTU $7) said it will raise up to $10.6 billion in capital by issuing common shares. Japanese banks have mostly avoided US subprime loans but poor investments and stock market losses have hurt their balance sheets. Meanwhile, the yen is adding to Friday's advance after an unexpected G7 statement over the weekend failed to calm jittery markets. The G7 said it is concerned about "excessive volatility," but there have been no signs of an imminent intervention.

However, JFE Holdings (JFEEF $21) spent much of the day in positive territory before a late-day slide pushed shares lower. The world's third-largest steelmaker behind ArcelorMittal (MT $22) and Nippon Steel (NISTY $30) raised full-year profit guidance and cited price hikes and lower materials costs. It also plans to continue stock buybacks, but analysts say the outlook has become a bit murkier as prospects for a steeper-than-expected slowdown in China and emerging markets rise.

The fear in the financial markets hit Hong Kong particularly hard, knocking the Hang Sang Index down 12.7%. But South Korea's Kospi Index managed a small gain after a surprise 75 basis point cut in interest rates from the central bank.