Morning Update

Economy Faces Difficulty

The Street is locking in profits following Barack Obama's win last night as the focus shifts back to the economy. President-elect Obama will have to quickly deal with the deteriorating economic conditions, and ADP's report of a worse-than-expected loss of 157,000 private sector jobs is a stark reminder that economic obstacles are rising. Shortly after the opening bell, the ISM Non-Manufacturing Index is expected to show weaker conditions in the service sector. In the meantime, Marsh & McLennan, Transocean, MBIA Inc., and Ambac Financial reported lower-than-expected earnings, while Time Warner beat the consensus profit estimate. Overseas, ArcelorMittal announced cutbacks in steel production. Europe is under pressure, while Asia pushed ahead.

As of 8:34 a.m. ET, the December S&P 500 Index Globex futures contract is 15 points below fair value, the Nasdaq 100 Index is 22 points below fair value, and the DJIA is 141 points below fair value. Crude oil is down $1.90 to $68.63 per barrel, and gold is down $3.00 per ounce at $754.30. The overnight LIBOR rate dropped 5 bp to 0.32%, and the three-month LIBOR rate fell 20 bp to 2.51%, the lowest rate since late 2004.

Falling jobs

ADP reported that private sector jobs fell by 157,000 in October, worse than the Bloomberg estimate of a 102,000 decline. The report indicates the labor market is deteriorating amid weak economic conditions. The ADP report has been overstating the employment situation for most of the year when compared to the nonfarm payroll numbers reported by the Labor Department. Economists estimate that the government will report a 200,000 drop in nonfarm payrolls when the data is released on Friday.

In secondary economic news, the US MBA Purchase Index fell 13.9% to 260.9, the worst reading since January 2001. Housing sales, which have been showing nascent signs of stabilizing, may be coming under renewed pressure from still-high mortgage rates, tight credit standards, and a worsening economic situation. Treasuries are mixed.

At 10:00 a.m. ET, the ISM Non-Manufacturing Index will be released and a decline from 50.2 in September to 47.0 in October is forecast. A reading below 50 suggests the service sector is contracting.

Profit taking, steel pull on Europe

European shares are under pressure for the first day in seven as traders take profits and refocus on the weak economic climate, while the world's largest maker of steel comes under considerable pressure after announcing cuts in output and weaker-than-expected profits. ArcelorMittal (MT $32) is down about 15% after posting a 76% rise in operating profits to $8.6 billion, just shy of the Street's forecast. The company said the steel market has changed "dramatically" and it will go ahead with production cuts of about 30% that may remain in place until early 2009. BNP Paribas (BNPQY $38), France's largest bank, reported a larger-than-expected 56% drop in 3Q profits to 901 million euros. The financial crisis forced more write-downs, sending shares slower.

Tokyo extends advance

A falling yen, a victory by Obama and a decisive win by the Democrats in the House and Senate increased odds of fiscal stimulus bill in the US, which supported sentiment in export-dependent Japan and sent the Nikkei 225 Index up 4.5%. Exporters registered sharp gains, with Canon (CAJ $37) and Honda Motor (HMC $26) jumping 13%, and Sony (SNE $25) adding over 9%. South Korea's Kospi Index responded favorably to the election results in the US and added 2.4%.