Morning Update

China Plans Measure to Pump Up Demand

Global equity markets are much higher and the US is following suit after China announced a massive fiscal stimulus package designed to support domestic demand. But the economy continues to face stiff headwinds, and traders will likely get some clarity on the upcoming Christmas shopping season when retailers begin reporting later this week. Meanwhile, US shares are also receiving support from higher same-store sales from McDonald's and AIG's disclosure that it has revised the terms of its federal rescue plan. AstraZeneca reported positive results from a drug study, but Dish Network continues to lose subscribers, and Circuit City declared bankruptcy. Treasuries are modestly lower.

As of 8:31 a.m. ET, the December S&P 500 Index Globex futures contract is 24 points above fair value, the Nasdaq 100 Index is 36 points above fair value, and the DJIA is 218 points above fair value. Crude oil is up $4.31 to $65.35 per barrel, and gold is up $28.60 per ounce at $762.90. The overnight LIBOR rate increased 2 bp to 0.35%, and the three-month LIBOR rate fell 6 bp to 2.24%.

Light data this week

This week's economic calendar will be on the light side but there are a couple of notable releases that are likely to grab the attention of investors. Advance retail sales out on Friday are likely to confirm the dismal same-store sales we saw in October as declining employment, tighter credit standards, and recession fears put consumers on the defensive. According to Bloomberg, a 2.1% drop in the headline number and a 1.2% decline in sales ex-autos are expected.

Following the steep plunge in the Consumer Confidence Index in October, preliminary University of Michigan consumer sentiment on Friday will give us the latest reading on confidence. Economic conditions last month were bleak and unemployment jumped to a 14-year high, but gasoline prices have been plunging and the data will show if there has been any post-election bounce in the mood heading into the Christmas shopping season. Other reports to look for include the trade balance and jobless claims on Thursday and the Import Price Index on Friday. Separately, Fedspeak will be light this week, though a panel discussion on Friday with Fed Chief Ben Bernanke and European Central Bank President Jean-Claude Trichet on monetary policy may provide a few clues on rates and possibly on non-conventional forms of stimulus that may be in the offing.

Europe cheers China stimulus

European stocks are powering ahead and starting the week on a strong note after China unveiled a huge stimulus plan designed to lift domestic demand. The government has authorized about $586 billion to boost infrastructure spending and offset sagging demand in the US and in Europe. The plan is the latest move to alleviate weaker economic conditions and is the clearest sign so far that policymakers are growing increasingly concerned over recessionary conditions have enveloped developed economies. Commodity shares responded with the most enthusiasm as metal, mining, and steel companies are up about 10% in afternoon action. China's Shanghai Composite Index was among the top performers in Asia, rising 7.3%.

Meanwhile, Rio Tinto(RTP $167) became the latest mining firm to announce cutbacks in production in response to lower prices and falling demand. The world's second-largest iron ore producer said it will cut shipments from Australia by about 10% and will review a $10 billion joint venture to manufacture aluminum. Shares are participating in today's rally.

Asia warms to China plan

Traders in Tokyo quickly warmed to China's plan to spend about 18% of their GDP to support sagging domestic demand, sending the Nikkei 225 Index up 5.8%. Japan has been a big beneficiary of demand from China, while a drop in the yen also brightened the mood. The market shrugged off a steep drop in core machinery orders, which is suggesting that businesses are pulling back on capital spending plans.