Morning Update

Oil Rises, Stocks Flat

Escalating tensions in the Middle East and expectations that more OPEC nations will confirm production cuts are pushing oil prices back to $40 per barrel. But stocks are looking past the latest round of violence and are up slightly, with volume and equity news expected to be light. Kuwait said it will back out of its joint venture with Dow Chemical, potentially complicating its acquisition of Rohm and Haas. Meanwhile, world markets are a little higher and Treasuries are up.

As of 8:29 a.m. ET, the March S&P 500 Index Globex futures is at fair value, the Nasdaq 100 Index is 6 points above fair value, and the DJIA is 28 points above fair value. Crude oil is up $2.60 to $40.31 per barrel, and gold is up $12.80 at $884.00. The overnight LIBOR rate fell 1 bp to 0.14%, and the three-month LIBOR rate dropped 1 bp at 1.46%.

Dow Chemical (DOW $19 ¹) is under pressure after the Kuwait Petroleum Corporation decided to cancel plans for a $17.4 billion joint venture. Dow said it is "extremely disappointed" with the decision by the Kuwaiti government and will evaluate its options but remains committed to its Middle East strategy. Rohm and Haas (ROH $63), which had already inked an agreement to be acquired by Dow, reiterated that completion of the deal between Kuwait and Dow Chemical is not a condition of its merger agreement. Nonetheless, shares of ROH are under heavy pressure because Dow had planned to use some of the cash from the Kuwaiti joint venture to pay down debt on its planned $15.4 billion purchase of ROH.

Manufacturing and home prices in the spotlight

This week will see four trading sessions and will be light on economic releases but there will be a couple of reports that are likely to be in focus. The ISM Manufacturing Index on Friday is expected to show that national manufacturing activity remains under heavy pressure, while prices continue to fall at a fast pace in the early stages of production amid declining demand. Falling home prices are also expected to be in the spotlight with the release of the S&P/CaseShiller Home Price Index on Tuesday. Although some analysts have criticized the measure for overstating falling prices, a survey by Bloomberg is forecasting that price declines are likely to have accelerated in October.

Other economic releases to keep an eye on include the Consumer Confidence Index and the Chicago Purchasing Managers' Index on Tuesday and weekly jobless claims on Wednesday. Separately, Treasuries are slightly higher.

Europe moves ahead

Traders in Europe are coming back from the Christmas holiday in a buying mood and mining and energy shares are giving the overall market support amid higher prices, but volume is light. Gold prices are trading higher and are at a three-month high, and the uncertainty caused by the latest violence in the Middle East is lifting oil, but copper prices are flat. Volume may remain low for the remainder of the week since many investors will probably remain on the sidelines until after the New Year.

Asia mostly flat

Most markets in Asia ended little changed, while stocks in Japan climbed off early lows and the Nikkei 225 Index managed to close fractionally higher in subdued action. Talk that three non-life insurance companies may merge and create the largest non-life insurance company in Japan, according to reports in the Financial Times and Dow Jones Newswires, sent the insurance group higher. The firms involved did not comment. Elpida Memory (ELPDF $4), Japan's largest maker of memory chips, jumped nearly 14% after confirming it has begun talks with rival chipmakers in Taiwan. The industry has been plagued by large losses due to an oversupply of memory chips, and analysts said that a merger may help control production and absorb the excess supply that has depressed prices.