Morning Update

Optimism Sparks Gains

Gains in Asia and Europe are spreading to US equities as 2009 brings new funds into the market amid expectations that the fiscal stimulus packages around the world and coordinated global rate cuts will eventually begin to stem the serious decline in economic activity. The advance comes against the backdrop of several major economic reports out today, including the latest look at the service sector and the minutes from the FOMC's latest meeting. Meanwhile, Dow Chemical said it will pursue legal actions against Kuwait, LDK Solar cut guidance, and Treasuries are under pressure.

As of 8:30 a.m. ET, the March S&P 500 Index Globex futures contract is 11 points above fair value, the Nasdaq 100 Index is 15 points above fair value, and the DJIA is 76 points above fair value. Crude oil is up $1.40 to $50.21 per barrel, and gold is down $10.10 at $847.70. The overnight LIBOR was unchanged at 0.12%, and the three-month LIBOR rate dipped 1 bp to 1.41%.

Dow Chemical (DOW $15 1) announced it will pursue legal and other options to enforce its rights under the terms of various agreements it had with Petrochemical Industries of Kuwait. Prior to signing the definitive agreement with the Kuwaiti partners, which has since been abrogated, Dow said it had been talking to other partners and it has already been contacted by other interested parties and has begun discussions. The chemical maker also said it took aggressive action in 2008 amid declining demand and will accelerate these actions in 2009. These measures are designed to maintain its "strong investment grade rating" and to continue to pay its quarterly dividend, which it said it has done since 1912 without a reduction or interruption.

LDK Solar (LDK $15) is under pressure after cutting 4Q revenue guidance from $555-565 million to $425-435 million and noting it sees lower wafer shipment volumes and average selling prices in fiscal 2009 than had been previously expected. LDK Solar blamed the softer outlook on the global financial crisis.

Busy calendar includes look at services and minutes

The ISM Non-Manufacturing Index is set to be released at 10 a.m. ET. The index has been around since 1997 and is designed to measure the broad service sector. Given the many headwinds buffeting the economy, including tight credit standards and a reluctance by consumers to spend on discretionary items, a decline from November's record low of 37.3 to 36.5 in December is anticipated, according to Bloomberg, indicating the drop in activity is accelerating. A reading below 50 suggests that activity is the service sector is declining.

Factory orders are expected to drop 2.3% in November, which would be the fourth consecutive decline, as manufacturers feel the pressure from falling auto sales, the collapse in housing, and the steep decline in sales overseas.

Pending home sales for November will also be released and a 1.0% drop is anticipated against the backdrop of tighter credit standards, a very weak labor market, and falling consumer confidence.

Rounding out a busy economic calendar, traders will be paying close attention to the FOMC's minutes from its December 16 meeting, which will be out at 2 p.m. ET. In its statement, the Fed not only announced a target range for the fed funds rate that brought the key rate down to as low as zero, but also detailed a number of unconventional actions that signaled the Committee will do everything in its power to prevent a debilitating round of deflation from setting in. Clearly, FOMC members are concerned that the recession will be steeper and longer than many previous downturns and the lack of normalcy in the credit markets has only made things worse.

In front of the releases, Treasuries are extending losses amid the improvement in equity markets.

Europe extends gains

The massive stimulus packages that have been announced by governments around the world, along with numerous rate cuts, are helping European stocks gain ground for the sixth-straight session as new funds enter the market in the new year. Given that the poor car sales numbers in the US were expected, automakers are among the big winners after Porsche (POAHF $73) confirmed it has raised its stake in Volkswagen (VLKAY $71) to over 50% and it could raise its shares to 75%. Energy companies are also posting an advance as oil climbs above $50 per barrel amid the escalating price dispute between Ukraine and Russia over natural gas.

Stocks are also receiving a push from the lowest level of inflation in over two years, which may encourage the European Central Bank to adopt a more aggressive monetary stance at its January 15 meeting. Preliminary data showed that the CPI fell from 2.1% year-over-year (y/y) in November to 1.6% y/y, below the forecast of 1.8%. Inflation peaked at 4.1% y/y just five months ago but falling aggregate demand and the big drop in oil prices have quickly brought inflation below the ECB's target of "close to, but below 2%." The euro is under heavy pressure for the second consecutive day.

Meanwhile, Germany, which had been reluctant to announce a large stimulus package, may be getting ready to announce a plan that could reach 50 billion euros, about double the amount expected a week ago, according senior officials. The new package underscores Germany's concern over the potential severity of the recession.

Asia continues advance

China's Shanghai Composite Index was the leader in Asia, with the benchmark index rising 3.0%. Growing optimism that the stimulus plans and global rate cuts will bear fruit and an influx of foreign buyers sent South Korea's Kospi Index up 1.8%. Samsung Electronics (SSNLF $626), the number one maker of memory chips, benefitted from firmer DRAM prices. And LG Display(LPL $9) closed up over 3% amid growing expectations that flat panel prices will improve.

Japan's Nikkei 225 Index closed higher and gained 0.4% but the advance lagged behind most of Asia. Yesterday's uncertain performance on Wall Street was a nagging reminder that markets remain under stress, but the drop in the yen and strength around much of Asia helped the key index finish higher. Following the weak numbers in the US, Toyota (TM $66) announced it will halt auto production for 11 days in February and March