Morning Update

Inauguration Fails to Inspire Wall Street

Continued worries about the banking sector in the wake of the announcement by Royal Bank of Scotland that it will report the largest corporate loss in UK history is offsetting any enthusiasm from today's historic inauguration of President-elect Barack Obama. State Street is sharply lower after offering weak guidance, while Johnson & Johnson provided a mixed report, and Forest Laboratories topped the Street's profit outlook. Treasuries are falling despite the glum mood, and world markets are weaker.

As of 8:30 a.m. ET, the March S&P 500 Index Globex futures contract is 12 points below fair value, the Nasdaq 100 Index is 11 points below fair value, and the DJIA is 91 points below fair value. Crude oil is down $2.41 to $34.10 per barrel, and gold is up $10.50 at $850.40.

State Street (STT $36) is under very heavy pressure after reporting that it expects revenues in 2009 to be approximately flat, versus its long-term goal of 8-12% growth, and 2009 operating profits will also be approximately flat, compared to the long-term goal of 10-15% growth. The company also said it sees rising unrealized losses in its asset-backed commercial paper conduits. State Street posted 4Q operating earnings of $1.18 per share, four cents above the Reuters view, and said operating revenues increased 6% to $2.6 billion.

Johnson & Johnson (JNJ $57) reported 4Q EPS ex-items of $0.94, two cents above the Reuters estimate, as sales dipped 5% to $15.2 billion, below the Street's forecast of $15.9 billion. Stronger sales in its consumer segment were offset by a drop in pharmaceutical and medical device sales. The Dow component offered 2009 profit guidance just shy of the Street's forecast.

Forest Laboratories (FRX $26) reported fiscal 3Q net earnings of $1.03 per share, ahead of the consensus forecast of $0.86, as revenues were nearly flat at $1.0 billion. Forest Labs raised full-year profit guidance from $3.30-3.40 to $3.35-3.45 per share.

Light week

The four-day week will see a lull in economic reports, with most of the focus on housing. Mortgage rates are at historic lows, falling to 5% for a 30-year fixed rate, but potential homebuyers remain on the sidelines due to worries about prices and job security. The NAHB Housing Market Index, which measure sentiment among homebuilders, is expected to hold at a low as builders find little reason for optimism amid a glut of homes and skittish consumers. Housing starts and building permits will be released on Thursday along with weekly jobless claims. Treasuries are falling.

Europe remains under pressure

Deepening fears that the global recession will continue to punish corporate profits is modestly pressuring European markets in afternoon action, with technology and banking stocks racking up sizeable losses. Logitech International (LOGI $13) is down more than 10% after reporting net earnings fell about 70% to $40.5 million in the quarter just ended and sales dropped 16% to $627.5 million, both shy of analysts' estimates. The maker of PC accessories blamed falling consumer demand brought about by the worsening global slump.

BNP Paribas (BNPQY $21) is under pressure following an analyst's report that the France-based bank will be forced to raise more capital. The company did not comment. But Royal Bank of Scotland (RBS $11) is trading higher after plunging on Monday. Yesterday, the company said it may report a loss of 28 billion pounds, the UK's largest ever full-year loss, and the government unveiled a second bank rescue plan. The British pound reacted poorly and is down over 5% against the dollar over the past two days and is trading below $1.40 for the first time since 2001.

Separately, the ZEW survey of economic sentiment improved from -45.2 in December to -31.0 in January, the third-straight rise and ahead of the expected reading of -43.1. The closely-watched measure of German institutional sentiment stands at its best reading in over a year as the second stimulus package announced by the government appears to have lifted sentiment, according to the Center for European Economic Research. Much of the data, however, continues to point to weakening conditions in Europe.

Financial fallout worries Tokyo

The grim outlook from the Royal Bank of Scotland raised fears about the state of the financial sector, pulling down the Nikkei 225 Index by more than 2%. The Japanese government cut its assessment on the economy for the fourth month in a row, noting that the economy is "worsening rapidly" and exports are "decreasing very substantially."