Morning Update

Pressure Persists in Early Action

Stocks are lower in early action, after a modest decline yesterday as traders tread lightly ahead of the unofficial start to 1Q earnings season, which will commence with Alcoa's earnings report following today's closing bell. Financials are also under pressure after the London Times reported the International Monetary Fund was set to forecast the "toxic assets" that are clogging banks' balance sheets could reach $4 trillion. Equity and economic news is on the lighter side in the Good Friday-shortened week, with Applied Materials reporting a solar client slashed its order due to the global recession, and consumer credit set to be released later today. Treasuries are higher as equities are faltering, while overseas, markets are mostly lower.

As of 8:46 a.m. ET, the June S&P 500 Index Globex futures contract is 14 points below fair value, the Nasdaq 100 Index is 16 points below fair value, and the DJIA is 117 points below fair value. Crude oil is down $0.87 to $50.18 per barrel, and gold is up $5.80 at $877.30 per ounce.

Applied Materials (AMAT $12) announced that one of its solar production gear client has reduced its $1.9 billion order by more than 85% to $250 million as a result of the worsening global economy since the order was announced in March 2008. AMAT's solar business is part of its energy and environmental solutions unit, which accounted for over 20% of the company's total revenue in 1Q, according to Reuters.

Treasuries higher as equities soften

Treasuries are gaining ground in early action as equities are under pressure and as there are no major economic reports due out today. Yields have moved higher recently and have shown some volatility as traders grapple with whether deflation poses a larger threat versus inflation when the economy begins to get back on the growth track. So far, Fed Chairman Ben Bernanke is saying the right things. He knows that moving too early, as was done in the 1930s, will only elongate the pain and cause a further tailspin. He also knows that moving too late lets too much money generate too much inflation. He's a student of the Great Depression's mistakes-let's hope that he heeds them."

Later today, consumer credit will be released and is expected to follow January's $1.8 billion increase with -$3.0 billion in February. The gauge of short-term and intermediate-term credit extended to individuals-excluding loans secured by real estate-rose for the first time in four months in Januaryand that we are seeing some "green shoots" in economic data. The steep fall in spending and manufacturing following the Lehman Brothers bankruptcy in September 2008 was so dramatic that it simply could not be sustained. After recovering from a state of paralysis during which consumers locked down, some pent-up demand has been building. Although the economy is still in decline, the pace of decline is slowing. Better-than-expected reports on the economy include retail sales, manufacturing and durable goods orders.

However, February's forecasted decline illustrates why the government has been aggressive with its non-traditional actions to revive the credit markets, such the Term Asset Lending Facility (TALF) aimed at unfreezing the vital securitization market. While the equity markets have been comforted by the willingness of the government to do whatever it takes to stabilize the credit markets, some credit spreads have started to widen again, casting doubts on the ultimate success of these initiatives. We believe that these initiatives, along with others-including the Fed's purchases of mortgage backed securities (MBS) and Treasuries-will help, but we question whether we'll see a lasting recovery. Keys to a long-lasting recovery are the degree to which private money will enter these markets and the return of confidence so vital to the functioning of the credit markets.

Euro zone data dampening sentiment in Europe

Stocks in Europe are lower in afternoon action, led by financials after a report of a gloomy outlook for toxic debt on the balance sheets of banks and after data that showed euro zone GDP fell more than expected. The London Times reported-without acknowledging where it got the information-that the International Monetary Fund (IMF) is set to raise its estimate for toxic banking assets to $4 trillion. The IMF did not comment on the report. Meanwhile, the European Union revised its March 4Q GDP report to a 1.6% contraction versus 3Q, from the previous 1.5% decline in output. Investment fell 4%, consumer spending declined 0.3%, and exports fell 6.7%, while imports also dropped by 4.7%. In equity news, shares of BMW (BAMXY $11) are under pressure after the luxury car maker reported a 17% drop in vehicle sales and after analysts downgraded the stock. Also, Commerzbank (CRZBY $6) is lower after a person familiar with matter reported that the German bank may sell its commercial property unit or Eastern European operations to win European Union approval for state aid. Commerzbank did not comment.

Asia mixed as central banks react

Stocks in Asia were mixed with a modest negative tilt as traders dissected central bank announcements in Japan and Australia. The Bank of Japan left its key lending rate unchanged at 0.1% by a unanimous vote but announced that it will accept a broader range of collateral for loans to try to overcome the credit crisis by boosting lending. Japan's Nikkei 225 Index declined 0.3%, while the broader Topix Index managed to increase 0.2%. Elsewhere, Australia's central bank unexpectedly cut its main lending rate, reducing it by 25 basis points to 3.0%-a 49-year-low per Bloomberg, and policy makers warned its economy will contract this year for the first time since 1991 as a deepening global recession curbs demand for exports of natural resources, which the region relies heavily on. Australia's S&P/ASX 200 Index fell 1.3% following the announcement and as a solid decline in commodity prices helped extend losses for the region. In equity news, Rio Tinto (RTP $133) fell sharply on continued speculation it was ready to go ahead with an $8 billion rights issue, if its agreed $19.5 billion fund raising efforts with privately held Aluminum Corp. of China, or Chinalco falls through. Also, Australia's largest telecom firm Telstra (TLSYY $11) gained ground on hopes the company will be able to investment in the government's A$43 billion high-speed national internet network plan, after its earlier proposals were rejected.