Morning Update

Dubai Debt Concerns Wane to Alleviate Some of Friday’s Pain

Stocks are modestly higher in morning action as fears that surfaced last week regarding the impact of Dubai World’s debt restructuring request on lenders to the government holding company are being soothed by the announcement by the United Arab Emirates’ (UAE) central bank support. Steep losses occurred in the world equity markets last week and the announcement is helping support early sentiment in the US, somewhat offsetting some mixed data from retailers after the key “Black Friday” weekend. Treasuries are slightly lower as equity news remains light, ahead of a heavy week on the economic calendar. Overseas, the UAE announcement helped Asian shares rebound, while European trading is being bogged down by lingering fears in the financial sector.

As of 8:52 a.m. ET, the December S&P 500 Index Globex future is 1 point above fair value, the DJIA is 14 points above fair value, and the Nasdaq 100 Index is at fair value. Crude oil is lower by $0.07 at $75.98 per barrel, and the Bloomberg gold spot price is down $6.73 at $1,170.90 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.3% at 74.74.

With the “Black Friday” weekend—a key period for retailers’ sales—putting the holiday shopping period in focus on Wall Street, some data suggests that while more shoppers went out to stores over the holiday weekend, sales were softer than last year. The National Retail Federation (NRF) reported that the number of shoppers was up, but average spending was down. According to a NRF survey, 195 million shoppers visited stores and websites over the weekend, higher than the 172 million people who went to stores last year. However, the NRF said average spending over the weekend dropped 8% to $343.31 per person from $372.57 a year ago.

NRF President and CEO Tracy Mullin said, “Shoppers proved this weekend that they were willing to open their wallets for a bargain, heading out to take advantage of great deals on less expensive items like toys, small appliances and winter clothes.” She added that shoppers can continue to expect retailers to focus on low prices and bargains through the end of December.

Midwest manufacturing report to kick off busy week on the economic front

Treasuries are modestly lower in early action ahead of today’s release of the Chicago PMI, which is due out shortly after the opening bell, forecasted to slip from a 54.2 reading in October, to 53.3 in November. The gauge of manufacturing activity in the Midwest will kick off a heavy week for the economic calendar, which will likely go a long way in determining the direction of the equity markets.

The ISM Manufacturing Index will be released tomorrow, forecasted to decline to 54.8 in November from 55.7 in October, indicating expansion in the manufacturing sector, albeit at a slower pace, and coming after the index posted a significant jump last month from 52.6 in September. Thursday brings the companion ISM Non-Manufacturing Index, expected to have increased to 51.5 in November after falling to 50.6 in October from September’s level of 50.9.

Traders will be watching the employment components of both ISM indices for signs that the pace of job losses is continuing to improve, and the week’s employment focus will likely hit its pinnacle with Friday’s release of nonfarm payrolls. The Bloomberg survey of economists is forecasting the decline in payrolls to be 120,000 in November, after falling 190,000 in October, and the unemployment rate is estimated to be unchanged at 10.2%, after jumping in October from 9.8% in September.

The Federal Reserve will also be in the headlines next week, with the release of the Beige Book on Wednesday, wherein Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for December 15-16, and is used as an input to the Fed’s decision on whether to make any changes in monetary policy. When the Fed may begin to tighten its extremely loose monetary policy has been a major point of interest on the Street, with many grappling with when the Fed will raise the fed funds rate—the central bank’s key interest rate—off of the near zero point it sits today. Traders are speculating that the Fed will at least keep its main lending rate unchanged until well into next year, according to fed funds futures trading. Please see Schwab’s Director of Income Planning for the Schwab Center for Financial Research, Rob Williams’ latest article “The Impact of Interest Rates on Bond Investments,” located at www.schwab.com/marketinsight, for a look at some factors to consider regarding interest rates and fixed income investing. In other Fed news, on Thursday traders will be watching Fed Chair Ben Bernanke’s Congressional testimony as part of his confirmation process, ahead of the January 31, 2010 expiration of his four-year term as Chairman, although he has been appointed as a member of the Board through January 31, 2020.

Other releases on this week’s busy economic calendar include, construction spending, pending home sales, ADP employment change, MBA Mortgage Applications, nonfarm productivity, unit labor costs, initial jobless claims, and factory orders.

UAE central bank lends some support to soothe some Dubai debt concerns

The United Arab Emirates’ (UAE) central bank announced that it “stands behind” Dubai’s lenders, setting up a new liquidity facility for commercial banks. The UAE said on Sunday, “Central Bank has issued a notice to UAE banks and branches of foreign banks operating in the UAE, making available to them a special additional liquidity facility linked to their current accounts as the central bank, as the rate of 50 basis points above the 3 months EIBOR (Emirates interbank offered rate).” The support from the central bank is helping limit some of the worries that surfaced last week to pressure financial markets across the globe, stemming from the announcement out of Dubai, one of the seven states that comprise the country of the United Arab Emirates, the capital of which is Abu Dhabi. The emirate announced that it would ask creditors of Dubai World—a privately-held holding company for the government of Dubai—to agree to a temporary “standstill” to delay repayment on some of the liabilities that the government has in the holding company’s fund, as an early step to restructuring its debt agreements. Dubai World holds about $59 billion of Dubai’s total $80 billion in debt reported on its balance sheet. Markets fell over 6% in today’s trading in Dubai.

Europe under pressure on more weakness in financials

Stocks in Europe are under broad-based pressure, led by financials on lingering uneasiness about the impact of Dubai World’s request to restructure some of its debt, despite the UAE central bank’s action to support the emirate’s lenders. The group is also being pressured by a steep drop in shares of the Bank of Ireland (IRE $10) on the announcement that it may take a $5.1 billion loss on asset sales to the nation’s “bad bank” program. Technology and oil and gas issues are also under pressure to bog down the major markets in the European region. Meanwhile, there was an economic report released out of Europe that deserves a mention, as the eurozone CPI showed the first increase in consumer prices in seven months, after increasing 0.6% from a year earlier in November, and compared to the 0.4% increase of economists surveyed by Bloomberg.

Asia rebounds from Friday’s slide

Stocks in Asia were higher across the board, following Friday’s steep decline, as the worries about Dubai’s debt restructuring were cooled by the UAE’ central bank support for lenders of Dubai. China’s Shanghai Composite and Hong Kong’s Hang Seng Indexes led the way, both gaining over 3%, while Japan’s Nikkei 225 Index’s 2.9% gain was not too far behind. Financial firms rebounded to lead Asian trading, and some early weakness in the Japanese yen versus the dollar helped boost export issues in Japan as fears about the impact of the rally in the Asian currency—which reached a 14-year high recently—on profits of companies that rely on sales in US waned to help support the advance. Elsewhere, Australia’s S&P/ASX 200 Index rose 2.8%, South Korea’s Kospi Index rose 2%, and India’s BSE Sensex 30 Index gained 1.8% after the nation reported that its 3Q GDP rose 7.9% on a year-over-year basis, topping the 6.3% expansion that economists surveyed by Bloomberg had expected. In other economic news, the broad-based advance in Asia helped overshadow a report that showed Japanese industrial production rose 0.5% quarter-over-quarter in October, well below the 2.5% advance that had been expected.