Overnight Developments

• The European DJ Stoxx 50 this morning is up +0.28% and Sep S&Ps are down -1.80 points (-0.20%). The Asia-Pacific stock markets today closed higher with Japan (+0.83%), Hong Kong (+1.78%), China (+0.34%), Taiwan (+0.09%), Australia (+1.24%), Singapore (+0.67%), South Korea (+0.23%), India (+2.92%).
• European stocks are higher today led by a gain in energy producers after crude oil advanced over $71 a barrel. The dollar and US Treasuries are weaker today while gold prices climbed to a 2-week high after the People's Bank of China (PBOC) reiterated its call for a "super-sovereign" currency and said the IMF should manage part ot its members' foreign-exchange reserves. May German import prices were weaker than expected at 0.0% m/m and have been stable or fallen for the last 10 months while the -10.4% y/y drop is the largest annual decline in German import prices in 22-years. The Bank of England (BOE) released its biannual financial stability risk assessment which said "banks' balance sheets remain sensitive to any setbacks in recovery in financial markets or real activity." The report still expressed optimism that the slump may have past its worst with the BOE saying banks' funding conditions are improving as capital markets reopen and interest rates fall.
• Most Asia-Pacific stock markets gained after Bridgestone, the world's largest tiremaker, jumped 8.5% after it narrowed its first-half net loss forecast to 46 billion yen ($480 million) from 62 billion yen, citing reduced costs. Daiwa Securities SMBC said "uncertainty over the global economy has receded" and it expects companies to raise their earnings estimates as business conditions aren't as bad as feared. Japanee stocks rose even after the government reported that the country's consumer prices fell at a record pace in May. Japan's consumer prices tumbled to a record low last month, adding to risks that deflation may become entrenched and impede an economic recovery. The Japan May national CPI excluding fresh food fell -1.1% y/y, the sharpest decrease since data was first compiled in 1971. Japanese consumers may delay purchases if they expect goods to get cheaper as Japan only escaped from a decade of deflation in 2005.

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• September S&Ps this morning are down -1.80 points. The US stock market yesterday rallied sharply throughout the day and closed with sizable gains (Dow +2.08%, S&P 500 +2.14%, Nasdaq Composite +2.08%).
• Bullish factors for stock prices yesterday included (1) signs that the economy contracted at a slower pace than originally reported after US Q1 GDP was unexpectedly revised upward to -5.5% from -5.7%, (2) the Fed's action to curtail its Term Auction Facility emergency funding program, signaling an improvement in financial markets, (3) a rally in retailers led by J.C. Penny which jumped 6% after it was upgraded to "overweight" by JPMorgan Chase, which may be a sign of improved consumer demand, and (4) strength in energy producers after crude oil rallied on speculation that militant attacks on Nigerian oil infrastructure will reduce Nigerian crude exports.
• Bearish factors for stock prices yesterday included (1) the unexpected jump in weekly US initial unemployment claims, which may revive concerns that rising unemployment will prolong the recession, and (2) data from US stock exchanges that showed short-interest on the S&P 500 climbed to 9.8 billion shares as of Jun 15, a gain of almost 1% from two weeks earlier, and the the first increase in short-interest since March.
• Palm (PALM) surged 13% in European trading after the maker of the new Pre phone reported a Q4 loss of 40 cents a share, above analysts' estimates of 66 cents.

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• September 10-year T-notes this morning are down -2.5 ticks. Sep T-note prices yesterday rallied throughout the day and closed higher by +1-0.5/32 points at a 3-1/2 week high. Bullish factors for T-note prices yesterday included (1) the unexpected increase in weekly US initial unemployment claims (+15,000 to 627,000 versus expectations of -8,000 to 600,000), (2) the Fed's purchase of $3.249 billion in Treasuries as part of its quantitative easing program, and (3) strong demand for the Treasury's $27 billion 7-year T-note auction after indirect bidders, a class of investors that mainly includes foreign central banks, bought 67.2% of the notes, over twice as much as the 33.2% average of the past four auctions. Bearish factors for T-note prices yesterday included (1) the comment from a senior Chinese Communist Party official that China should buy gold rather than US debt because the Fed's policies make dollar depreciation inevitable, raising concern that Chinese demand f or US Treasuries may wane, (2) the unexpected upward revision to US Q1 GDP to -5.5% from -5.7%, and (3) reduced safe-haven demand for Treasuries after the stock market rallied.
• The dollar index this morning is weaker with the dollar/yen -0.41 yen and the euro/dollar +1.05 cents. Pressuring the dollar this morning was the reiteration from China for a "super-sovereign" currency. The dollar index yesterday erased an early rally and closed lower. Bearish factors for the dollar yesterday included (1) the comment from a senior Chinese Communist Party official that China should buy gold rather than US debt because the Fed's policies make dollar depreciation inevitable, fueling concern that Chinese demand for US assets may fall, (2) the rally in the stock market which erodes the safe-haven demand for the dollar, and (3) a decreased demand for dollars after the Fed cut the size of credit auctioned under its Term Auction Facility (TAF) biweekly auctions to $125 billion from $150 billion with the statement that "TAF funding will be reduced gradually further," a sign that improving financial markets are allowing the Fed take back some of its emergency funding measures. Bullish factors for the dollar yesterday included (1) weakness in the euro after the prediction from the IMF that Irish banks face as much as 35 billion euros ($49 billion) of losses through 2010 in an "unprecedented" economic slump, and (2) the prediction from UBS that the dollar may benefit from the Fed's view on inflation and on improved dollar interest-rate differentials as the European-US two-year yield difference has narrowed by 36 bp since Jun 4.
• August crude oil prices this morning are up +55 cents a barrel and August gasoline is +1.42 cents a gallon. Aug crude oil prices yesterday moved higher and closed up by +$1.56 per barrel. Aug gasoline closed up +5.16 cents a gallon. Bullish factors for crude oil prices yesterday included (1) the weaker dollar, (2) the report from the Guardian newspaper that Nigeria is running out of crude to supply refineries because of militant attacks on its oil infrastructure, (3) the shut down of several US oil refineries in Texas due to "operational issues," including the Baytown refinery, the largest in the US, which may curtail US gasoline demand, and (4) a rally in the equity market, which may indicate an improvement in energy demand as the recession eases. Bearish factors for crude prices yesterday included (1) the unexpected decline in Apr Euro-Zone industrial new orders which have now fallen for 9 straight months and indicate slack European energy demand, and (2) the unex pected decline in weekly US initial unemployment claims, raising concern that US energy demand will remain at depressed levels as unemployment climbs.

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