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• The European DJ Stoxx 50 this morning is trading -0.85%. European stocks were undercut by higher oil prices (+$1.62 per barrel) and by today's news that the GfK AG Institute's August German consumer confidence index fell to a 5-year low of 2.1 from 3.6 in July. European banking stocks were hurt by a sharp 11% sell-off in Australia's fourth largest bank, Australia & New Zealand Banking Group, which said its full-year profit will drop sharply due to bad loans. The UK's largest mortgage lender HBOS is down -5.1% this morning and Deutsche Bank is down -0.9%. Asia-Pacific stocks today closed mixed: Nikkei index +0.14%, Hong Kong -0.24%, China +0.74%, Australia -0.97%, Singapore -0.43%, South Korea -0.15%, Bombay +0.52%.
• Market focus - The US markets this week will focus on (1) the US stock market which rebounded sharply early last week but then settled back later in the week, tracking events in the US banking sector, (2) the T-note market which has basically mirrored the stock market recently, (3) the dollar which rallied to a 3-week high last week on the calmer US banking sector situation, which boosted expectations for Fed tightening and US interest rate differential, (4) crude oil prices which extended the sharp $24 sell-off seen in the past 2 weeks on heavy technical selling and the stronger dollar, and (5) the continued heavy flow of earnings reports this week. The markets this week will also continue to closely watch the banking sector for any new signs of trouble.
• Earnings - Of the S&P 500 companies, 118 are scheduled to release Q2 earnings this week. Market expectations for Q2 earnings are currently at –17.9% y/y, according to Thomson Reuters. However, if the –85% plunge in earnings for the S&P 500 financial sector is removed from the S&P 500, the remaining sectors of the S&P 500 earnings are expected to show respectable earnings growth of +7.7%, according to Thomson Reuters.
• US economic calendar - Tuesday brings the May S&P/Case-Schiller home index (expected –16.0% y/y), and the July U.S. consumer confidence index from the Conference Board (expected –0.4 to 50.0). Wednesday brings the weekly MBA mortgage applications report, the July ADP employment change (expected –60,000), and the Treasury’s announcement of next week’s 10-year and 30-year T-note auctions. Thursday brings weekly initial unemployment claims (expected –11,000), Q2 GDP (expected +2.3%), Q2 employment cost index (expected +0.7%), July Chicago purchasing managers index (expected –0.6 to 49.0), July Milwaukee purchasing managers index (expected +4.5 to 43.5), and a speech by Treasury Secretary Paulson on the markets and the economy. Friday brings the July unemployment report (July payrolls expected –75,000; July unemployment rate expected +0.1 to 5.6), July ISM manufacturing index (expected –1.0 to 49.2), June construction spending (expected –0.3%), and July domestic vehicle sales (expected 9.9 million units, unchanged from June’s 9.9 million units).
• Fed policy – The markets last week slightly curbed expectations for Fed tightening in early 2009 by about 5 bp. The quick Congressional passage last week of the bailout legislation for Fannie Mae and Freddie Mac provided a strong boost for the US financial sector. However, the market was disappointed with last Thursday’s weaker-than-expected US existing home sales report and the financial sector sold off sharply again. The market is discounting only about a 10% chance that the FOMC at its meeting next Tuesday will raise the funds rate by 25 bp to 2.25%. The market is discounting the chances for that 25 bp rate hike at about 40% for the following FOMC meeting on September 16. The market is fully discounting a 25 bp rate hike by January 2009, a 50 bp rate hike by March 2009, a 75 bp rate hike by June 2009, and a 100 bp rate hike by September 2009.

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• September S&Ps this morning are trading slightly lower by -1.60 points. Bearish factors this morning include higher oil prices and the -0.85% sell-off in European stocks. The US stock market last Friday closed higher to reverse some of last Thursday's losses (Dow +0.19%, S&P 500 +0.42%, Nasdaq Composite +1.33%).
• Bullish factors last Friday included (1) the $2.14 per barrel sell-off in Sep crude oil prices to a new 1-1/2 month low, (2) Friday's stronger-than-expected economic data, (3) a +1.5% rally in the S&P 500 homebuilder index on the stronger-than-expected June new home sales report, and (4) some short-covering after last Thursday's sharp sell-off. Bearish factors included (1) doubts that the 2-week recovery rally is for real given last Thursday's plunge, and (2) ongoing nervousness during the Q2 earnings season.
• Fannie Mae is up +4.4% and Freddie Mac is up +8.7% in European trading this morning after the Senate on Saturday approved the US Treasury's rescue legislation.
• Amgen (AMGN) is up +13% in European trading this morning after the company announced that its osteoporosis drug denosumab helped prevent spinal and hip fractures.
• American International Group (AIG) may see some strength today after Barron's noted that the insurer's low price-earnings ratio may lead to strong stock returns.

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• September 10-year T-notes this morning are trading +6 ticks on lower S&Ps and European stocks. Sep T-note prices last Friday fell sharply by -23 ticks. Bearish factors included (1) Friday's stronger-than-expected US final-July US consumer confidence report of +4.6 to 61.2 versus expectations for a -0.2 point decline to 56.4, (2) last Friday's stronger-than-expected June new home sales report of -0.6% to 530,000 versus expectations for a report of 503,000, (3), last Friday's stronger-than-expected June durable goods report (+0.8% overall and +2.0% ex-transportation, versus expectations of -0.3% overall and -0.2% ex-transportation), and (4) last Friday's rally in the stock market.
• The dollar this morning is trading lower with the dollar/yen down -0.23 yen and the euro/dollar up +0.52 cents. The dollar index last Friday closed slightly lower but near the top of the sharp 2-week rally. The dollar received underlying support last Friday from the stronger-than-expected US economic data and the rise in US interest rates.
• Sep crude oil prices this morning are trading +$1.62 per barrel and Sep gasoline is trading +3.92 cents. Bullish factors this morning included some short-covering after the recent losses and damage to two Shell pipelines by Nigerian militants. Sep crude oil prices last Friday closed -$2.23 per barrel and posted a new 1-1/2 month, bringing the overall plunge in the past 2 weeks to $24 per barrel. Bearish factors center on (1) heavy technical long liquidation pressure, (2) the recent rise in OPEC production, and (3) recent indications that high prices are undercutting demand. Underlying bullish factors include (1) continued concern about if and when Israel may attack Iranian nuclear facilities, and (2) the longer-term picture of rising demand and restricted investment and supply.

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Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): VZ-Verizon (BEST earnings consensus $0.65 per share), AMGN-Amgen (1.04), MOS-Mosaic Co (1.64), KFT-Kraft Foods (0.50), L-Loews Corp (na), SPG-Simon Property (0.41), K-Kellogg (0.81), HIG-Hartford Financial Services (2.14), EDS-Electronic Data Services (0.26)

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