Morning Update

Markets Ring in New Year in Positive Fashion

Stocks in the US are poised to start the trading day to the upside, after markets globally are generally higher on news that the pace of global manufacturing continued to increase in December, led by the report that Chinese manufacturing grew at the fastest pace in over five years. However, Chinese markets were lower on concerns of inflation overheating, after the country is set to post the fastest growth rate among large economies in 2009. In equity news, Kraft Foods is reported to be increasing its offer for Cadbury and General Motors announced record Chinese car sales. Treasuries are mixed ahead of the US manufacturing release and construction spending report, while bond traders are contemplating news that PIMCO is becoming more conservative on US government debt and corporate bonds. Overseas, Europe and Asian markets are generally higher.

As of 8:48 a.m. ET, the March S&P 500 Index Globex future is 7 points above fair value, the DJIA is 65 points above fair value, and the Nasdaq 100 Index is 20 points above fair value. Crude oil is up $1.88 at $81.24 per barrel, and the Bloomberg gold spot price is higher by $20.15 at $1,117.47 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.4% at 77.52.

Kraft Foods Inc (KFT $27) is reported to be increasing its offer for UK confectioner Cadbury PLC (CBY $51) according to a report in the Sunday Times, which cited unnamed sources reporting that the hostile bid for the company will be raised in the next two weeks. Neither company commented on the report.

General Motors reported that it sold a record 1.83 million vehicles in China in 2009, an increase of 67%, as the Chinese government boosted demand by halving the purchase tax for small engine vehicles in 2009. GM said it increased its market share in China by 1.3% to 13.4%.

US to join global manufacturing release party after the open of trading

The ISM Manufacturing Index will be released at 10 a.m. EST today, forecasted to improve to 54.1 in December after dropping to 53.6 in November, which would indicate the fifth consecutive month of expansion in the manufacturing sector (economic calendar). The report would be the latest in a slew of global manufacturing surveys today showing growth in December. Last month both US ISM reports disappointed to the downside and the ISM Non-Manufacturing Index dipped below the 50 level that marks the separation point between expansion versus contraction in economic activity. The ISM Non-Manufacturing Index will be released on Wednesday, and is expected to have increased back into expansion territory, to 50.5 in December from 48.7 in November. The trends in the employment components of both indexes will also be watched for signs of improvement.

Construction spending is also slated after the open of trading, forecasted to have fallen 0.5% in November. Treasuries are mixed ahead of the reports, and bond traders are digesting news from the world’s largest bond fund complex, Pacific Investment Management Co. (PIMCO), that the firm is paring holdings of US and UK debt as government borrowing continues to expand, and is “more cautious” on corporate debt, according to the 2010 outlook from the company.

Additional economic releases this week include Wednesday’s ADP Employment Change Report, forecast to show that private sector employers shed 75,000 jobs in December and the minutes from the December Federal Open Market Committee (FOMC). The headline release for the week will be nonfarm payrolls on Friday, with the Bloomberg survey of economists forecasting payrolls were flat in December, after falling a mere 11,000 in November, which was much better than economists had forecasted at the time. The unemployment rate is estimated to increase to 10.1% after falling from 10.2% to 10.0% in November.

Fed Chairman Ben Bernanke gave a speech at the American Economic Association annual meeting over the weekend, in which he defended the Fed’s policy of low rates during the past decade, rejecting claims they caused the housing bubble, saying rates were close to what they should have been when looking at the modified Taylor rule, noting housing bubbles in other countries, and blaming lax regulation. Bernanke said the Fed must be open to raising rates to fight against asset bubbles, but said stronger regulation is the best solution to prevent a repeat of the crisis.

European shares rise on reports manufacturing increasing globally

Stocks in Europe are higher, led by basic materials and industrial shares as multiple countries globally issued reports that showed manufacturing continued to expand in December, with China posting the fastest pace in over five years, the UK reporting the best increase in more than two years and besting estimates, and the euro area announcing the final release of PMI data that was in line with prior forecasts. Nestle (NSRGY $48), the world’s largest food company according to Bloomberg, is higher after Novartis (NVS $54) offered to buy the rest of eye-care company Alcon (ACL $164) from Nestle and minority shareholders for approximately $39.3 billion, and Nestle announced a stock buyback worth 10 billion Swiss francs ($9.65 billion). Alcon shares are higher, while Novartis is lower.

Chinese markets fail to rise on positive manufacturing data, Japan jumps

Markets in Asia were generally higher, after a report that Chinese manufacturing grew at the fastest pace in over five years was released, boosting shares of industrial companies. However, Chinese markets were lower, as the strong growth implied by the manufacturing report increased concerns about the possibility of inflation and tighter tax and mortgage rules dragged down property developers, and the Shanghai Composite ended 1.0% lower. The Shanghai government said on Dec. 31 that home buyers must prove they are first-time purchasers before they can benefit from reduced taxes on property transactions. Elsewhere in Asia, South Korea’s Kospi Index rose 0.8% as Korean exports increased at the best rate in 17 months and India’s BSE Sensex 30 Index gained 0.5% after the country reported a faster pace of manufacturing in December, while Australia’s S&P/ASX 200 Index increased 0.1%.

The Japanese Nikkei 225 Index was 1.0% higher on the Chinese data and as the yen weakened, buoying shares of export-led companies, extending gains after the Nikkei 225 posted its best monthly return in 14 years in December, at 13%. Meanwhile shares of Japan Airlines Corp (JALSY $4) rose over 30%, after the state-run Development Bank of Japan doubled a credit line, easing bankruptcy concerns. The Yomiuri newspaper today reported that JAL will partner with Delta Air Lines (DAL $11), breaking its relations with AMR Corp’s (AMR $8) American Airlines and that All Nippon Airways is considering taking over JAL’s international flights, citing unidentified sources. JAL, Delta and All Nippon have not commented, while a representative in Japan for American said the report was “misleading and inaccurate.”