Morning Update

China Drains Liquidity and Start to 4Q Profit Season Unpleasing

Already under pressure as Dow member Alcoa posted a smaller-than-expected profit after yesterday's close, unofficially kicking off 4Q earnings season, the equity markets were exacerbated by news that China took further measures to rein in liquidity, boosting concerns about the sustainability of the global economic recovery. Adding to the uneasy backdrop, Chevron warned that its 4Q earnings are expected to be lower than 3Q on weaker refining margins. In other equity news, fellow Dow component Wal-Mart announced that it is shuttering some of its underperforming Sam's Clubs facilities. Treasuries are higher as equities come under pressure, following a wider-than-expected trade deficit on surging oil prices. Overseas, Asia was mixed and Europe is lower.


As of 8:50 a.m. ET, the March S&P 500 Index Globex future is 8 points below fair value, the Nasdaq 100 Index is 13 points below fair value, and the DJIA is 63 points below fair value. Crude oil is up $1.33 at $81.19 per barrel, and the Bloomberg gold spot price is lower by $4.08 at $1,147.78 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-is up 0.1% at 77.07.

Dow member Alcoa (AA $17) reported 4Q EPS ex-items of $0.01, missing the $0.06 estimate of Wall Street analysts, but revenues grew 18% versus last quarter to $5.4 billion, above the $4.8 billion forecast. The aluminum producer said this was a tough year for the aluminum industry, which saw a price crash, demand destruction, and a credit crunch, but it is stronger today than when the year started, as it reshaped its cost structure and built its cash reserves. AA said increased pricing and all-time record production and third party shipments, along with lower costs were partially offset by a weaker US dollar. The company expects that markets will remain weak in 1Q but prices will continue to rise.

Chevron (CVX $81) warned that earnings for 4Q are expected to be lower than in 3Q, with upstream earnings-exploration and production-to be in line with 3Q as the benefit from higher commodity prices is offset by the absence of gains recognized in 3Q. However, downstream earnings-refining-are expected to be sharply lower, mainly due to significantly weaker refining margins. The Dow member posted 3Q EPS of $1.72, and analysts were expecting EPS of $1.77 in 4Q. Shares are lower.

Meanwhile, fellow Dow component Wal-Mart (WMT $54) reported that it will close 10 financially underperforming Sam's Club locations in the US. The company expects that approximately 1,500 Sam's associates will be impacted as a result of the closures.

Trade deficit widens

The trade deficit increased from a negatively revised $33.2 billion in October to $36.4 billion in November, versus the Bloomberg estimate calling for the deficit to widen to $34.6 billion. Strength in oil prices led to imports outpacing exports as the average price per barrel jumped $5.15 to $72.54, the highest since October 2008. Treasuries remained higher following the trade report.

Materials weighing on Europe

Stocks in Europe are under pressure in afternoon action, led by a solid decline in basic resources on the heels of Alcoa's disappointing earnings report. Oil and gas and financials are also pacing the decline on concerns that recent efforts to drain liquidity in China could slow down the economic recovery. Britain's FTSE 100, France's CAC-40, and Germany's DAX indices are all down over 1%. Equity news is prominent across the pond with shares of European Aeronautic Defence and Space Co. (EADSY $21)-also known as EADS and the parent of aircraft manufacturer Airbus-losing altitude after it reported a sharp drop in annual revenue, while UK retailer Tesco (TSCDY $21) is higher after it announced solid same-store sales results. Elsewhere, Beiersdorf (BDRFY $13) is lower after the German consumer product maker reported profits that came in below expectations.

Asia mixed as China tightens policy and drains liquidity

Stocks in Asia were mixed, with Japan's Nikkei 225 Index rising 0.8% after returning from yesterday's holiday trading, reacting positively to China's favorable trade data, which was released on Monday. Focus on China dominated Asian action again as the People's Bank of China (PBOC) increased interest rates on a 20 billion yuan one-year bill auction, the second time in a week that it increased interest rates on an auction, and the PBOC also drained 200 billion yuan through the execution of a 28-day bond repurchase agreement, to stem excess liquidity. Moreover, the Chinese central bank announced in the evening that it raised the reserve requirements that banks must set aside by 50 basis points, according to Bloomberg news. However, the Shanghai Composite Index gained 1.9% on the heels of the actions by the PBOC, while Hong Kong's Hang Seng Index decreased 0.4%.

Elsewhere, Australia's S&P/ASX 200 Index fell 1% after a report showed home loan approvals fell by the highest amount since May 2008, following the string of three-straight interest rate increases by the nation's central in the last three months of 2009. Meanwhile, India's BSE Sensex 30 Index declined 0.6%, despite a larger-than-expected increase in industrial production and a solid gain in shares of Infosys Technologies (INFY $55) after the country's second-largest software exporter posted earnings that exceeded analysts' estimates and boosted its annual revenue outlook. Rounding out the day, South Korea's Kospi Index rose 0.3% and Taiwan's Taiex Index dipped 0.2%.