Evening Market Update

Stocks Sink to Start the Week

With no major corporate news or any economic reports to provide catalyst, US stocks came under pressure to begin the holiday-shortened week, as traders may have booked some profits following last week’s advance that came courtesy of a number of upbeat global economic reports, including stronger-than-expected growth in US private sector jobs. On the equity front, former Dow member Hewlett-Packard Co Chairman and CEO Mark Hurd found a place at Oracle as its President and board member, while M&A news continued with Casey’s General Stores receiving a $40 per share bid from a strategic third party, and Air Products & Chemicals sweetened its unsolicited offer to acquire Airgas Inc. Treasuries moved higher amid the downdraft in stocks.

The Dow Jones Industrial Average moved 107 points (1.0%) lower to 10,341, the S&P 500 Index lost 13 points (1.2%) to 1,092, while the Nasdaq Composite shed 25 points (1.1%) to 2,209. In light volume, 830 million shares were traded on the NYSE and 1.7 billion shares were traded on the Nasdaq. Crude oil fell $0.51 to $74.09 per barrel, wholesale gasoline was unchanged at $1.93 per gallon, and the Bloomberg gold spot price gained $5.20 to $1,255.25 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.9% higher at 82.82.

Oracle Corp.(ORCL $24) was solidly higher after it announced that Mark Hurd has joined that company as its President and has been named to ORCL’s Board of Directors. Hurd resigned last month from Dow member Hewlett-Packard Co. (HPQ $40) following an investigation of the facts and circumstances surrounding a claim of sexual harassment against Hurd and HPQ by a former contractor to the company. However, HPQ added that the investigation determined there was no violation of HPQ's sexual harassment policy, but did find violations of HPQ's Standards of Business Conduct. ORCL’s CEO Larry Ellison said, Hurd did a “brilliant job” at HPQ and, “There is no executive in the IT world with more relevant experience than Mark.” Later in the day, the Wall Street Journal reported that HPQ filed a lawsuit against Mr. Hurd surrounding a “confidentiality provision in (his) exit agreement” with HPQ, citing a person familiar with the matter. ORCL did not comment on the suit, nor did a spokesperson for Mr. Hurd.

Casey’s General Stores Inc. (CASY $43) ended solidly higher after the convenience store chain said its Board of Directors unanimously recommends against Canadian firm Alimentation Couche-Tard Inc.’s (ANCUF $23) revised takeover offer of $38.50 per share as it substantially undervalues the company and is not in the best interests of its shareholders. CASY added that it has received a preliminary proposal from a strategic third party regarding a consensual transaction at $40 per share in cash. Separately, the company reported fiscal 1Q EPS ex-items of $0.81, matching the Reuters estimate, with revenues rising 14.6% year-over-year (y/y) to $1.4 billion, roughly inline with expectations.

In other M&A news, Air Products & Chemicals Inc. (APD $77) announced that it has increased its all cash offer to acquire all outstanding common shares of Airgas Inc. (ARG $66) from $63.50 per share in July to $65.50, or about $5.5 billion. ARG confirmed receiving the sweetened bid and will review the unsolicited tender offer. Both firms were lower on the day.

Economic calendar light in an abbreviated week

Treasuries moved higher amid weakness in the equity markets and as there were no major reports slated for release on today’s economic calendar. The yield on the two-year note was 2 bps higher at 0.51%, the yield on the 10-year note rose 9 bps to 2.71%, and the 30-year bond yield advanced 7 bps to 3.79%.

The economic docket will be relatively light for the holiday-shortened week, with the headlining report being tomorrow’s afternoon release of the Federal Reserve’s Beige Book. The report is a summary of anecdotal information gathered from all twelve Federal Reserve Districts across the US depicting current economic conditions and is one of the tools used by Federal Open Market Committee (FOMC) members in forming monetary policy. The last report at the end of July noted that economic activity continued to increase, but some Districts reported the level of economic activity generally held steady, and a number of them noted that increases were modest, while two said the pace of activity had slowed recently.

Last week’s release of the minutes from their policy meeting on August 10 showed that while participants viewed the recovery as progressing at a slower-than-expected pace, the Fed continued to believe growth would continue and gather strength in 2011. However, FOMC members saw both employment and inflation as likely to fall short of levels consistent with the dual mandate for longer than anticipated, and some saw increased downside risks. Moreover, several members emphasized that the Committee would need to consider steps it could take to provide further stimulus if the economic outlook were to “weaken appreciably further.”

The only other report on tomorrow’s US economic docket is the MBA Mortgage Applications Index.

Mixed economic news in Europe, BoJ and RBA hold steady

Factory orders in Germany—Europe’s largest economy—unexpectedly fell by 2.2% month-over-month (m/m) in July after an upwardly revised 3.6% gain in June and compared to the 0.5% increase that economists had expected. Elsewhere in the region, UK retail sales rose 2.8% year-over-year (y/y) in August, after rising 2.6% in July, and Switzerland’s unemployment rate remained unchanged at 3.6% in August, matching expectations.

In Asia/Pacific, the Bank of Japan left its benchmark interest rate unchanged at 0.1%, as widely expected, and didn’t offer any extraordinary measures in order to help stem the advance in the Japanese yen. The BoJ noted that Japan’s economy shows further signs of a moderate recovery, but “against the backdrop of increased uncertainty about the future, especially for the US economy, and associated instability in the foreign exchange and stock markets, attention should be paid to downside risks to Japan’s economy.” Last week, the BoJ held an emergency monetary policy meeting, in which it introduced a new 10-trillion yen ($118 billion) funds-supplying operation to “encourage a decline in market interest rates and further enhance easy monetary conditions.”

In other central bank news, the Reserve Bank of Australia kept its key lending rate unchanged at 4.5% for the fourth month in a row, as expected, saying that the global economy grew faster than trend over the year to mid 2010, but will probably ease back to about trend pace over the coming year. The RBA said growth in China is moderating to a more sustainable rate, European output has improved significantly so far this year, but prospects for next year are probably for slower growth given planned fiscal contraction, and US growth was solid in the first half of 2010, but the pace of expansion in the second half of the year is looking weaker.

Elsewhere in the land down under, Australian Prime Minister Julia Gillard secured a second term in office after her minority Labor Party received support of independent lawmakers. The Labor Party vowed to press ahead with a new mining tax and work toward a scheme that would force major polluters to pay for their carbon emissions.

Tomorrow’s international economic calendar will include Germany’s trade balance and industrial production, housing prices and industrial production out of the UK, France’s trade balance and employment numbers, while Japan releases machinery orders and its trade balance, and Australia reports unemployment figures. In central bank action, the Bank of Canada will announce its interest rate decision.