Morning Market Update

Favorable Retail Reads Failing to Keep Rally Rolling

The global equity markets are under modest pressure following the broad-based gains seen yesterday despite a stronger-than-forecasted August retail sales report and much better-than-anticipated earnings from retailer Best Buy Co Inc. Treasuries are slightly higher, paring some gains following the retail sector data, and a report that showed small business confidence increased for the first time since May. A read on business inventories is set to be released after the opening bell today. In other equity news, the Wall Street Journal reported that AIG is in talks to possibly make an early exit from the US Government’s grasp. Overseas, Asian markets were mixed, with a Japanese parliamentary vote in focus, while disappointing reports on investor confidence in Germany and euro-zone industrial production are bogging down European stocks.

As of 8:54 a.m. ET, the December S&P 500 Index Globex future is 3 points below fair value, the Nasdaq 100 Index is 5 points below fair value, while the DJIA is 12 points below fair value. Crude oil is down $0.20 at $76.99 per barrel, and the Bloomberg gold spot price is up $14.00 at $1,259.60 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is flat at 81.88.

Best Buy Co. Inc. (BBY $35) reported 2Q EPS of $0.60, well above the $0.44 Reuters estimate, but revenues, which rose 2.9% year-over-year (y/y) to $11.3 billion, came in shy of the $11.5 billion that analysts were looking for. Same-store sales—sales at stores open at least 14 full months—at the electronics retailer dipped 0.1% during the quarter, but the company said it “significantly” increased its operating margin in 2Q. Also, BBY increased its fiscal 2011 EPS guidance.

The Wall Street Journal reported that government-controlled American International Group Inc. (AIG $37) is in talks with government officials to speed up it exit plan from the Treasury Department, which could commence as early as the first half of 2011, and repay US taxpayers in full, according to people familiar with the matter. The reports notes that some estimated it would take another two to three years for the process to start. AIG did not comment on the report.

Retail sales gain more than expected, small business optimism improves

Advance retail sales for August rose 0.4%, compared to the Bloomberg forecast of economists that called for an increase of 0.3%, and July’s 0.4% gain was revised modestly to a 0.3% advance. August sales ex-autos gained 0.6%, well above the expectation of a 0.3% increase, but July’s 0.2% rise was revised to a 0.1% advance. Sales ex-autos and gas rose 0.5% in August, versus the 0.4% increase that was anticipated, and its July figure was left unrevised at a 0.1% decline. Treasuries are modestly higher after paring some gains initially after the sales data.

In other economic news, the NFIB Small Business Optimism Index posted the first increase since May, rising from 88.1 in July to 88.8 in August, but the expectation of economists called for the index to improve to 89.0. The increase came as the number of firms reporting expectations of a better economy improved, along with those expecting the higher sales and selling prices, while firms’ plans to hire remained weak.

Later today, the US economic calendar will yield business inventories, forecasted to increase 0.7% in July, after rising 0.3% in June.

Europe under pressure amid mixed economic docket

Stocks in Europe are under slight pressure in afternoon action, following yesterday’s advance on a plethora of favorable Chinese economic data and relief following the agreement among global regulators on banking capital rules. Utilities are pacing the decline following a few analyst downgrades in the sector, and traders are digesting a mixed bag of European economic data. The ZEW Survey of Economic Sentiment in Germany—Europe’s largest economy—fell much more than anticipated, dropping from 14 in August to -4.3 for September, versus the decrease to 10 that economists had expected, and the measure of investor confidence sits at a 19-month low. Additionally, UK home prices declined more than expected, and euro-zone industrial production unexpectedly came in flat month-over-month (m/m) for July, compared to the 0.1% growth that was anticipated, and the y/y change showed production grew at a smaller pace than forecasted. Meanwhile on the positive side of the economic ledger, a report on UK consumer confidence improved by a larger amount than forecasted. Inflation data is plentiful across the pond, with consumer prices in the UK and German wholesale prices both coming in hotter than anticipated, while France’s consumer prices were cooler than forecasted.

On the equity front in Europe, Philips Electronics (PHG $31) is under some pressure after the company released growth targets that disappointed analysts, while Cap Gemini (CGEMY $23) is gaining ground after the computer services company reported that it signed a new contract with the UK government.

The UK FTSE 100 Index is 0.2% lower, while France’s CAC-40 Index and Germany’s DAX Index are declining 0.1%.

Asia mixed as yen continues to climb ahead of election in Japan

Following the broad-based advance yesterday on the Chinese economic data and improved banking sector sentiment, stocks in Asia finished mixed as traders paused to ponder politics in Japan. Japan’s Nikkei 225 Index declined 0.2% as the yen strengthened ahead of a ruling party leadership vote that followed the closing bell. Japanese Prime Minister Kan was victorious and received just over half the votes, easily defeating the other Democratic Party Candidate, but the yen remains higher against the US dollar and other major currencies following the outcome, continuing the dampen the outlook for profits of Japanese companies that rely heavily on sales outside the Asian nation. Kan has the difficult task of trying to cut down on the debt levels of the Japanese government and attempting to ensure that the yen’s recent surge—which continues to trade near a fifteen-year high versus the dollar—does not further hamstring the Japanese economy. In Japanese economic news, the final read on the nation’s industrial production for July came in at a decline of 0.2% m/m, compared to the 0.3% gain that was initially forecasted.

In other economic reports across the Asia/Pacific region, Australia’s business confidence improved, while a read on business conditions down under remained unchanged, and New Zealand’s retail sales unexpectedly declined, while the US Conference Board’s Leading Economic Index for China improved from 146.9 in June to 147.6 for July. Australia’s S&P/ASX 200 Index rose 0.3% and New Zealand’s NZX 50 Index increased 0.6%, while stocks in China were nearly unchanged, with the Hong Kong Hang Seng Index increasing 0.2% and the Shanghai Composite Index coming in flat. Elsewhere, South Korea’s Kospi Index declined 0.2%, Taiwan’s Taiex Index rose 0.5%, and India’s BSE Sensex 30 Index gained 0.7%.