Morning Market Update

Stocks Higher in Wake of Change in Political Landscape

The US equity markets are higher in early action following yesterday’s US midterm elections, giving the Republicans control of the House, which is being perceived as an increased possibility of more business friendly policy going forward. Also, a report showing a larger-than-anticipated increase in private sector payrolls ahead of Friday’s US labor report is aiding the advance in morning action. However, traders continue to tread cautiously ahead of the afternoon monetary policy announcement from the US Federal Reserve, which is expected to bring the deployment of further economic stimulus efforts. Treasuries are modestly higher ahead of the announcement, after showing little reaction to the jobs data and a separate report showing a decline in mortgage applications. But key reads on service sector activity and factory orders are also due out later this morning. Inn equity news, Time Warner Inc, Aetna Inc, and Electronic Arts Inc all posted better-than-expected earnings results, while CVS Caremark Corp matched the Street’s projections. Overseas, Asia was mostly higher following the US elections results, and financials are aiding an advance in Europe in muted action ahead of the US Fed’s policy announcement.

As of 8:49 a.m. ET, the December S&P 500 Index Globex future is 5 points above fair value, the Nasdaq 100 Index is 4 points above fair value, while the DJIA is 30 points above fair value. Crude oil is up $0.91 at $84.81 per barrel, and the Bloomberg gold spot price is down $0.98 at $1,356.48 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is flat at 76.72.

Time Warner Inc. (TWX $32) reported 3Q EPS ex-items of $0.62, compared to the consensus estimate of analysts surveyed by Reuters that called for earnings to come in at $0.53 per share, with revenues increasing 2% year-over-year (y/y) to $6.4 billion, matching the Street’s forecast. The media company said its networks businesses delivered “robust growth” in advertising and subscription revenues. TWX raised its full-year EPS outlook.

Aetna Inc. (AET $30) achieved 3Q profits ex-items of $0.84 per share, well above the $0.67 that analysts had anticipated, with revenues declining 2% y/y to $8.5 billion, mostly inline with the Street’s forecast. The healthcare firm said its results were driven by a reduction in utilization of health care services after the surge it saw in 2009, combined with appropriate pricing and effective medical quality and cost management. The company’s total medical benefit ratio—a closely watched industry gauge of medical costs—declined from 85.6% a year ago to 81.8%.

Electronic Arts Inc. (ERTS $16) reported fiscal 2Q EPS ex-items of $0.10, compared to the loss of $0.10 per share that analysts had expected, and although revenues fell 23% y/y to $884 million, the figure topped the $815 million that the Street had forecasted. The video game publisher said its “strong” quarter was driven by its FIFA 11 soccer game and digital offerings like the The Sims 3 Ambitions and Madden NFL 11. ERTS reaffirmed its full-year guidance, but issued 3Q EPS and 4Q guidance that was below analysts’ forecasts.

CVS Caremark Corp. (CVS $31) announced 3Q adjusted earnings of $0.65 per share, inline with the Street’s forecast, with revenues dropping 3.1% y/y to $23.9 billion, roughly matching analysts’ expectations. The company said its pharmacy services segment revenue fell due to the previously announced termination of a few large client contracts and the decrease of covered lives under its Medicare Part D program. However its retail pharmacy segment revenues rose and same-store sales—sales at stores open at least a year—gained 2.5% y/y, reflecting a positive impact of its Maintenance Choice program. The company lowered the high end of its full-year EPS outlook.

Private sector payrolls rise, but service sector read and Fed meeting loom on the horizon

The ADP Employment Change Report showed private sector payrolls rose by 43,000 jobs in October, compared to the forecast of economists surveyed by Bloomberg, which called for a 20,000 increase, and September’s 39,000 job decrease was favorably revised to a 2,000 loss. The release does not include government hiring and firing and comes ahead of Friday’s broader nonfarm payrolls report, where economists expect an increase of 60,000 jobs in October, after falling 95,000 in September. Excluding government hiring, October private sector payrolls are expected to increase 80,000, after expanding by a smaller-than-forecasted 64,000 in September. Treasuries are higher, showing little reaction to the jobs data.

In other economic news, the MBA Mortgage Application Index fell 5.0% last week, after the index that can be quite volatile on a week-to-week basis, increased 3.2% in the previous week. The decline came as the Refinance Index dropped 6.4%, more than offsetting a 1.4% rise in the Purchase Index. The downward move in the overall index came amid a 3 basis point increase in the average 30-year mortgage rate to 4.28%, just above the record low of 4.21% on October 8.

Later today, the economic calendar will continue to turn out key pieces of data, with the ISM Non-Manufacturing Index forecasted to increase slightly from 53.2 in September to 53.5 in October, and factory orders expected to rise 1.6% for September.

However, the market reaction will likely focus on the midday statement that is issued at the conclusion of the two-day Federal Open Market Committee (FOMC) meeting. No changes are anticipated to the fed funds target rate, but there is an expectation the Fed will embark on another round of asset purchases, or quantitative easing (QE). Fueling speculation are comments from Fed Chair Ben Bernanke on October 15 where he said that the “risk of deflation is higher than desirable,” as well as speeches from New York Fed President William Dudley, who said that unemployment and inflation levels and the timeframe over which they will return to levels consistent with the Fed’s mandate are “unacceptable.” The size of the potential purchase program has been widely debated, but market expectations seem to be centered on an initial purchase of around $500 billion. As the market has moved in anticipation of the announcement, the Fed has a delicate communication balancing act – to appease markets, while also keeping its options open.

The Fed’s prior purchase program was viewed as ineffective in stimulating growth, as the regular transmission of an increase in liquidity has not resulted in money flowing throughout the economy due to a weakened consumer, as well as skittish banks. As such, there have been many questions about the rationale for QE2. The impact of QE2 would be to lower Treasury rates, which form the basis for many lending rates as a preventive measure to stave off the threat of a renewed downturn in the economy. However, the real thrust is likely to come from a weaker dollar due to the increased supply of money, boosting the prospects of exporters, and a “wealth effect” that could come as low yields push investors into riskier assets, creating higher stock prices and thus boosting consumer sentiment.

Europe modestly higher ahead of US Fed decision

The equity markets in Europe are slightly higher in afternoon action, with financials leading the way as shares of Societe Generale (SCGLY $12) are solidly higher after France’s second-largest bank posted 3Q profits that exceeded analysts’ forecasts. Also, the French financial firm said it is “confident” that it will meet its full-year earnings target and that it will exceed the Basel III capital requirements without having the raise additional capital. Meanwhile, trading is being muted by the pending monetary policy announcement by the US Federal Reserve after the European markets close. Also, a steep decline in share of Statoil ASA (STO $22) is limiting the advance, with the company finding pressure from its reduced production forecast.

The economic calendar in Europe is relatively light, with a reading of UK services activity unexpectedly improving, and Spain’s unemployment increasing by a smaller-than-expected amount, while a separate report showed Spanish consumer confidence deteriorated.

The UK FTSE 100 Index is 0.2% higher, France’s CAC-40 Index is up 0.5%, and Germany’s DAX Index is rising 0.3%, while Spain’s IBEX 35 Index is declining 0.2%.

Asia mostly higher following midterm elections in US

Stocks in Asia were mostly higher following the change in the political landscape in the US, but some caution ahead of the US Fed’s monetary policy decision limited action in the region even as further stimulus efforts are widely expected. Hong Kong’s Hang Seng Index rose 2.0% to lead the way, reaching a 28-month high, aided by a report that showed the nation’s PMI improved in October and an upgrade of the outlook for the index by Goldman Sachs. However, stocks in mainland China were lower as the Shanghai Composite Index declined 0.5% after mixed reports on the country’s service sector. Meanwhile, Australia’s S&P/ASX 200 Index rose 0.5% on the optimism in the wake of the US elections and as shares of Westpac Banking Corp. (WBK $117) gained ground after Australia’s second largest bank posted half-year profits that exceeded analysts’ forecasts. Equities down under managed to increase despite an unexpected drop in Australian building approvals. But action in Asia was also limited by markets in Japan being closed for a holiday. Elsewhere, South Korea’s Kospi Index rose 0.9%, Taiwan’s Taiex Index fell 0.6%, and India’s BSE Sensex 30 Index increased 0.6%.