Evening Market Update

Re-emergence of Euro-area Debt Anxiety Stymies Stocks

Stocks bounced off their lows of the day to finish mixed with strength in tech shares aiding the Nasdaq’s trek into positive territory. Early pressure came courtesy of resurfaced euro-area debt anxiety and concerns that China and India may tighten monetary policy. M&A activity was at the forefront of equity news, with Duke Energy agreeing to purchase Progress Energy for about $13.7 billion, and Dow member DuPont entering a definitive agreement to acquire Danish specialty food ingredients company Danisco for $5.8 billion. Elsewhere, Strayer Education suffered amid a large drop in enrollment versus last year, while Alcoa unofficially kicked off 4Q earnings season after the close reporting EPS that beat analysts’ forecasts. Treasuries moved modestly higher as there were no major economic reports slated for release today.

The Dow Jones Industrial Average fell 37 points (0.3%) to 11,637, the S&P 500 Index was down 2 points (0.1%) at 1,270, while the Nasdaq Composite gained 5 points (0.2%) to 2,708. In moderate volume, 955 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. Crude oil gained $1.22 to $89.25 per barrel, wholesale gasoline added $0.04 to $2.45 per gallon, while the Bloomberg gold spot price rose $5.30 to $1,374.20 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.4% to 80.87.

Alcoa (AA $16) unofficially kicked of 4Q earnings season by delivering results after the closing bell. The aluminum producer reported 4Q EPS of $0.21 ex-items, above the $0.19 expected by analysts, on revenues of $5.7 billion, inline with expectations. Shares finished higher.

M&A news is dominating the equity headlines, with Duke Energy Corp. (DUK $18) reaching an agreement to acquire Progress Energy Inc. (PGN $44) in a stock-for-stock transaction that will create the nation’s largest utility, with PGN shareholders receiving 2.6125 common shares of DUK, a value of $46.48 per share or $13.7 billion. Both companies’ Boards of Directors have unanimously approved the merger agreement and the transaction is expected to be accretive to adjusted earnings in the first year. Shares of both firms were lower.

Elsewhere, Dow member  DuPont (DD $49) announced that it has entered into a definitive agreement to acquire Danish specialty food ingredients company Danisco (DNSCY $14) for $5.8 billion in cash and the assumption of $500 million in debt. DD said the deal would establish it as a “clear leader” in industrial biotechnology that address global challenges in food production and reduced fossil fuel consumption. DD was lower, while DNSCY was sharply higher.

Outside of M&A activity, Strayer Education Inc. (STRA $118) finished over 20% after the for- profit education firm announced that new enrollments for the 2011 winter term fell approximately 20% year-over-year (y/y). The company cut its 2011 forecasts as a result of the enrollment data and cited negative publicity and new government regulations for the drop in enrollment and lowered outlook.

Slow start to economic calendar

Treasuries finished modestly higher amid the weakness in the equity markets. The yield on the two-year note fell 3 bps to 0.57%, the yield on the 10-year note was 5 bps lower at 3.28%, and the 30-year bond yield declined 3 bps to 4.46%.

The only economic item of note today was minor, as the Chicago Purchasing Managers Index was revised lower than previously estimated, from 68.6 to 66.8, due to lower-than-initially reported increases in new orders, prices paid, production, inventories and employment all being revised downward.

In Fedspeak, in an interview with the Wall Street Journal, Dallas Fed President Richard Fisher said that while he “did express a good deal of concern” about the Federal Reserve’s asset purchase program to buy $600 billion in Treasuries, he expects that the program will be carried through to its end, but that going beyond the $600 billion is unlikely. He added that, “I wouldn’t be personally terribly keen on that idea given what I’m seeing in the economy now.”

Other releases on this week’s US economic calendar  include: the NFIB Small Business Optimism Index, wholesale inventories, the Import Price Index, MBA Mortgage Applications, the Consumer and Producer Price Indices, initial jobless claims, industrial production and capacity utilization, the trade balance, the University of Michigan Consumer Sentiment Index and business inventories.

Debt concerns remerge overseas 

Euro-area debt concerns resurfaced, exacerbated by reports that pressure in the euro-zone is mounting for Portugal to seek bailout funds from the European Union. Last week, a jump in the cost of some peripheral euro-area nations to raise capital brought the region’s debt crisis back to the forefront of sentiment and today’s report amplified the uneasiness. However, Bloomberg reported that there are “no talks going on, nor envisaged to begin” about Portugal tapping the EU’s crisis-resolution facility, a spokesman for EU Economic and the Monetary Affairs Commissioner said today in an e-mailed statement.

Economic news across the pond took a backseat to the debt concerns, with reports showing industrial production in France grew much more than economists anticipated and UK home prices fell more than three times forecasts.

Further east, concerns toward possible policy tightening in China and India weighed on sentiment, as reports surfaced that the Chinese government may institute property taxes to help combat the formation of asset bubbles in the real estate market, and speculation grew that India’s central bank may raise interest rates at its policy meeting later this month. In economic news in the Asia/Pacific area, a report over the weekend showed China’s trade surplus narrowed by a larger amount than anticipated in December, as the nation’s import growth grew more than expected, while export growth came in below expectations. Elsewhere in the region, a report showed Australian retail sales grew 0.3% m/m in November, after falling 0.8% in October.

The only item on tomorrow’s US economic docket will be wholesale inventories, forecast to rise 1.5% m/m during November, following a 1.9% increase the month prior. The international calendar will offer a few more reports for traders to digest, including retail sales and housing prices out of the UK, Canada will provided housing start numbers, Australia will report trade balance and job ad figures, while Japan will release its Leading Index.