Morning Market Update

On the Rebound as US and Euro-Data Picks Stocks off Ground

Following a few lackluster sessions in the equity markets in the holiday-shortened week, US stocks are rebounding in morning action, on the heels of better-than-expected earnings reports in the US and a record high in a gauge of business confidence in Germany—Europe’s largest economy. Dow member General Electric, and the world’s largest internet search engine Google Inc, both posted profits and revenues that topped analysts’ projections to get the bulls’ blood flowing on Wall Street. However, Dow component Bank of America’s 4Q results are being met with some confusion as analysts grapple with several nonrecurring items imbedded in the financial firm’s report. Treasuries are higher in early action as the US economic calendar is void of any major reports. Overseas, continued concerns toward China weighed on most Asian markets, while the aforementioned upbeat data out of Europe is helping stocks across the pond gain solid ground.

As of 8:44 a.m. ET, the March S&P 500 Index Globex future is 5 points above fair value, the Nasdaq 100 Index is 10 points above fair value, while the DJIA is 34 points above fair value. Crude oil is $0.17 lower at $89.42 per barrel, and the Bloomberg gold spot price is down $3.23 at $1,343.05 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.4% at 78.53.

Dow member General Electric Co. (GE $18 ¹) reported 4Q EPS of $0.36, topping the $0.32 that analysts surveyed by Reuters had expected, with revenues increasing 1% year-over-year (y/y) to $41.4 billion, exceeding the $39.9 billion that the Street had forecasted. The company said its industrial segment posted organic revenue—excluding divestitures, acquisitions, and currency exchange rates—growth of 6% y/y. Meanwhile, orders for infrastructure grew 12% y/y, equipment orders rose 20%, and services posted a gain of 5%. Also, the company said it saw “strong execution” at its GE capital unit, as earnings came in at $1.1 billion, up from $1.0 billion a year ago, as losses and impairments declined q/q and it saw improvement in delinquencies across the businesses.

Fellow Dow member Bank of America Corp. (BAC $15 1) posted 4Q EPS ex-items of $0.04, compared to the $0.15 that analysts had expected, but it was unclear if the Street’s estimate was comparable, due to its results including a goodwill impairment charge, as well as litigation expenses, and a provision for outstanding and future mortgage repurchase claims that some analysts may or may not have factored into their estimates. Revenues came in at $22.4 billion, compared to the $24.9 billion that the Street had expected, down from $25.1 billion that it posted in the same period last year. The company said credit costs declined “significantly” as the economy continues to improve and its global wealth and investment management unit achieved record asset management fees.

Meanwhile, Google Inc. (GOOG $627) announced 4Q EPS ex-items of $8.75, above the $8.09 that analysts were anticipating, with revenues growing 26% y/y to $8.44 billion, exceeding the $8.04 billion that analysts were anticipating. Excluding traffic acquisition costs (TAC)—expenses paid to its marketing partners—revenues came in at $6.37 billion, versus the $6.06 billion that the Street was looking for. The world’s largest internet search engine said its Google sites revenues, which accounted for 67% of total revenues, grew 28% y/y, while its network revenues rose 22% y/y, representing 30% of total sales. Meanwhile, the company’s paid clicks—a measure of the frequency of customer clicks on its ads—increased 18% y/y and was up 11% quarter-over-quarter (q/q). Separately, the company announced that starting on April 4, current Chief Executive Officer Eric Schmidt will assume the role of Executive Chairman, with Larry Page taking charge of the company’s day-today operations as CEO.

Economic calendar bears no fruit to finish out the week

Treasuries are higher in morning action as there are no major US economic reports scheduled for release today, with the yield on the two-year note declining 2 bps to 0.61%, the 10-year note decreasing 3 bps to 3.42%, and the 30-year bond yield dropping 4 bps to 4.57%.

This week’s economic reports provided a mixed reaction in the markets, with regional manufacturing reports out of New York and Philadelphia showing smaller-than-expected rates of expansion in January, while initial jobless claims fell more than expected and the Index of Leading Economic Indicators posted the sixth-straight monthly increase. Even the housing data for the week diverged with housing starts dropping much more than anticipated and building permits, although surging almost 17% month-over-month (m/m), the figure was attributed to changes in building codes in several states as homebuilders worked to get approvals before the changes took effect. Moreover, existing home sales surged three times what economists had expected.

Europe rallying on record high in German business confidence and easing debt concerns

The equity markets in Europe are nicely higher across the board, led by financials, while a measure of German business confidence is fostering some optimism across the pond. Financials are receiving a lift from a couple of sources, as shares of Royal Bank of Scotland Group Plc. (RBS $13) are surging on a report from the Financial Times that the bank, which is majority owned by the UK government, may be nearing the exit of a government program to insure distressed assets sooner than previously forecasted. RBS has not commented on the matter. The sector is also finding support from a report from Reuters that Spain’s government is mulling a partial takeover of the nation’s weakest savings banks, which is helping soothe the outlook for the troubled nation that sits at the forefront of the euro-area’s debt crisis. Spain has not commented on the matter. Moreover, financials may be benefitting from some bargain hunting following their recent drop that has come courtesy of some disappointing earnings reports out of the group in the US.

Meanwhile, European stocks are also getting a boost from a report out of Germany—Europe’s largest economy—which showed the Ifo Business Climate Index rose to 110.3 in January from 109.8 in December, compared to the 109.9 reading that economists were expecting. The gauge of German business morale rose to the highest level since records began for a reunified Germany in 1991, aided by strong exports and household spending, per Bloomberg. Adding to the upbeat sentiment, a reading of business confidence in France also gained ground. However, a report showed UK retail sales declined in December.

The UK FTSE 100 Index is 0.7% higher, France’s CAC-40 Index is up 1.8%, Germany’s DAX Index is rising 1.1%, and Spain’s IBEX 35 Index is jumping 2.6%.

Asia mostly lower as China concerns continue

Stocks in Asia were mostly lower on continued uneasiness toward the possibility of further monetary policy tightening measures by the Chinese government, exacerbated by yesterday’s stronger-than-expected 4Q GDP report, to thwart runaway inflation and the formation of asset bubbles. South Korea’s Kospi Index fell 1.7%, coming off of the record high the index reached earlier this week, to pace the decline in the region, as a downgrade of the nation’s stocks by Morgan Stanley applied some additional pressure. Elsewhere, Japanese markets were not far behind, as the Nikkei 225 Index dropped 1.6%. Meanwhile, Hong Kong’s Hang Seng Index declined 0.5%, while yesterday’s steep losses posted by commodities in the wake of the aforementioned concerns in China pressured the resource-rich nation of Australia and the S&P/ASX 200 Index gave up early gains and finished 0.6% lower. However, all was not lost in Asia, as the Shanghai Composite Index posted a 1.4% gain to buck the overall trend in the region, possibly aided by some bargain hunting following the index’s steep decline yesterday.