Morning Market Update

Stocks on the Rise, Despite Middle East Tensions

The US equity markets are moving higher in early action, even as political unrest in Egypt continue, aided by a better-than-expected 4Q earnings release from Dow member Exxon Mobil Corp, as well as growth in personal income and spending. Treasuries are lower in morning action ahead of some regional business activity reports, and ahead of a full-slate of economic data later in the week, headlined by Friday’s labor report. Meanwhile, some M&A news is also helping sentiment, with Alpha Natural Resources Inc reaching a definitive agreement to acquire Massey Energy Co for $7.1 billion. Overseas, Asia was mostly lower amid the Middle East uneasiness, which has Europe mixed, along with some disappointing economic report across the pond.

As of 8:48 a.m. ET, the March S&P 500 Index Globex future is 4 points above fair value, the Nasdaq 100 Index is 7 points above fair value, while the DJIA is 41 points above fair value. Crude oil is $0.30 higher at $89.64 per barrel, and the Bloomberg gold spot price is down $9.92 at $1,326.83 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.6% at 77.69.

Dow member Exxon Mobil Corp. (XOM $79) reported 4Q EPS of $1.85, above the $1.63 consensus estimate of analysts surveyed by Reuters, with revenues of $105.2 billion, exceeding the $99.1 billion that the Street had expected. Shares are higher.

In M&A news, Alpha Natural Resources Inc. (ANR $58) reached a definitive agreement to acquire Massey Energy Co. (MEE $57) for $69.33 per share or $7.1 billion. Under the terms of the deal, MEE stockholders will receive 1.025 shares of ANR plus $10.00 per share in cash. Upon completion of the deal, which is subject to customary closing conditions including stockholder approval of both companies, ANR and MEE shareholders will own approximately 54% and 46% of the combined company, respectively.

Personal income and spending rise as expected, regional business activity reads on deck

Personal income rose 0.4% month-over-month (m/m) in December, matching the expectation of economists surveyed by Bloomberg, and November’s 0.3% increase was revised to a gain of 0.4%. Personal spending was 0.7% higher m/m in December, compared to expectations of a 0.5% advance, but November’s 0.4% rise was revised to a 0.3% increase. The savings rate moved lower to 5.3% in December, after an upwardly revised 5.5% for November.

Also, the PCE Price Index, which is released with the income and spending data, was up 1.2% year-over-year (y/y) in December, below expectations calling for a 1.3% advance, after November’s 1.0% increase was revised to a 1.1% gain. The core PCE Price Index, which excludes food and energy, was flat m/m, compared to economists’ expectations of a 0.1% gain, while y/y core prices moved 0.7% higher, below the consensus 0.8% estimate.

Treasuries remain lower, showing little reaction to the personal income and spending data, with the yield on the two-year note up 1 bp at 0.55%, while the yields on the 10-year note and the 30-year bond are increasing 3 bps to 3.35% and 4.56%, respectively.

Later this morning, the economic calendar will yield the releases of the Chicago PMI, expected to decline from 66.8 in December to 64.5 in January, and the Dallas Fed Manufacturing Index, forecasted to improve from 12.8 in December to 15.0 in January.

Later this week, the economic front will heat up, beginning with national reports on business activity, starting with tomorrow’s release of the ISM Manufacturing Index, forecasted to increase to 58.0 in January from 57.0 in December, while the ISM Non-Manufacturing Index, to be released on Thursday, is anticipated to tick down slightly to 57.0 in January from 57.1 in December. A reading of 50 separates expansion from contraction. Within the reports, traders will be keying in on the employment and pricing components.

The employment market will likely garner the most attention this week, headlined by the most comprehensive reading on jobs in the form of Friday’s nonfarm payrolls, expected to grow 140,000 in January after posting two months of disappointing figures, including a 103,000 gain in December. The unemployment rate is estimated to increase slightly to 9.5% in January after dropping to 9.4% in December. Traders will get warmed up for Friday’s labor report throughout the week with the releases of the ADP Employment Change and initial jobless claims, on Wednesday and Thursday, respectively.

Progress on the job front has been disappointingly slow, due to the combination of dramatic losses on payrolls, high uncertainty, and potential secular changes within certain sectors of the economy, namely construction and financial services. The Fed has noted the “disappointingly slow” progress and projected five-to-six year time to reach their goal of maximum employment as a contributing factor to pursue their asset purchase program, commonly called quantitative easing, or QE2. As such, Fed Chief Ben Bernanke’s press conference and Q&A session on Thursday at 1 p.m. EST will be closely monitored.

Other releases on this week’s US economic calendar include: MBA Mortgage Applications, unit labor costs and nonfarm productivity, construction spending, and factory orders.

Europe mixed with focus on turmoil in Egypt

The equity markets are mixed in afternoon action, with stocks that have exposure to the Middle East being pressured by continued political unrest in Egypt, exacerbated by Moody’s credit downgrade of Egypt, on increased “political risk.” Egyptian markets were closed amid the turmoil in the region. Moreover, economic data across the pond is offering little help, with reports showing retail sales in Germany—Europe’s largest economy—unexpectedly dropped in December, while euro-zone consumer prices rose more than economists had forecasted, prompting economic uneasiness and concerns toward the rising inflationary pressures that could hamper growth in the region if monetary policy tightening actions result, possibly threatening the euro-zone recovery. However, stocks in Europe have come well off of the worst levels of the day as the uneasiness toward Egypt has dissipated somewhat and not all economic data was disappointing, as Italian business confidence improved more than forecasted.

The UK FTSE 100 Index is down 0.1%, France’s CAC-40 Index is 0.3% higher, and Germany’s DAX Index is flat, and Italy’s FTSE MIB Index is gaining 0.5%.

Asia mostly lower amid uneasiness toward the Middle East

Stocks in Asia finished mostly lower amid some reining in of risk appetites on the concerns in Egypt, with Japan’s Nikkei 225 Index falling 1.2%, exacerbated by strength in the Japanese yen, which dampened the outlook for export issues. The decline in Japan came despite favorable reports on the nation’s industrial production, construction orders, and and housing starts, which all easily exceeded economists’ growth estimates. Meanwhile, equities in China closed mixed, with the Shanghai Composite Index rising 1.4% and the Hong Kong Hang Seng Index declining 0.7%. Elsewhere, Australia’s S&P/ASX 200 Index finished 0.4% lower, while South Korea’s Kospi Index fell 1.8%. There were some GDP reports that deserve a mention, with India’s output expanding 8.0% y/y in 1Q, after growing 6.8% in 4Q, Taiwan’s 4Q GDP increased 6.5% y/y, above the 6.0% rate of expansion forecasted, and the Philippines posted 7.3% y/y growth in GDP, above the 7.0% that was anticipated. India’s BSE Sensex 30 Index declined 0.4% and the Philippine SE Index fell 2.2%, while Taiwanese markets were closed.