Morning Market Update

Modest Moves Even as Small Business Sentiment Improves

The US equity markets are near the unchanged mark in morning action as a larger-than-forecasted improvement in small business optimism is being met with weakness in the basic materials sector on the heels of another interest rate hike out of China. Treasuries are lower in early action. Meanwhile, growth in January same-store sales from Dow member McDonald’s Corp may be supporting sentiment, partially offset by a much larger-than-estimated loss from Beazer Homes. Overseas, Asia finished mixed before China’s monetary policy announcement, which is helping European markets diverge, along with some economic and corporate news across the pond.

As of 8:52 a.m. ET, the March S&P 500 Index Globex future is 1 point below fair value, the Nasdaq 100 Index is 3 points below fair value, and the DJIA is 5 points above fair value. Crude oil is $1.23 lower at $86.25 per barrel, and the Bloomberg gold spot price is up $11.10 at $1,362.40 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.3% at 77.85.

Dow member McDonald’s Corp. (MCD $73) reported global January same-store sales—sales at restaurants open at least thirteen months—grew 5.3% year-over-year (y/y), with sales in Europe increasing 7.0%, the US rising 3.1%, and Asia/Pacific, Middle East and Africa gaining 5.2%.

Beazer Homes USA Inc. (BZH $5) reported a fiscal 1Q loss of $0.66 per share, wider than the $0.47 per share shortfall that analysts were expecting, as revenues fell 48.2% y/y to $110.3 million, compared to the $165 million that the Street was anticipating. The homebuilder said its total home closings dropped 43.6% y/y and total new orders fell 23.9% y/y, as conditions “remained very challenging.” BZH added that despite low interest rates and excellent home price affordability, demand for new homes “remained at exceptionally low levels.” Looking ahead, the company said it anticipates seasonal improvements in home buyer demand over the next six months, and it remains hopeful that it will see the initial stages of a cyclical recovery in demand for new homes this year.

Small business confidence rises to highest level since December 2007

The NFIB Small Business Optimism Index rose from 92.6 in December to 94.1 in January—the highest reading since December 2007—compared to the expectation of economists surveyed by Bloomberg, which called for the index to improve to 94.0. The increase came as the number of firms reporting expectations of a better economy increased, while those expecting to increase inventories and anticipating higher sales improved. Moreover, firms expecting to increase capital spending rose. However, plans to hire over the next three months declined.

Treasuries are lower following the business sentiment data, with the yields on the two-year note and the 10-year note 2 bps higher at 0.79% and 3.65%, respectively, while the 30-year bond yield is gaining 1 bp to 4.71%.

Europe mixed on earnings, China rate hike, and economic data

The equity markets in Europe are mixed in afternoon action, with basic materials seeing some weakness on the heels of the announcement of a rate hike in China, as well as a report showing industrial production in Germany—Europe’s largest economy—unexpectedly fell month-over-month (m/m) in December. However, the pressure on stocks is being limited by a solid increase in shares of UBS AG (UBS $18) after it offered encouraging asset inflows in its private wealth management unit, which is overshadowing its softer-than-forecasted profit report. Moreover, shares of ArcelorMittal SA (MT $37) are nicely higher to help the equity markets show some resilience after the steelmaker posted better-than-forecasted profits. Meanwhile, there are some economic reports that are helping stocks come well off of the worst levels of the day, with a report showing French business sentiment rose more than anticipated in January, while data on UK home prices improved more than economists had forecasted.

The UK FTSE 100 Index is down 0.1%, France’s CAC-40 Index is increasing 0.1%, Germany’s DAX Index is gaining 0.2%, and Switzerland’s Swiss Market Index is nearly unchanged.

Asia mixed following M&A action in the US

Stocks in Asia finished mixed, with Japan’s Nikkei 225 Index finishing up 0.4%, near the highest level in nine months, on the heels of the gains in the US that were fueled by a plethora of M&A announcements yesterday, which helped boost optimism regarding the global economic recovery. Economic news was relatively light in the region, with Japan’s trade surplus rising solidly in December, but short of economists’ forecasts, while a report on Australian business confidence improved in January. Australia’s S&P/ASX 200 Index rose 0.5% on the day, aided by strength in financials following a better-than-forecasted profit report from National Australia Bank Ltd. (NABZY $26), on smaller losses for bad loans, which lifted its shares, but the company said the credit market remained subdued. However, South Korea’s Kospi Index declined 0.6% on weakness in shipping-related issues and steelmakers, Taiwan’s Taiex Index declined 0.4% on losses in chipmakers in the first trading session following a week-long New Year holiday, and Hong Kong’s Hang Seng Index decreased 0.3%. Meanwhile, most of the notable news in the region came after the closing bell, with Toyota Motor Corp. (TM $85) reporting earnings that topped expectations and raising its full-year outlook, while China’s central bank increased its benchmark interest rate by 25 basis points to 6.06%, effective tomorrow, when Chinese markets return to trading after being closed for a week to celebrate the Lunar New Year holiday. This was the third rate hike since mid-October and China also boosted the nation’s deposit rate by the same amount to 3.0%.