Morning Market Update

Stocks Spill as Fed Chief Set to Take to Capitol Hill

The US equity markets are under pressure in early action as traders await Federal Reserve Chairman Ben Bernanke’s testimony in front of the House for any clues to the direction of future Fed monetary policy. Meanwhile, there are some key earnings reports to hold the Street over, as Dow members Walt Disney Co and Coca-Cola Co both posted results that exceeded analysts’ forecasts. Moreover, fell Dow component 3M Co announced a new $7 billion share repurchase program and an increase in its quarterly dividend. Treasuries are higher as there are no major US economic reports due out today, but a report showed mortgage applications fell as mortgage rates jumped above 5%. Overseas, Asia was mostly lower following yesterday’s rate hikes out of China, while an M&A announcement is helping limit the impact of some disappointing earnings and economic data in Europe.

As of 8:52 a.m. ET, the March S&P 500 Index Globex future is 4 points below fair value, the Nasdaq 100 Index is 5 points below fair value, and the DJIA is 5 points below fair value. Crude oil is $0.71 higher at $87.65 per barrel, and the Bloomberg gold spot price is up $0.40 at $1,364.43 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.2% at 77.83.

Dow member Walt Disney Co. (DIS $41) reported fiscal 1Q EPS of $0.68, above the $0.56 consensus estimate of analysts surveyed by Reuters, with revenues increasing 10% year-over-year (y/y) to $10.7 billion, exceeding the $10.5 billion that the Street had expected. The company said its earnings were driven by growth at media networks, studio entertainment, parks and resorts, and consumer products.

Meanwhile, fellow Dow component Coca-Cola Co. (KO $63) posted 4Q earnings ex-items of $0.72 per share, slightly above the $0.71 that was expected by analysts, as revenues grew 40% y/y to $10.5 billion, topping the $10.0 billion that was anticipated.

Elsewhere, 3M Co. (MMM $89) announced that its Board of Directors authorized a 5% increase in its quarterly dividend to $0.55 per share, and the repurchase of $7 billion of the company’s outstanding common stock, replacing the company’s existing repurchase program. The Dow member said today’s announcement reflects the strength of its business model and its confidence in the future.

Mortgage applications decline, Fed Chief set to opine on Capitol Hill

The lone release on today’s US economic calendar was the MBA Mortgage Application Index, which fell 5.5% last week, after the index that can be quite volatile on a week-to-week basis, increased 11.3% in the previous week. The decrease came as a 7.7% drop in the Refinance Index was accompanied by a 1.4%% decline in the Purchase Index. The decrease in the overall index also came as the average 30-year mortgage rate jumped 32 basis points to 5.13%, well above the record low of 4.21% on October 8.

However, the headlining event on the economic front may prove to be Federal Reserve Chairman Ben Bernanke’s testimony at a hearing of the House Budget Committee, on the topic of “The Economy, Jobs and the Budget.” The hearing begins at 10:00 a.m. ET, and while Bernanke will likely reiterate that the federal budget remains on an unsustainable path unless Congress enacts significant changes, the Fed Chief’s comments on the economy and the employment picture will probably garner the most scrutiny. The Fed confirmed at its most recent monetary policy meeting in late January that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions, and Friday’s disappointing job growth figures illustrated this point. Traders will be looking for any signals from Bernanke regarding any changes to its $600 billion asset purchase program, commonly known as quantitative easing, or QE2, in response to the sluggish job growth, while also trying to get a feel for where the Fed stands on the other side of its dual mandate, inflation. The Fed has acknowledged the recent rise in commodity prices, but has maintained that measures of underlying inflation are somewhat low.

Europe nearly unchanged as M&A deal is offsetting disappointing data

The European equity markets are near the unchanged mark in afternoon action, as traders digest a major M&A announcement and a plethora of corporate earnings news, as well as a disappointing economic report out of Germany—Europe’s largest economy. Shares of Sanofi-Aventis (SNYNF $69) are lower after the French drugmaker offered a disappointing 2011 earnings outlook, while Statoil (STO $25) is also losing ground after the company reported lower-than-estimated profits and issued a lackluster outlook on production. Meanwhile, on the economic front, Germany reported that exports grew at a smaller pace than economists had expected in December, causing its trade surplus to contract by a larger amount than was anticipated, hamstringing sentiment across the pond. However, stocks are well off of the best levels of the day, led by sharp gains in London Stock Exchange Group (LDNXF $14) after it announced that it has reached a deal to acquire the TMX Group (TMXGF $41)—the parent of the Toronto Stock Exchange—in an all stock transaction valued at about $3.2 billion. In other economic news, the UK trade deficit widened in December.

The UK FTSE 100 Index is down 0.3%, France’s CAC-40 Index is off 0.1%, and Germany’s DAX Index is nearly unchanged.

Asia mostly lower in the wake of China’s rate hikes

Stocks in Asia finished mostly lower on the heels of yesterday’s announcement from China’s central bank that it increased its benchmark interest rate by 25 basis points to 6.06%, while also boosting the nation’s deposit rate by the same amount to 3.0%. China’s Shanghai Composite Index dropped 0.9% in its return from a week-long Lunar New Year Holiday, while Hong Kong’s Hang Seng Index fell 1.4%. Meanwhile, concerns about a possible self-induced slowdown of China’s economy overshadowed Toyota Motor Corp’s (TM $89) solid gain after yesterday’s report that the automaker’s earnings topped expectations and its full-year outlook was lifted, causing Japan’s Nikkei 225 Index to decline 0.2%. The uneasy sentiment also offset a report that showed Japan’s consumer confidence improved in January. In other Japanese equity news, Nissan Motor Co. (NSANY $21) posted better-than-forecasted profits and also raised its full-year EPS outlook, but the announcement came after the close of trading in Asia. Elsewhere, South Korea’s Kospi Index dropped 1.2%, India’s BSE Sensex 30 Index fell 1.0% amid the dampened sentiment toward China, which also led to a 1.2% decline in Taiwan’s Taiex Index, even after a report showed inflation in the nation came in cooler than economists expected. However, Australia’s S&P/ASX 200 Index rose 0.3%, aided by an improvement in that nation’s consumer confidence, as well as a solid gain in shares of Commonwealth Bank of Australia (CBAUF $53) after it posted a record profit, per Reuters, which supported the financial sector in the region.