Morning Market Update

Middle East Uneasiness Gives Bulls Some Queasiness

The US equity markets are under some pressure in morning action as concerns toward the Middle East are stymieing sentiment on the heels of Egyptian President Mubarak’s decision to remain in office, defying ramped up expectations regarding his resignation. Meanwhile, Kraft Foods’ warning of “significant input cost inflation,” and disappointing EPS outlook are also hamstringing sentiment, while overshadowing the Dow member’s favorable 4Q revenue performance. Treasuries are mixed after paring losses following a wider-than-forecasted US trade deficit, and ahead of a report on consumer sentiment. In other equity news, Dow member Microsoft Corp, and Nokia Corp announced plans to form a strategic partnership. Overseas, Asia was mixed as Japanese markets were closed, while a negative reaction to the aforementioned announcement from Nokia and Middle East concerns are keeping European markets modestly below the flatline.

As of 8:51 a.m. ET, the March S&P 500 Index Globex future is 4 points below fair value, the Nasdaq 100 Index is 6 points below fair value, and the DJIA is 32 points below fair value. Crude oil is $0.04 higher at $86.77 per barrel, and the Bloomberg gold spot price is up $3.95 at $1,367.75 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.4% at 78.52.

Dow member Kraft Foods Inc. (KFT $31) reported 4Q EPS ex-items of $0.46, inline with the consensus estimate of analysts surveyed by Reuters, with revenues growing 30% year-over-year (y/y) to $13.8 billion, exceeding the $13.5 billion that the Street was forecasting. The food products firm said its results were driven by “strong” volume and product mix gains in each geographical region it operates. However, looking ahead, the company said it expects the operating environment “to remain challenging, with significant input cost inflation and persistent consumer weakness in many markets.” KFT issued full-year 2011 EPS guidance that missed expectations. KFT is under pressure in early trading.

Meanwhile, fellow Dow component Microsoft Corp. (MSFT $28), and Nokia Corp. (NOK $11) announced plans to form a broad strategic partnership aimed at creating “a new global mobile ecosystem.” Under the partnership, NOK would adopt MSFT’s Windows Phone as its smartphone operating platform and the two companies would work together on joint marketing initiatives regarding the future of mobile products. Additionally, NOK will use MSFT’s Bing search functionality for its devices, while NOK’s content and application store would be integrated with Microsoft Marketplace. NOK said the company is “at a critical juncture, where significant change is necessary and inevitable in our journey forward,” while MSFT said the partnership “provides incredible scale, vast experience in hardware and software innovation and a proven ability to execute.” MSFT is nearly unchanged, while NOK is trading sharply lower, due to disappointment regarding NOK’s guidance, in which it called 2011 and 2012 “transition years.”

Trade deficit widens, read on consumer sentiment follows the opening bell

The trade deficit widened more than anticipated, increasing from an unrevised $38.3 billion in November to $40.6 billion in December, versus the estimate of economists surveyed by Bloomberg, which called for the deficit to widen to $40.5 billion.

Treasuries are mixed, paring losses on the trade data, with the yield on the two-year note up 1 bp to 0.81%, the yield on the 10-year note 1 bp lower at 3.64%, and the 30-year bond gaining 2 bps at 4.73%.

Later this morning, the US economic calendar will yield the release of the preliminary University of Michigan’s Consumer Sentiment Index, which is expected to improve from 74.2 in January to 75.0 in February.

Europe modestly lower as technology issues weigh

European stocks are slightly lower in afternoon action, as strength in healthcare issues—which are helping markets come well off of the worst levels of the day—are being more than offset by weakness in the technology sector. The decline in technology comes courtesy of a sharp drop in shares of Nokia Corp, on the negative reaction to its aforementioned strategic partnership with Dow member Microsoft Corp. Also, sentiment is being tilted to the downside amid some modest resurfacing of uneasiness toward the tensions in the Middle East after its President surprisingly did not step down. Moreover, some economic data is giving little support to sentiment as a report showed German consumer prices rose at the fastest y/y rate in more than two years, according to Bloomberg, as prices rose 2.0% in January, compared to a pace of 1.9% that economists forecasted. Additionally, producer prices in the UK came in hotter than expected, while Spain’s 4Q GDP rose 0.2% quarter-over-quarter (q/q), matching expectations, but compared to last year, output came in slightly below forecasts. In other economic news, France’s nonfarm payrolls rose at a rate that was inline with estimates, while French wages increased at a rate that was just below forecasts.

The UK FTSE 100 Index is down 0.1%, France’s CAC-40 Index is off 0.4%, Germany’s DAX Index is flat, while Spain’s IBEX 35 Index is falling 0.6%.

Asia mixed as holiday closes Japanese markets

The equity markets in Asia were mixed, with Chinese stocks gaining ground, with the Shanghai Composite Index increasing 0.3% and the Hong Kong Hang Seng Index rising 0.5%, led by strength in property issues. However, South Korea’s Kospi Index fell 1.6% even as the Bank of Korea unexpectedly left its benchmark interest rate unchanged at 2.75%, while economists expected the rate to be raised to 3.00%. Meanwhile, Australia’s S&P/ASX 200 Index lost 0.7%, pressured by a solid decline in shares of Newcrest Mining Ltd. (NCMGY $38) after the nation’s largest gold producer posted profits that missed expectations. Elsewhere, Taiwan’s Taiex Index dropped 2.6% to lead the decline despite a favorable report on the nation’s trade balance, while India’s BSE Sensex 30 Index rose 1.5%, after overcoming early pressure that resulted from a report that showed the slowest pace of industrial production in 20 months, per Bloomberg, possibly easing concerns about further monetary tightening by the nation’s central bank. The announcement that the Egyptian President Mubarak did not step down as some expected weighed on sentiment, along with lingering concerns about further monetary policy tightening in the region that faces rising inflationary pressures. Today’s session may have been impacted by lighter-than-usual volume as the Japanese markets were closed due to a holiday.