Morning Market Update

Failing to Capture Loving Feeling Amid Wheeling and Dealing

The US equity markets are modestly lower despite a plethora of corporate dealmaking and favorable economic reports out of Asia, which are failing to prod the bulls into action. Treasuries are mostly higher as there are no major economic reports scheduled for the day, but the rest of the week will bring plenty of reports for traders to digest. Headlining today’s M&A announcements, Dow member General Electric reported that it agreed to acquire the Well Support Division of UK-based John Wood Group for about $2.8 billion, EchoStar Corp agreed to buy Hughes Communications Inc for around $2 billion, and private equity firm Clayton, Dubilier & Rice LLC reached an agreement to acquire Emergency Medical Services Corp for about $3.2 billion. In other equity news, Dow member Boeing Co unveiled its new 747-8 passenger airplane, while MGM Resorts International posted a narrower-than-forecasted loss but revenues declined. Overseas, Asia moved broadly higher, aided by a smaller-than-projected contraction in Japan’s GDP and a surge in international trade from China, which are helping Europe move modestly higher despite a report showing euro-zone industrial production unexpectedly declined.

At 10:50 a.m. ET, the Dow Jones Industrial Average is declining 0.3% and the S&P 500 Index is down 0.2%, while the Nasdaq Composite is gaining 0.1%. Crude oil is up $0.55 at $86.13 per barrel, wholesale gasoline is $0.08 higher at $2.54 per gallon, and the Bloomberg gold spot price is gaining $8.15 to $1,365.20 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.3% at 78.66.

Dow member General Electric Co. (GE $21 ¹) announced that its oil & gas unit has entered into an agreement to acquire the Well Support division of UK-based John Wood Group Plc. (WDGJF $9) for approximately $2.8 billion. GE said the deal, which is expected to close later in 2011, provides it with entry into the fast growing demand for enhanced oil recovery from mature oil fields and expands its offering in unconventional oil and gas production, with significant applications for shale gas production. GE is gaining ground, while John Wood Group is trading sharply higher overseas.
Fellow Dow component Boeing Co. (BA $72 ¹) unveiled its new 747-8 Intercontinental high-capacity passenger airplane. The aerospace company said the new aircraft offers airlines the lowest operating costs and best economics of any large passenger airplane while providing enhanced environmental performance. Shares are lower.

In other M&A news, satellite solutions and technology company EchoStar Corp. (SATS $30) reached an agreement to acquire broadband satellite technologies firm Hughes Communications Inc. (HUGH $59), valued at about $2 billion, including debt. Under the terms of the deal, HUGH shareholders will receive $60.70 per share and is expected to be closed later this year. SATS is flat, while HUGH is trading lower. Moreover, private equity firm, Clayton, Dubilier & Rice LLC announced that one of its affiliates reached an agreement to acquire Emergency Medical Services Corp. (EMS $63) for $64.00 per share in cash, in a deal valued at about $3.2 billion, including debt. EMS is trading solidly lower as the deal price was below Friday’s closing price.

In earnings news, MGM Resorts International (MGM $15) reported a 4Q net loss ex-items of $0.20 per share, compared to the $0.22 per share shortfall that analysts surveyed by Reuters had forecasted. Revenues declined 1% year-over-year (y/y) to $1.5 billion, roughly inline with the Street’s forecast. The company said casino revenue decreased 3% y/y and hotel room revenue decreased 5% y/y, with revenue per available room (REVPAR) declining 2% as Las Vegas Strip occupancy declined. Looking ahead, the company said it is encouraged in early 2011 by the level of business activity it is seeing and its forward booking pace is currently ahead of last year, led by a stronger convention mix, which it believes will position the company to have a better year than last. Shares are down solidly.

Light day ahead of the week’s economic fray

Treasuries are mostly higher in late-morning action as there are no major  economic reports due out today, with the yield on the two-year note flat at 0.83%, the yield on the 10-year note 1 bps lower at 3.62%, and the 30-year bond yield declining 3 bps to 4.66%.

However, readings on a wide swath of the economy will be reported this week, beginning with advance retail sales tomorrow, forecasted to post a 0.5% month-over-month (m/m) gain in January, while sales ex-autos are also estimated to grow 0.5%, the same pace as in December. Same-store sales results - sales at stores open at least a year - reported by retailers were better than expected, despite poor weather. Meanwhile, housing starts will be reported Wednesday, expected to increase 1.7% m/m in January to an annual rate of 538,000 units, after falling 4.3% in December, while building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, are forecasted to fall 9.9% m/m to 565,000 units, following a 16.7% gain the prior month.

Wednesday also brings the January reading on industrial production, expected to rise 0.5% m/m, and capacity utilization is forecasted to increase to 76.4%. The Producer Price Index (PPI) is also scheduled for Wednesday, expected to show prices at the wholesale level rose 0.8% m/m in January, while the core rate, which excludes food and energy, is expected to increase 0.2%. The release precedes Thursday’s Consumer Price Index (CPI) report, forecasted to show a 0.3% m/m increase, while ex-food and energy, the core rate is expected to again rise 0.1%. On a y/y basis, the CPI is expected to increase 1.6% at the headline level and 0.9% at the core level.

Finally, Wednesday will also bring the midday release of the minutes from the January Federal Open Market Committee (FOMC) meeting, where investors will be monitoring any changes to the economic forecast. The discussion that transpired at the meeting could be outweighed by several speeches given by Fed Chairman Ben Bernanke since the meeting, where he reiterated a strengthened recovery, but still slow progress on the jobs front, and low overall inflation.

Other releases on this week’s US economic calendar include: the Empire Manufacturing Index, the Import Price Index, business inventories, the NAHB Housing Market Index, MBA Mortgage Applications, initial jobless claims, the Philadelphia Fed’s Business Activity Index, and the Conference Board’s Index of Leading Economic Indicators.

Europe slightly higher as materials get a lift from Chinese data

Stocks in Europe are modestly higher in late-day action, with basic materials moving higher on the heels of a trade report out of China, which showed some steep gains in the nation’s exports and imports. However, enthusiasm may be being limited by concerns about further monetary policy tightening from China’s central bank, exacerbated by cautiousness ahead of a key report on Chinese inflation. Also, gains are being kept in check by a report showing euro-zone industrial production unexpectedly declined m/m in December. In equity news, shares of Nokia Corp.  (NOK $9) are continuing Friday’s sharp losses that came from the negative reaction to its announced joint venture with Dow member Microsoft Corp. (MSFT $27), but John Wood Group Plc is sharply higher following its announcement that it will sell its Well Support Division to GE. Elsewhere, shares of Credit Suisse Group (CS $43) are solidly higher to limit losses in the financial sector after the Swiss bank announced that it agreed to sell about 6 billion Swiss francs ($6.17 billion) of contingent convertible bonds to shareholders in Qatar and Saudi Arabia, soothing concerns about the firm’s capital position as the sector faces new global capital rules.

The UK FTSE 100 Index and France’s CAC-40 Index are advancing 0.1%, Germany’s DAX Index is rising 0.4%, and Switzerland’s Swiss Market Index is gaining 0.2%.

Data leads Asia higher

The equity markets in Asia finished broadly higher amid a plethora of better-than-forecasted economic data, which boosted optimism regarding global economic prosperity. Chinese stocks led the way, with the Shanghai Composite Index rising 2.5% and the Hong Kong Hang Seng Index gaining 1.3%, on the heels of a report that showed China’s exports jumped 37.7% year-over-year (y/y) in January, compared to the 22.5% increase that economists had expected, and imports surged 51.0% y/y, versus the 27.0% rise that was projected. Economic growth optimism resulting from the report outweighed concerns about the data forcing further monetary policy tightening by the Chinese central bank, but all eyes will be on tomorrow’s release of China’s Consumer Price Index, forecasted to accelerate from 4.6% y/y growth to a rate of 5.4%.

Meanwhile, Japan’s Nikkei 225 Index rose 1.1%, amid the economic enthusiasm in the region, aided by a report showing Japan’s 4Q GDP contracted by a smaller rate than expected, declining 0.3% quarter-over-quarter (q/q)—versus the 0.5% contraction that was anticipated—to an annualized 1.1% drop, compared to the 2.0% decline that was projected. Elsewhere, Australia’s S&P/ASX 200 Index increased 1.1%, as the aforementioned improved sentiment was complimented by a report showing Australian home loans grew more than two times the forecast of economists. Moreover, India’s BSE Sensex 30 Index jumped 2.7% on the heels of a report showing the nation’s wholesale prices decelerated in January. Rounding out the day, South Korea’s Kospi Index increased 1.9% and Taiwan’s Taiex Index gained 0.9%.