Morning Market Update

Under Pressure as Middle East Turmoil Festers

Although well off of the worst levels of the day, the global markets remain solidly lower in the wake of violent anti-government protest spreading to Libya—a major producer of the global supply of crude oil—sending oil prices sharply higher. Treasuries are also gaining solid ground amid some flight-to-safety buying on the exacerbated geopolitical concerns, which is overshadowing another decline in a gauge of US home prices. Meanwhile, the earnings front is mixed, with Dow member Wal-Mart Stores Inc reporting better-than-forecasted earnings but disappointing sales results, mainly in the US, while fellow Dow member Home Depot posted favorable results, and an increase in its dividend. Elsewhere, department store Macy’s Inc announced 4Q earnings that exceeded analysts’ forecasts. Outside of earnings, Dynegy Inc reported that its President and CEO will resign and it has terminated a merger agreement with Icahn Enterprises. Overseas, Asia found solid pressure on the aforementioned Middle East uneasiness, which is also weighing on equity markets in Europe.

As of 8:46 a.m. ET, the March S&P 500 Index Globex future is 13 points below fair value, the Nasdaq 100 Index is 31 points below fair value, and the DJIA is 58 points below fair value. Crude oil is $6.91 higher at $96.62 per barrel, and the Bloomberg gold spot price is down $3.09 at $1,403.36 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.1% at 77.73.

Dow member Wal-Mart Stores Inc. (WMT $55) reported 4Q EPS ex-items of $1.34, above the $1.31 consensus estimate of analysts surveyed by Reuters, with revenues increasing 2.5% year-over-year (y/y) to $115.6 billion, below the $117.1 billion that the Street had expected. The world’s largest retailer said its same-store sales—sales at stores open at least a year—in the US declined 1.8% y/y, while increasing 2.7% at its Sam’s Club. WMT said it was pleased with its earnings performance in 4Q across its three operating segments, but “we are disappointed” by US 4Q sales. WMT issued full-year EPS guidance that was inline with expectations.

Fellow Dow component Home Depot Inc. (HD $38) posted 4Q EPS of $0.36, five cents above the Street’s estimate, with revenues increasing 3.8% y/y to $15.1 billion, exceeding the $14.8 billion that analysts were anticipating. The world’s largest home improvement retailer said its same-store sales rose 3.9% y/y, with US stores increasing 4.8%. HD also reported that it will increase its quarterly dividend by 6% to $0.25 per share, and it increased its full-year 2011 EPS outlook.

Meanwhile, Macy’s Inc. (M $24) announced 4Q earnings ex-items of $1.59 per share, above the $1.52 that was expected, with revenues rising 5.4% y/y to $8.3 billion, matching forecasts, with same-store sales gaining 4.3% y/y. The department store said it believes the company is now “on a clear path” that will lead to continued growth in sales, earnings and cash flow in the years ahead.

Elsewhere, Dynegy Inc. (DYN $6) is under some pressure after the company announced that its President and CEO Bruce Williamson will resign and its current Board of Directors do not intend to stand for reelection at the company’s next annual meeting. Also, DYN announced that its merger agreement with Icahn Enterprises LP (IEP $43) has been terminated, due to an insufficient number of shares tendered in response to the takeover offer.

Home prices decline, consumer confidence reading after the opening bell

Just before the opening bell, the S&P/Case-Shiller Home Price Index was released showing a decline in home prices of 2.38% y/y in December, compared to the 2.40% drop that economists surveyed by Bloomberg had expected. Month-over-month (m/m), home prices were 0.41% lower, compared to forecasts, which called for a decline of 0.50%.

Treasuries remain higher following the home price data as the exacerbated Middle East uneasiness is fostering some flight-to-safety buying. The yield on the two-year note is 2 bps lower at 0.73%, the yield on the 10-year note is down 5 bps to 3.54%, and the 30-year bond is declining 2 bps to 4.66%.

Later this morning, the economic calendar will yield the releases of the Consumer Confidence Index, forecasted to improve from 60.6 in January to 65.0 in February, and the Richmond Fed Manufacturing Index, which is anticipated to remain at 18 for February.

Today’s report on home prices kicked off the week’s focus on the housing sector, as Wednesday will bring the January existing home sales report, which reflects closings from contracts entered one to two months earlier, forecasted to fall 1.5% m/m to an annual rate of 5.2 million units. The decline comes after sales surged 12.3% in the month prior, with single-family sales increasing 11.8%. Moreover, Thursday will bring the release of new home sales, which calculates sales of single-family homes based on signings instead of closings, and is considered a more timely indicator of conditions in the housing market, expected to fall 8.1% in January to an annual rate of 303,000 after spiking by 17.5% m/m in December.

Also highlighting the week’s economic docket, the second reading of 4Q gross domestic product (GDP) will be released on Friday, forecasted to be revised up to 3.3% from a 3.2% quarter-over-quarter (q/q) annualized rate, an acceleration from the 2.6% rate experienced in 3Q. The anticipated upward revision to GDP comes despite an expected downward revision to personal consumption to 4.2% from the initially reported 4.4%. Inflation readings are expected to unchanged, with the GDP Price Index coming in at a mere 0.3% gain, and the core PCE Index, which excludes food and energy, forecasted at an increase of 0.4%. Other releases on the US calendar throughout the week include: the volatile durable goods orders report, the MBA Mortgage Applications Index, weekly initial jobless claims, and the final University of Michigan Consumer Sentiment Index reading for February.

Europe mostly under pressure as Middle East concerns weigh on stocks

Stocks in Europe are under some pressure in afternoon action as the uneasiness in the Middle East is weighing on sentiment and prompting some profit-taking from the recent upward momentum as traders assess the potential impact of escalated anti-government protests in Libya, which is a major producer of global crude oil output. Oil & gas issues are lower despite a sharp spike in the price of crude oil, while trading in Italy—the European nation with the closest economic ties to Libya—has been halted due to “technical issues,” after falling sharply yesterday. The economic front in the region is taking a back seat to the geopolitical concerns, but there were some pieces of data worth mentioning, as a gauge of consumer confidence in Germany—Europe’s largest economy—unexpectedly improved, and a read of Italian consumer sentiment improved by a larger amount than economists forecasted. Moreover, the UK reported some favorable budget data, with the region posting the largest surplus in January since July 2008 on a surge in government revenue, per Bloomberg.

The UK FTSE 100 Index is down 0.7% and France’s CAC-40 Index is declining 1.1%, while Germany’s DAX Index is 0.1% higher.

Middle East uneasiness pressures Asia

Festering geopolitical concerns in the Middle East weighed on the equity markets in Asia, as all major markets posted solid declines, with Japan’s Nikkei 225 Index retreating from a recent nine-month high, falling 1.8%, as financials lead the decline, exacerbated by Moody’s Investor Service changing its outlook on the nation’s debt rating from stable to negative. Meanwhile, stocks in China paced the broad-based decline in the region as the Shanghai Composite Index fell 2.6% and the Hong Kong Hang Seng Index dropped 2.1%. The decline in Hong Kong was amplified by a sharp drop in shares of Alibaba.com Ltd. (ALBIY $11) after the ecommerce company reported that its CEO and COO have resigned amid an investigation into an increase of fraudulent transactions on its website, even though the company said the two executives were not personally involved, per Reuters. Elsewhere, South Korea’s Kospi Index decreased 1.8% and Australia’s S&P/ASX 200 Index fell 0.9%, as losses were limited by a sharp increase oil prices amid the Middle East concerns and a solid gain in shares of BHP Billiton (BHP $92) after it announced that it agreed to acquire the Arkansas shale gas assets of US-based Chesapeake Energy Corp. (CHK $30) for $4.75 billion in cash. Finally, New Zealand’s NZX 50 Index declined 0.7% after a magnitude 6.3 earthquake hit the region.