Evening Market Update

Reprieve in Oil, Financials Boost Stocks

Despite continued unrest in the Middle East and the reemergence of euro-area debt anxiety, stocks moved higher on the day, courtesy of a decline in crude prices on reports of an increase in oil production and a possible exit for Gadhafi. Financials led the way following upbeat comments from Dow component Bank of America’s CEO, however fellow Dow member McDonald’s disappointed the Street with its US same-store sales results, Urban Outfitters fell short of analysts’ forecasts, and United Continental Holdings said it will pare back capacity as a result of higher fuel costs. Treasuries finished lower amid the strength in equities, while showing little reaction to the fourth-straight monthly increase in small business optimism.

The Dow Jones Industrial Average rose 124 points (1.0%) to 12,214, the S&P 500 Index gained 12 points (0.9%) to 1,323, and the Nasdaq Composite added 20 points (0.7%) to 2,766. In moderate volume, 1.0 billion shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.42 to $105.02 per barrel, wholesale gasoline fell $0.05 to $2.95 per gallon, while the Bloomberg gold spot price fell $3.00 to $1,429.05 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was 0.4% higher at 76.81.

Dow component Bank of America Corp. (BAC $15 ¹) was nicely higher after the company’s CEO Brian Moynihan offered some upbeat comments at BAC’s investor day. Moynihan noted that the firm will focus on cost cutting and returning capital to shareholders. He noted that that company could earn between $35-40 billion annually in pre-tax earnings after a couple years as it gets past large costs associated with the financial crisis. Also, Moynihan said BAC has no intentions for large acquisitions and will focus on returning “every dollar” in capital to shareholders, through regular dividends, share buybacks, and special dividends, per Dow Jones Newswires.

However, fellow Dow member McDonald’s Corp. (MCD $76) reported global February same-store sales results—sales at stores open at least thirteen months—which rose 3.9% year-over-year (y/y). The Street was looking for a 3.3% increase in global sales, per CNBC—citing analysts surveyed by StreetAccount. US same-store sales grew 2.7% and European sales rose 5.1%, while a 4.0% increase was seen in Asia/Pacific, Middle East and Africa. However, shares were lower as analysts were expecting US sales to rise by 3.6%.

Meanwhile, Urban Outfitters Inc. (URBN $32) was sharply lower after the specialty retailer posted 4Q EPS of $0.45, below the $0.52 consensus estimate of analysts surveyed by Reuters, and revenues, which although grew by 14% y/y to $668 million, missed the $676 million that was estimated.

Elsewhere, United Continental Holdings Inc. (UAL $25) announced that it will reduce capacity from its previous 2011 projections by about 1%, “due to the recent increase in fuel prices.” The airline said 4Q consolidated domestic capacity is expected to decrease 5% y/y, while international capacity is forecasted to increase 2% y/y. Shares moved higher as oil prices retreated somewhat from their recent spike.

Small business optimism increased for fourth-consecutive month

The NFIB Small Business Optimism Index improved slightly, increasing from 94.1 in January to 94.5 in February—the fourth-straight monthly increase—compared to the expectation of economists surveyed by Bloomberg, which called for the index to improve to 95.0. The increase came as the number of firms reporting expectations of higher sales improved, but those expecting a better economy and rising inventories declined modestly. However, the bulk of the improvement in the index came from the employment front, with firms expecting to hire over the next three months rising.

Treasuries ended lower amid the strength in the equity markets, while showing little reaction to the business sentiment data. The yield on the 2-year note was up 2 bps to 0.72%, the yield on the 10-year note was 3 bps higher at 3.55%, while the 30-year bond yield gained 3 bps to 4.66%.

Relief at lower oil prices tempered by resurfacing euro-area debt worries

Sentiment overseas was mixed as relief from declining oil prices was somewhat offset by the reemergence of euro-area debt concerns. Helping to pressure crude prices, reports surfaced that Kuwait’s oil minister had said that OPEC was in discussions about production hikes. However, no decision has been made nor has an emergency meeting been scheduled. As well, it was reported that members of Gadhafi’s inner circle were discussing whether the embattled Libyan leader should remain in power, or whether he should step aside. The downgrade of Greece’s debt by Moody’s Investors Service brought the euro-area debt situation back to the forefront. The uneasiness bumped yields of debt-laden nations in the euro-zone, while stocks in Greece fell markedly, reacting for the first time to the announcement as the nation’s markets were closed yesterday. Exacerbating the negative sentiment, European Central Bank (ECB) council member Axel Weber suggested that the ECB could raise rates multiple times this year, per Bloomberg.

Some favorable economic reports in the region helped the resiliency in the region, with factory orders in Germany—Europe’s largest economy—rising more than economists anticipated, and a gauge of UK home prices showing improvement.

In economic news in the Asia/Pacific region, Japan’s trade balance swung to a wider-than-forecasted deficit in January, and Australia’s business confidence improved in February.

Economic data remains light tomorrow

The only items on the economic docket for the US tomorrow are wholesale inventories, forecast to rise 0.9% month-over-month (m/m) in January, following a 1.0% gain in December, and the MBA Mortgage Application Index.

Reports on the international economic front will also be sparse, with the trade balance from the UK, industrial production from Germany, Switzerland CPI and Japanese machinery tools the only noteworthy items on the calendar. In central bank action, the Bank of England begins its two-day monetary policy meeting, and Thailand’s central bank will release its interest rate decision where it is expected to raise its overnight repo rate by 25 bps to 2.50%.