Evening Market Update

Stocks Rise to End Week Dominated by Foreign News

In tentative trading today that included options expiration, stocks managed to end the day in the green, responding today primarily to coordinated currency intervention by the G7 to stop the surge in the Japanese yen. Meanwhile, the United Nations voted to implement a no-fly zone over Libya, and the Wall Street Journal reported that Libya renewed attacks despite initially saying it would implement a cease fire. Elsewhere in Asia, China announced another monetary policy tightening. In the US, the Federal Reserve completed its second stress tests of US banks, and a slew of firms reported dividend increases and share buybacks. Treasuries were mixed and there were no US economic reports. In equities, Dow member Cisco Systems added to the dividend fever today, while Nike Inc missed estimates.

The Dow Jones Industrial Average rose 84 points (0.7%) to 11,859, the S&P 500 Index gained 5 points (0.4%) to 1,279, and the Nasdaq Composite advanced 8 points (0.3%) to 2,644. In heavy options-related volume, 1.9 billion shares were traded on the NYSE and 2.6 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.35 to $101.07 per barrel, wholesale gasoline was flat at $2.95 per gallon, while the Bloomberg gold spot price rose $15.38 to $1,419.10 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies was 0.5% lower at 76.04. For the week, including dividends, the DJIA fell 1.5%, the S&P 500 Index declined 1.9% and the Nasdaq Composite decreased 2.7%.

The US Federal Reserve announced that it has completed the second round of stress tests of the 19 largest US banks and as a result, some firms are expected to increase or restart dividend payments, share repurchases, or repay government capital. The Fed is discussing the results with the banks and its decisions with firms that requested a capital action, with all 19 firms receiving more detailed assessments of the capital planning processes next month. Many of these financial services firms announced dividend increases and share repurchases today.

In other stock dividend news, Dow member Cisco Systems Inc. (CSCO $17) reported that its Board of Directors has approved the company's first-ever cash dividend to shareholders. CSCO will pay a quarterly dividend of $0.06 per share, paid on April 20, 2011, to all shareholders of record as of the close of business on March 31, 2011, with future dividends subject to Board approval. Shares rose.

Nike Inc. (NKE $78) was sharply lower after reporting fiscal 3Q EPS of $1.08, below the $1.12 consensus estimate of analysts surveyed by Reuters, with revenues increasing 7% year-over-year (y/y) to $5.1 billion, also below expectations, as the company was forecasted to post $5.2 billion in revenues. The company's gross margin declined 110 basis points to 45.8%, mainly as a result of higher product costs, elevated freight costs, and a smaller proportion of license revenue. However, the company said futures orders for its footwear and apparel, scheduled for delivery from March through July, totaled $7.9 billion, 11% higher than orders reported for the same period last year, led by double-digit increases in North America, Greater China, and Emerging Markets.

US economic front quiet today after week of mixed data

Treasuries were mixed while the US economic calendar was void of any major reports on Friday. The yield on the two-year note was flat at 0.59%, while the yield on the 10-year note was 1 bp higher at 3.27%, and the 30-year bond yield was down 2 bps at 4.41%.

Stocks fell during the week and bond yields moved lower amid some flight-to-safety buying following last week's massive earthquake and tsunami in Japan and resulting nuclear threat at a damaged facility north of Tokyo. However, the move in yields was not in a straight line as traders digested some mixed reports from the economic front, headlined by the Federal Reserve modestly upgrading its economic assessment at the one-day Federal Open Market Committee (FOMC) monetary policy meeting, saying it is on "firmer footing," while expanding its commentary on inflation.

Meanwhile, there were some favorable manufacturing releases to keep the gains in Treasuries in check, with the Empire Manufacturing Index and Philly Fed Manufacturing Index both depicting accelerating activity in New York and the Mid-Atlantic regions.  Adding to the favorable backdrop for the US economy, weekly initial jobless claims fell more than expected, and the Index of Leading Economic Indicators posted the eighth-straight monthly increase.

However, increasing inflation concerns were supported by hotter-than-forecasted figures from the Import Price Index, the Producer Price Index (PPI), and the Consumer Price Index (CPI). Finally, data from the housing front continued to be lackluster, with housing starts tumbling, while building permits unexpectedly fell.

Global focus continued, G7 currency intervention, Libya action and China tightening

After a week of focus on news overseas, today was no exception. Today the G7 intervened in the currency markets for the first time in over a decade to try to thwart the surge in the Japanese yen. The yen had reached a record high versus the US dollar on Wednesday evening on continued expectations that funds in response to the tragedy in Japan could be repatriated to the nation and converted into yen. The rally in the yen was exacerbating concerns toward the Japanese economy in the aftermath of the earthquake and subsequent nuclear meltdown threat. The G7 said in a statement, "As we long have stated, excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability." The yen traded solidly lower versus the major currencies as the Bank of Japan began selling the Asian currency, followed by European central banks and the Bank of Canada, while the US Federal Reserve confirmed that it has participated in the intervention.

Elsewhere in Asia, the Chinese government yet again increased the reserve requirement for its banking sector, raising the required amount of capital that its banks must keep out of the financial system by 50 basis points, with the rate that the nation's largest institutions must keep in reserve rising to 20%.

Asian trading digested a United Nations' vote to impose a no-fly zone over Libya, however after the Asian close, and during European trading, Libya's Foreign Minister Koussa ordered an immediate cease-fire and an immediate stop to all military operations. However, the Wall Street Journal reported renewed attacks late in US trading. Meanwhile, concerns toward the Japanese economy, which is battling damage from last week's massive earthquake and the resulting threat of a nuclear facility meltdown, were eased to help stocks post modest gains. The soothed concerns toward the world's third largest economy came after the Group of Seven (G7) global industrialized nations announced that it will step into the currency markets to try to stem the record high surge in the Japanese yen, which is amplifying the Japanese economic adversity.

The European economic front continued to be light and overshadowed by the focus on Japan and the Middle East. However, there were some reports that deserve a mention, with UK consumer confidence unexpectedly deteriorating, while y/y producer prices in Germany came in hotter than forecasted. Meanwhile, European bank regulators continued to grapple with defining the curriculum for its second-round of stress tests it is planning to conduct on the euro-zone's banking sector.

Housing to highlight US economic data next week

Next week starts off with data on the housing market, with Monday's February existing home sales report, which reflects closings from contracts entered one to two months earlier, forecasted to fall 4.7% m/m to an annual rate of 5.1 million units. The decline comes after sales gained 2.7% in the month prior. Wednesday brings the release of new home sales, which calculates sales of single-family homes based on signings instead of closings, considered a more timely indicator of conditions in the housing market, which is expected to gain 2.1% in February to an annual rate of 290,000 after falling by 12.6% m/m in January.

Friday brings the final reading of 4Q gross domestic product (GDP), forecasted to be revised up to 3.0% from a 2.8% quarter-over-quarter (q/q) annualized rate, an acceleration from the 2.6% rate experienced in 3Q. No change is expected to the all-important personal consumption component, which was last reported at a 4.1% q/q rate for 4Q. Inflation readings are also expected to be unchanged, with the GDP Price Index coming in at a 0.4% gain, and the core PCE Index, which excludes food and energy, reporting an increase of 0.5%.

Other releases on the US economic calendar include the volatile durable goods orders report, expected to increase 1.0% in February after rising by 2.7% m/m in January, while ex-transportation, orders are forecasted to have grown 2.0% m/m, after falling 3.6% in January. The week also includes the Richmond Fed Manufacturing Index, the MBA Mortgage Applications Index, weekly initial jobless claims, and the final University of Michigan Consumer Sentiment Index reading for March.

International economic releases due out next week include UK CPI and retail sales, euro-zone consumer confidence, French 4Q GDP and consumer confidence, German consumer confidence and the IFO survey of business confidence, as well as PMI manufacturing and services reports from most of the euro-zone. Also, the Bank of England will release the minutes from its most recent monetary policy meeting. Reports on the Asia/Pacific calendar include the Australian leading index, Taiwan's industrial production, Hong Kong's CPI and trade balance, Singapore's CPI and industrial production, Japanese department store sales and CPI. Back in the Americas, Canada will release leading indicators and retail sales, Brazil will report CPI and the unemployment rate, while Mexico will announce retail sales, the unemployment rate, CPI and trade balance.