Morning Market Update

Sentiment at the Mercy of Oil Prices

The US equity markets are higher in late-morning action as an early rise in crude oil prices has been pared. Exacerbated concerns toward the Middle East, which led to the steep losses yesterday, caused oil to eclipse the $100 per barrel mark in early morning action, sending stocks lower and overshadowing a larger-than-forecasted increase in private sector payrolls according to ADP. Treasuries are lower following the jobs data, ahead of the afternoon release of the Fed’s Beige Book. Meanwhile, Federal Reserve Chairman Ben Bernanke is concluding his two-day semiannual testimony on Capitol Hill, reiterating that economic growth could accelerate in 2011 compared to last year, while inflation remains low, In other economic news, the MBA Mortgage Application Index declined on declines in refinancing and purchasing activity. In equity news, Costco Wholesale Corp topped analysts’ revenue forecasts, while Staples Inc missed the Street’s earnings and revenue estimates. In M&A news, US-based utility company PPL Corp reached an agreement to acquire the Central Networks electric distribution business from UK-based E. ON UK for $5.6 billion in cash. Overseas, Asia finished lower amid strength in oil prices and Middle East geopolitical concerns, which are also weighing on European markets.

At 10:57 a.m. ET, the Dow Jones Industrial Average is up 0.4%, the S&P 500 Index is 0.5% higher, and the Nasdaq Composite is advancing 0.9%. Crude oil is up $0.79 at $100.42 per barrel, wholesale gasoline is rising $0.02 to $3.01 per gallon, and the Bloomberg gold spot price is increasing $4.33 to $1,437.60 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.6% to 76.56.

Costco Wholesale Corp. (COST $73) reported fiscal 2Q EPS of $0.79, inline with the consensus estimate of analysts surveyed by Reuters, with revenues increasing 11% year-over-year (y/y) to $20.9 billion, compared to the $20.5 billion that the Street had forecasted. The wholesale retailer announced that 2Q same-store sales—sales at stores open at least a year—rose 7% y/y including fuel sales and currency changes. COST also said same-store sales in February increased 8% y/y. COST is trading lower.

Staples Inc. (SPLS $21) announced 4Q EPS ex-items of $0.39, one penny short of analysts’ expectations, with revenues roughly flat y/y at $6.4 billion, compared to the $6.5 billion that was anticipated on the Street. The office supply company said 4Q was challenging primarily due to the impact of winter storms and sales have recovered in 1Q, while issuing full-year 2011 EPS that exceeded forecasts. Shares are lower.

In M&A news, US-based utility company PPL Corp. (PPL $25) reached a definitive agreement to acquire the Central Networks electric distribution business from UK-based E. ON UK for 3.5 billion pounds ($5.6 billion) in cash. PPL said the deal will be “significantly accretive” to earnings and cash flow for 2011 and beyond. PPL is trading higher.

Private sector payrolls jump, mortgage apps decline, Fed in focus

The ADP Employment Change Report showed private sector payrolls rose by 217,000 jobs in February, above the forecast of economists surveyed by Bloomberg, which called for a 180,000 increase, and January’s 187,000 job gain was revised to 189,000 jobs. The release does not include government hiring and firing and comes ahead of Friday’s broader nonfarm payrolls report, where economists expect an increase of 193,000 jobs in February, after posting a disappointing 36,000 in January. Excluding government hiring, February private sector payrolls are expected to increase 200,000, after expanding by a smaller-than-forecasted 50,000 in January.

In other economic news, the MBA Mortgage Application Index decreased by 6.5% last week, after the index that can be quite volatile on a week-to-week basis, rose 13.2% in the previous week. The decline came as a 6.5% decrease in the Refinance Index joined a 6.1% drop in the Purchase Index. The decline in the overall index came even as the average 30-year mortgage rate fell 16 basis points to 4.84%, above the record low of 4.21% on October 8.

Treasuries remain lower following the employment and housing data, with the yield on the two-year note up 2 bps to 0.66%, while the yields on the 10-year note and the 30-year bond are gaining 3 bps to 3.43% and 4.51%, respectively.

Moreover, Federal Reserve Fed Chairman Ben Bernanke is concluding his two-day semiannual monetary policy testimony on Capitol Hill, speaking to the House Financial Services Committee. Bernanke’s testimony did not change from what he gave yesterday to the Senate, in which he noted that the combination of rising household and business confidence, accommodative monetary policy, and improving credit conditions seems likely to “lead to a somewhat more rapid pace of economic recovery in 2011 than we saw last year.” However, Bernanke reiterated that job growth “remains relatively weak and the unemployment rate is still high,” and overall inflation remains low. The Fed Chief also acknowledged the recent spike in oil prices and other commodities, exacerbated by the Middle East unrest, but said, “the most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in US consumer price inflation.” Bernanke also reiterated that the Fed will continue to review its asset purchase program—QE2—in light of incoming information, adjusting it as needed. Traders are monitoring the Q&A session that followed his opening remarks for any new insights from the Fed Chief.

Europe mostly lower as Middle East concerns continue to stymie sentiment

The equity markets in Europe are lower in late-day action, led by weakness in automakers and mining issues on concerns regarding the economic impact of the unrest in the Middle East and the resulting strength in oil prices. However, as oil prices have come off of the best levels of the day, the markets have pared losses. Meanwhile, financial issues are lower on a solid decline in shares of Swiss Life Holding (SZLMY $8) after the company posted earnings that missed expectations, while Swiss Reinsurance Co. (SWCEY $60) is also under pressure after it assessed its costs from the recent earthquake in New Zealand to be about $800 million, per Bloomberg. However, losses in the sector are being limited by a sizeable gain in shares of Standard Chartered Plc. (SCBFF $26) after the UK lender reported a solid increase in profits and issued an upbeat outlook. UK stocks have overcome early losses and are slightly higher.

In economic news, the UK PMI Construction reading unexpectedly improved to 56.5 in February, from 53.7 in January, compared to the decline to 52.8 that economists forecasted, while euro-zone producer prices rose more than expected in January.

The UK FTSE 100 Index is up 0.1%, while France’s CAC-40 Index is 0.5% lower, and Germany’s DAX Index and Switzerland’s Swiss Market Index are decreasing 0.3%.

Asia falls as oil’s strength reemerges

Stocks in Asia were broadly lower following the steep losses in the US yesterday as oil prices jumped again on continued supply concerns amid the lingering uneasiness in the Middle East. Transportation-related issues were some of the biggest drags on the major markets as rising oil prices threaten the economic recovery, as well as demand for automakers and profits of airline companies. Japan’s Nikkei 225 Index fell 2.4% to lead the decline in the region. In equity news, shares of Yahoo Japan Corp. (YAHOY $125) moved nicely higher amid reports that Yahoo Inc. (YHOO $16) is in discussions to sell its stake in the Japanese joint-venture with Softbank Corp. (SFTBY $21). Softbank Corp denied the reports that it is in discussions to acquire Yahoo’s stake in the venture, and its shares finished solidly lower. None of the other firms involved commented on the report.

Elsewhere, Chinese stocks were lower, with the Hong Kong Hang Seng Index falling 1.5% and the Shanghai Composite Index declining 0.2%, hampered by the concerns about the unrest in the Middle East, which caused shares of China Railway Construction Corp. (CWYCY $11) to fall after it said it halted work on three projects in Libya. Elsewhere, South Korea’s Kospi Index fell 0.6% as the Middle East uneasiness was exacerbated by a report that showed consumer prices came in hotter than anticipated. Finally, Australia’s S&P/ASX 200 Index declined 0.5%. Australian stocks decreased even after a report showed the nation’s 4Q GDP expanded at a rate of 0.7% quarter-over-quarter (q/q), matching expectations, after increasing 0.1% in 3Q. However, on a y/y basis, the nation’s output rose at a pace of 2.7%, slightly below the 2.8% that economists had expected.