Morning Market Update

Early Advance Thwarted by Middle East and Euro Concerns

US equity markets have pared an early advance as oil prices are taking a breather from their recent surge, but concerns about the global economic impact of the continued unrest in the Middle East and North African region are stymieing sentiment. Also, rising yields of debt-laden peripheral euro-area bonds, mainly in recently bailed out Greece, are causing some attention to be redirected toward the crisis facing the euro-zone. Treasuries are modestly higher after erasing early losses, showing little reaction to the fourth-straight monthly increase in small business optimism. Meanwhile, the US equity front is doing little to help sentiment, with Dow member McDonald’s Corp posting disappointing US same-store sales, while Urban Outfitters missed the Street’s profit forecasts and United Continental Holdings Inc announced that it will reduce capacity due to higher fuel costs. Overseas, Asia was higher, while European equities are lower as Middle East uneasiness and concerns toward the euro-area debt crisis are weighing on stocks.

As of 8:49 a.m. ET, the March S&P 500 Index Globex future is 1 point above fair value, the Nasdaq 100 Index is 4 points below fair value, and the DJIA is 15 points above fair value. WTI crude oil is $0.35 lower at $105.08 per barrel, and the Bloomberg gold spot price is up $1.50 at $1,433.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.4% at 76.79.

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, analysts were expecting US sales to rise by 3.6%.

Meanwhile, Urban Outfitters Inc. (URBN $38) is down solidly 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, that missed the $676 million that was estimated.

Elsewhere, United Continental Holdings Inc. (UAL $23) 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.

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 are modestly higher after giving up early losses, showing little reaction to the business sentiment data, with the yield on the two-year note flat at 0.70%, while the yields on the 10-year note and the 30-year bond are down 1 bp at 3.50% and 4.62%, respectively.

Europe gives up early gains as oil and euro-area debt concerns weigh on sentiment

The equity markets in Europe have surrendered early gains and are lower in afternoon action, led by weakness in basic materials stocks as the uneasiness toward the spike in oil prices is dampening the outlook for the economy. Not even a decline in oil prices today, amid reports that Kuwait’s oil minister said OPEC was in discussions about production hikes, per Reuters, is helping soothe concerns. Meanwhile, oil & gas issues are lower on some profit-taking from the recent run in energy prices to add to the declines across the pond. Also, the persistent concerns about higher oil prices are overshadowing some favorable economic reports in the region, with factory orders in Germany—Europe’s largest economy—rising more than economists anticipated, and an improvement in a gauge of UK home prices, failing to keep the equity markets in positive territory.

Euro-area debt concerns are also resurfacing to weigh on the European markets, as stocks in Greece are solidly lower in reaction to yesterday’s credit rating downgrade of the bailed out peripheral euro-zone nation by Moody’s Investors Service. Greece’s markets were closed yesterday when the announcement came. The euro-area debt uneasiness is boosting yields of debt-laden nations in the euro-zone, exacerbating sentiment.

The UK FTSE 100 Index is down 0.4%, France’s CAC-40 Index is declining 0.4%, Germany’s DAX Index is decreasing 0.9%, and Greece’s Athex Composite Index is falling 3.0%.

Asia higher despite higher energy prices

Stocks in Asia finished mostly higher despite the backdrop of surging energy prices on escalated geopolitical tensions in the Middle East and North African region amid some bargain hunting on the heels of recent losses. Japan’s Nikkei 225 Index rose 0.2% as the uncertainty toward the Middle East and threat of higher oil prices kept conviction limited, but some solid gains resulting from M&A announcements helped stocks notch a positive session. Shares of Hitachi Ltd. (HIT $65) moved nicely higher after its announcement that it will sell its global storage technologies unit to US-based Western Digital Corp. (WDC $35) for about $4.3 billion. Moreover, shares of Terumo Corp. (TRUMY $108) also gained solid ground after its announcement of the acquisition of US medical device company CaridianBCT for about $2.6 billion. Elsewhere, Chinese stocks gained ground, with the Shanghai Composite Index increasing 0.1%, while the Hong Kong Hang Seng Index jumped 1.7%. Moreover, Australia’s S&P/ASX 200 Index increased 0.2% and South Korea’s Kospi Index gained 0.8%, while India’s BSE Sensex 30 Index rose 1.2%. In economic news in the region, Japan’s trade balance swung to a wider-than-forecasted deficit in January, and Australia’s business confidence improved in February.