Morning Market Update

Markets Lower as Damage in Japan Remains in Focus

The US equity markets are lower in early action as the destruction of the magnitude 8.9 earthquake in Japan and the threat of a radiation leak following explosions at a nuclear facility in the nation continue to garner the Street’s attention. Treasuries are mixed in morning action as there are no major US economic reports scheduled for release today. Meanwhile, the equity front is also taking a back seat to the natural disaster in Japan, but Berkshire Hathaway Inc’s $9 billion acquisition of specialty chemical company Lubrizol Corp is in the headlines. Overseas, Japanese markets finished sharply lower following the earthquake in Japan, which is also pressuring insurers in Europe, but the weekend agreement by the European Union to broaden the scope of its bailout fund is supporting peripheral euro-area markets.

As of 8:51 a.m. ET, the June S&P 500 Index Globex future is 7 points below fair value, the Nasdaq 100 Index is 11 points below fair value, and the DJIA is 50 points below fair value. WTI crude oil is $1.92 lower at $99.24 per barrel, and the Bloomberg gold spot price is up $8.45 at $1,425.90 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.2% at 76.57.

Berkshire Hathaway Inc. (BRK/B $85) announced that it has reached an agreement to acquire specialty chemical company Lubrizol Corp. (LZ $105) for $135 per share in an all-cash transaction, valued at about $9.7 billion, including $700 million in debt. Berkshire Hathaway CEO Warren Buffett said the maker of lubricant additives for engine oils, “is exactly the sort of company with which we love to partner,” and Lubrizol CEO James Hambrick added that the deal “provides compelling value to our shareholders.”

Heavy dose of economic data op tap for the week

Treasuries are mixed in morning action as the attention remains on Japan following Friday’s massive earthquake and devastating tsunami, and as there are no major US economic reports scheduled for today. The yield on the two-year note is down 4 bps to 0.60%, the yield on the 10-year note is 3 bps lower to 3.38%, and the 30-year bond yield is 2 bps higher at 4.57%.

However, the rest of the week will bring a plethora of key economic reports, beginning with tomorrow’s one-day Federal Open Market Committee (FOMC) meeting and midday statement that concludes the meeting. No changes are expected to the fed funds target rate, currently at a level between 0-0.25%, or to the $600 billion asset purchase program, commonly known as quantitative easing, or QE2. Oil prices have spiked since the last meeting held January 25 and there have been indications of future strengthening in the job market.

Inflation readings will be reported after the Fed meeting, with Wednesday’s Producer Price Index (PPI) expected to show prices at the wholesale level rose 0.7% month-over-month (m/m) in February, while the core rate, which excludes food and energy, is expected to increase 0.2%, down from January’s 0.5%. The release precedes Thursday’s Consumer Price Index (CPI) report, forecasted to show a 0.4% m/m increase, while ex-food and energy, the core rate is expected to rise 0.1%, down from January’s 0.2%. On a year-over-year (y/y) basis, the CPI is expected to increase 2.0% at the headline level and 1.0% at the core level.

Meanwhile, housing starts will also be reported Wednesday, expected to fall 4.4% m/m in February to an annual rate of 570,000 units, while building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, are forecasted to increase a modest 1.2% m/m to 570,000 units. Thursday also brings the February reading on industrial production, expected to rise 0.6% m/m in February, and capacity utilization is forecasted to increase to 76.5%.

Other releases on this week’s US economic calendar include: the Empire Manufacturing Index, import prices, the NAHB Housing Market Index, MBA Mortgage Applications, initial jobless claims, the Philadelphia Fed’s Business Activity Index, and the Conference Board’s Index of Leading Indicators. Other reports in the Americas include Canada’s CPI, as well as manufacturing and wholesale sales, Mexico’s industrial production, and Brazil’s retail sales.

Europe mixed as Japan disaster hits insurers, but euro-zone leaders reach agreement

The equity markets are mixed in Europe as insurance companies remain under pressure as estimates of the cost of the massive earthquake in Japan is weighing on the group, while debt-laden euro-zone peripheral nations are rising solidly as European Union (EU) leaders agreed to step up efforts to combat the region’s debt crisis. Over the weekend, euro-zone leaders announced that they will allow the lending capacity of its bailout fund—the European Financial Stability Facility (EFSF)—to be raised from the previously agreed capped amount of 250 billion euros to 440 billion euros in full lending capacity. Also, EU leaders agreed to cut costs of loans made to the recently bailed out nation of Greece, per Bloomberg. However, the arrangement needs final approval at the EU summit set for March 24-25. The announcement is sending bond yields of troubled euro-area nations lower and the stock markets of the countries nicely higher. The euro is also gaining solid ground compared to the US dollar and other major currencies.

The focus on the earthquake in Japan and the agreement among European leaders is overshadowing the economic front across the pond but a larger-than-forecasted y/y increase in euro-zone industrial production deserves a mention.

The UK FTSE 100 Index is down 0.4%, France’s CAC-40 Index is 0.8% lower, and Germany’s DAX Index is trading 1.4% in the red. However, Greece’s Athex Composite Index is jumping 5.4%, Spain’s IBEX 35 Index is gaining 1.1%, and Portugal’s PSI 20 Index rising 1.2%.

Asia mixed as Japan tumbles following massive earthquake

Stocks in Asia finished mixed, with Japanese markets falling sharply as the nation continues to assess the damage caused by Friday’s magnitude 8.9 earthquake and resulting tsunami that hit the nation’s northeast region. The Nikkei 225 Index fell 6.2% and the broader Topix Index dropped 7.5% in today’s trading. Also, attention is on efforts to avoid a meltdown at a Japanese nuclear power plant following multiple hydrogen explosions at the facility in Fukushima. Reuters is reporting that officials are saying containment walls surrounding the radioactive cores of the damaged reactors appear to be intact, and people have been evacuated from the area. Tokyo Electric Power Co. (TKECY $31), which is the nuclear plant’s operator, fell about 24% in today’s trading session, while several Japanese manufacturers, including Toyota Motor Corp. (TM $86), closed plants and halted production as factories are being impacted by the earthquake and power shortages.

In response to the natural disaster, the Bank of Japan (BoJ) held a shortened policy meeting and announced that it will double the size of its asset purchase program to 10 trillion yen and will pump 15 trillion yen into money markets to try to alleviate liquidity concerns. The BoJ the actions are aimed at “preempting a deterioration in business sentiment and an increase in risk aversion in the financial markets from adversely affecting economic activity.” The Japanese yen, which rose solidly on Friday versus the US dollar and most major currencies in anticipation to funds that will be repatriated to Japan and converted into yen, is trading nearly unchanged versus the greenback.

Meanwhile, Chinese markets finished higher, with the Hong Kong Hang Seng Index rising 0.4% and the Shanghai Composite Index increasing 0.1%, while South Korea’s Kospi Index gained 0.8%. These markets may have found some support by the outlook of the rebuilding efforts that will be needed as the Japanese nation recovers. Elsewhere, Australia’s S&P/ASX 200 Index declined 0.4%.