Morning Market Update

Nuclear Concerns in Japan Unnerve Sentiment

Although off of the worst levels of the day, the global equity markets are broadly lower, led by a sharp drop in Japanese stocks amid exacerbated nuclear radiation threats after further explosions occurred at a nuclear facility that had been damaged by Friday’s massive earthquake and tsunami. Treasuries are posting solid gains in some flight-to-safety buying, showing little reaction to a larger-than-expected improvement in a gauge of manufacturing activity in New York, hotter-than-anticipated import prices, and a modest increase in homebuilder sentiment. But the headlining US economic event will likely be the Federal Reserve’s afternoon conclusion of its one-day monetary policy meeting, where no changes are expected to be made to its policy, including its $600 billion asset purchase program, dubbed QE2. Equity news remains light, with Dow member Hewlett-Packard announcing a 50% increase in its quarterly dividend, while Texas Instruments Inc warned that its first-half sales will be hurt by damage caused to one of its plants in Japan. Elsewhere overseas, European markets are solidly lower in response to the nuclear radiation threat in Japan.

At 10:50 a.m. ET, the Dow Jones Industrial Average and the S&P 500 Index are 1.8% lower, and the Nasdaq Composite is off 1.9%. WTI crude oil is down $3.43 at $97.76 per barrel, wholesale gasoline is off $0.15 at $2.81 per gallon, and the Bloomberg gold spot price is dropping $28.63 to $1,397.78 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.3% to 76.61.

Dow member Hewlett-Packard Co. (HPQ $41) announced that its Board of Directors has authorized a 50% increase in the company’s quarterly dividend to $0.12 per share, effective in May. The company’s previously announced dividend, which is payable on April 6, to stockholders of record on March 16, will not be increased and will remain at $0.08 per share. Shares are lower amid the broad-based sell-off in the equity markets.

Elsewhere, Texas Instruments Inc. (TXN $33) is lower after the second largest US chipmaker, per Bloomberg said “substantial damage” to one of its plants in Japan will negatively impact sales in its fiscal first and second quarters. Technology issues are among the day’s biggest decliners with chipmakers finding pressure on concerns about the impact of the disaster in Japan on demand, manufacturing activity, and production disruptions.

New York manufacturing activity improves, import prices rise, Fed meeting later today

The Empire Manufacturing Index, a measure of manufacturing in the New York region, increased in March to a level of 17.50, compared to the estimates of economists surveyed by Bloomberg, which expected an increase to 16.10, from the previous month’s level of 15.43. The index moved further into expansionary territory depicted by a reading above zero. The report is the first major piece of data looking at manufacturing conditions in March, while on Thursday the Philly Fed Manufacturing Index will be released, expected to decline from 35.9 in February to 30.0 in the current month, providing further insight into the health of the sector.

Elsewhere, the Import Price Index rose 1.4% month-over-month (m/m) for February, compared to the expectation of economists, which called for the index to increase by 0.9%. This was the fifth-straight monthly increase of over 1%. Year-over-year (y/y), import prices are higher by 6.9%—the largest y/y increase since May 2010—versus the 6.3% forecast of economists. Fuel contributed to the larger-than-forecasted increase in import prices, with petroleum prices increasing 3.7%, while prices for industrial supplies and materials, as well as for foods, feeds, and beverages all were higher.

In other economic news, the NAHB Housing Market Index a gauge of homebuilder sentiment, rose inline with expectations, increasing from 16—it had remained at this level since November—in February to 17 in March. The index sits at the highest level since May 2010, but remains depressed, as any reading below 50 indicates more respondents feel conditions are poor.

Treasuries remain higher in morning action following the morning’s data, as the situation in Japan is garnering some flight-to-safety buying, with the yield on the two-year note falling 4 bps to 0.55%, the yield on the 10-year note dropping 9 bps to 3.27%, and the 30-year bond yield decreasing 8 bps to 4.46%.

However, the day’s headlining economic event will likely be the 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. Traders will be looking for how the Fed feels about the current economic environment in light of some encouraging signs from the employment front and upward pressure on commodity prices since their last meeting held on January 25. Moreover, any reaction to the devastating earthquake in Japan and nuclear radiation threat will also likely garner some attention.

Europe solidly lower amid growing nuclear concerns in Japan

The equity markets in Europe are posting solid broad-based losses in late-day action, as stocks in Japan fell sharply on rising nuclear radiation levels in the nation after more explosions occurred at a nuclear facility. Technology and basic materials are the worst performers across the pond, along with insurers and automakers, while stocks related to clean energy are among the few that are gaining ground in the region. The focus on the disaster in Japan is overshadowing data from the economic front, which showed consumer prices in France rose at a rate that was below economists’ forecasts, and an unexpected drop in the German ZEW Survey of Economic Sentiment. The gauge of investor confidence in Germany—Europe’s largest economy—fell for the first time in five months. The euro is lower versus the greenback but has pared losses, while currencies related to commodities are the worst performers on the day as traders are grappling with economic impact of the disaster facing Japan.

The UK FTSE 100 Index is 1.8% lower, France’s CAC-40 Index is down 3.2%, and Germany’s DAX Index is falling 4.5%.

Japan tumbles again following more explosions at a nuclear facility

The equity markets in Asia finished solidly lower across the board, led by a sharp 10.6% drop in Japan’s Nikkei 225 Index, as concerns about a nuclear meltdown in the nation sparked heavy selling pressure in the region. Two new explosions at the nuclear facility in Fukushima resulted in reports of rising radiation levels in the area, exacerbating concerns about the devastation caused by Friday’s earthquake and tsunami that hit the northeast region of Japan. Today’s drop in the Nikkei 225 Index—although finishing off of the worst level of the day as trading curbs were implemented—was the biggest since October 2008, per Bloomberg, and the index sits at the lowest level since April 2009. Equity markets elsewhere in the region also came under steep pressure with the Hong Kong Hang Seng Index and the Shanghai Composite Index falling 2.9% and 1.4%, respectively, while Taiwan’s Taiex Index fell 3.4%.

Meanwhile, Australia’s S&P/ASX 200 Index dropped 2.1% as commodity prices were broadly lower, and South Korea’s Kospi Index decreased 2.4%. Mining issues, insurance companies, and stocks related to nuclear power were among the biggest losers in the region. In response, the Bank of Japan (BoJ) committed to deploying an additional 8 trillion yen in funds to try to stabilize the financial system. This follows the decision yesterday, when the 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. The yen is trading higher versus the US dollar and other major currencies on continued anticipation that funds from insurance claim payments, rebuilding capital, and foreign investments will be repatriated to Japan and converted into yen. Elsewhere, the Swiss franc is solidly higher versus the major currencies amid some flight-to-safety buying.