Morning Market Update

M&A Helping Takeover Bearish Sentiment

The US equity markets are gaining some ground in early trading following the sixth-straight weekly loss for the Dow Jones Industrial Average last week, with some M&A action providing some support. TransAtlantic Holdings Inc and Allied World Assurance Co. Holdings announced a definitive merger agreement to create a global specialty insurance and reinsurance company with total capital of $8.5 billion, while VF Corp announced that it has reached an agreement to acquire footwear and apparel company Timberland Co for $43 per share in cash. In other equity news, Gilead Sciences Inc announced that it has received a subpoena from the US Department of Justice requesting documents related to the manufacturing and distribution practices of several of the company’s drugs. Treasuries are lower in morning trading as there are no major economic reports due out today, but traders are bracing for some key data on inflation, manufacturing, housing and retail sales that will be release later this week. Overseas, Asia finished mixed as some Chinese inflation and manufacturing loom on the horizon, while European shares are higher in light afternoon action.

As of 8:50 a.m. ET, the September S&P 500 Index Globex future is 4 points above fair value, the Nasdaq 100 Index is 8 points above fair value, and the DJIA is 46 points above fair value. WTI crude oil is $0.72 lower at $98.57 per barrel, and the Bloomberg gold spot price is up $0.17 at $1,531.44 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.2% at 74.69.

TransAtlantic Holdings Inc. (TRH $44) and Allied World Assurance Co. Holdings (AWH $58) announced that they have reached a definitive merger agreement to create a global specialty insurance and reinsurance company with total capital of $8.5 billion. The transaction is structured as a merger of equals with the combined company operating under the corporate name TransAllied Group Holdings. Under the terms of the deal, shareholders of TRH will receive 0.88 AWH common shares for each share they own, valued at about $3.2 billion.

In other M&A news, VF Corp. (VF $92) announced that it has reached a definitive agreement to acquire footwear and apparel company Timberland Co. (TBL $30) for $43 per share in cash, representing a total enterprise value of approximately $2 billion. VF said the acquisition is expected to provide “significant EPS accretion in 2011 and 2012.”

Gilead Sciences Inc. (GILD $40) announced that it has received a subpoena from the US Department of Justice requesting documents related to the manufacturing and distribution practices of several of the company’s drugs. GILD said it is cooperating in this civil and criminal investigation.

Inflation, manufacturing, housing and retail sales to highlight economic front this week

The US economic calendar is void of any major releases today, and Treasuries are lower in early action, with the yield on the 2-year note up 2 bps to 0.42%, while the yields on the 10-year note and the 30-year bond are advancing 3 bps to 3.00% and 4.21%, respectively.

However, tomorrow the US economic calendar will heat up with the release of the Producer Price Index (PPI), expected to show prices at the wholesale level rose 0.1% month-over-month (m/m) in May after spiking 0.8% in April, while the core rate, which excludes food and energy, is expected to increase 0.2%. Inflation can have a significant impact on consumer spending and corporate profits and Wednesday’s Consumer Price Index (CPI) report will round out the inflation picture, forecasted to show a 0.1% m/m increase in May after rising 0.4% in April, while ex-food and energy it is expected to rise 0.2%.

Also, Tuesday will bring a look at the health of the retail sector in the form of advance retail sales, forecasted to fall 0.5% m/m in May, after gaining 0.5% in April, while sales ex-autos and ex-autos and gas are estimated to grow 0.3%. Same-store sales results—sales at stores open at least a year—reported by retailers disappointed, possibly as consumers grappled with higher gasoline prices. The retail sales report includes spending at supermarkets and gas stations.

Meanwhile, in the middle of the week we will get data on manufacturing and housing with the releases of industrial production and capacity utilization, while the NAHB Housing Market Index will provide a checkup on homebuilder sentiment. Moreover, regional manufacturing activity will be in focus, beginning with the Empire Manufacturing Index, followed by the Philadelphia Fed’s Business Activity Index, which will be accompanied by housing starts and building permits.

Other releases on this week’s US economic calendar include: the NFIB Small Business Optimism Index, business inventories, MBA mortgage applications, initial jobless claims, the Index of Leading Indicators and the preliminary University of Michigan Consumer Sentiment Index.

Europe higher amid lack of news on the debt crisis

The major equity markets in Europe are trading to the upside in afternoon action as there were no new developments on the euro-area debt crisis over the weekend. However, concerns remain, as Germany and the European Central Bank (ECB) appear at odds pertaining to whether private investors should bear some of the costs of a debt restructuring of the troubled nation of Greece. Meanwhile some M&A speculation is helping support the broad equity markets in Europe, with shares of ENRC (EURNY $7) moving nicely higher after the Kazakhstan-based miner is rumored to be in the takeover crosshairs of commodity trading firm Glencore International Plc, for about 12 billion British pounds, according to the Sunday Times. Both firms have not commented on the report. Elsewhere, the lone report on the European economic calendar was the release of Italian industrial production, which rose 1.0% m/m in April, compared to the 0.2% increase that was projected by economists. Trading is relatively lighter than usual, with several markets, including Greece and Switzerland, closed for holidays, while the French markets are open during a national holiday.

The UK FTSE 100 Index and France’s CAC-40 Index are rising 0.4%, Germany’s DAX Index is gaining, and Italy’s FTSE MIB is rising 0.1%.

Asia mixed following data and ahead of Chinese inflation reports

Stocks in Asia finished mixed as traders continued to grapple with the growing concerns about global economic growth, while digesting some disappointing reports in the region. Japan’s Nikkei 225 Index declined 0.7% following the release of the nation’s April machine orders data, which showed a decline of 3.3% m/m, compared to the 1.7% increase that economists had expected. Also, year-over-year (y/y) Japanese machine orders were down 0.2% in April, versus the 4.9% gain that was anticipated. Adding to the pressure on the equity markets in Japan, shares of Toyota Motor Corp. (TM $81) moved solidly lower after the automaker said late-day on Friday that it expects full-year profits to fall more than 30% y/y, missing the forecasts of analysts, due to the impact of the March earthquake and tsunami.

However, Chinese markets finished mixed, with the Shanghai Composite Index declining 0.2%, while the Hong Kong Hang Seng Index rose 0.4%. Traders treaded with some caution ahead of key reports on inflation due out tomorrow, along with reads on retail sales and industrial production, trying to determine if further monetary policy tightening is needed to fight inflation and if previous measures taken by the government to cool off the economy have impacted activity in May. Meanwhile, we got some data on loan growth in China for May, in form of new yuan loans, which rose by 551.6 billion yuan, down from the 739.6 billion yuan increase seen in April, and below the 650.0 billion increase in yuan loans that were expected by economists. Rounding out the day, South Korea’s Kospi Index ticked 0.1% higher, while markets in Australia were closed for a holiday.