Morning Market Update

Chinese Economic Optimism Lifting Stocks

The US equity markets are higher in early trading as fears about a hard landing in China are being soothed by a stronger-than-forecasted read on 2Q GDP, suggesting that aggressive monetary policy tightening is not hampering Chinese growth and boosting optimism about the global economy. Treasuries are lower amid the gains in the equity markets, showing little reaction to a report that showed US import prices and mortgage applications declined. However, traders are looking forward to Fed Chairman Ben Bernanke’s two-day monetary policy testimony on Capitol Hill, kicking off after the opening bell, on the heels of yesterday’s Fed report that showed policymakers discussed further monetary policy easing. Meanwhile, M&A news is dominating the equity front, with Electronic Arts Inc announcing an agreement to acquire digital and social gaming company PopCap Games in a transaction worth up to $1.3 billion, while Validus Holdings Ltd reported it has proposed to acquire TransAtlantic Holdings Inc for about $3.5 billion in cash and stock. Overseas, Asian markets moved broadly higher, while European stocks are trying to snap a three-session losing streak.

As of 8:50 a.m. ET, the September S&P 500 Index Globex future is 7 points above fair value, the Nasdaq 100 Index is 18 points above fair value, and the DJIA is 69 points above fair value. WTI crude oil is $0.66 lower at $96.77 per barrel, and the Bloomberg gold spot price is up $5.89 at $1,573.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is 0.2% lower at 75.75.

In M&A news, Electronic Arts Inc. (ERTS $24) announced that it reached an agreement to acquire digital and social gaming company PopCap Games in a transaction worth up to $1.3 billion. ERTS said it will pay $650 million in cash and $100 million in stock initially, with further cash compensation coming if certain earnings performance targets are reached through December 2013. ERTS also reaffirmed its fiscal 1Q and full-year 2012 guidance.

Elsewhere, Bermuda-based reinsurer Validus Holdings Ltd. (VR $31) announced late-yesterday that it has issued a proposal to acquire US-based reinsurance firm TransAtlantic Holdings Inc. (TRH $49) for $55.95 per share, or about $3.5 billion in cash and stock. Under the proposal, TRH shareholders would receive 1.5564 shares of VR and $8.00 per share in cash. The offer comes as TRH and Swiss-based Allied World Assurance Co. Holdings AG (AWH $57) agreed to a merger last month for $3.2 billion. VR said its offer “clearly constitutes a superior proposal” to the agreement reached between TRH and AWH, which both have not commented on VR’s announcement.

Import prices fall, mortgage applications decline, Fed Chief set to testify

The Import Price Index declined 0.5% month-over-month (m/m) for June, compared to the expectation of economists surveyed by Bloomberg, which called for the index to decrease by 0.6%. The decrease follows the 0.1% increase seen in May, which was revised from an initially reported 0.2% rise. Year-over-year, import prices are higher by 13.6%, versus the 13.2% forecast of economists, and the upwardly revised 12.8% gain that was posted in May.

In other economic news, the MBA Mortgage Application Index declined 5.1% last week, after the index that can be quite volatile on a week-to-week basis, fell by 5.2% in the previous week. The decrease came as a 6.2% drop in the Refinance Index was accompanied by a 2.6% decline in the Purchase Index. Elsewhere, the average 30-year mortgage rate dropped by 14 basis points (bps) to 4.55%.

Treasuries remain lower following the data and the rebound in stocks, with the yield on the 2-year note up 2 bps at 0.38%, the yield on the 10-year note 5 bps higher at 2.93%, and the 30-year bond yield advancing 4 bps at 4.21%.

Later this morning, Federal Reserve Chairman Ben Bernanke will begin his two-day semi-annual monetary policy report in front of Congress by speaking to the House of Representatives at 10:00 a.m. ET. Traders will be looking for how the Fed feels about the current soft patch in the economy and the possibility of further policy easing following yesterday’s release of the minutes from its June meeting, which revealed that Committee members broached the subject of further “monetary policy accommodation,” if economic growth remained too slow to bring down the unemployment rate.

Europe riding China data to try to snap three-day losing streak

The equity markets in Europe are mixed in afternoon action, as some better-than-expected economic growth data out of China is helping boost industrials and materials, diverting some of the attention away from the festering eurozone debt crisis. However, technology shares are lower for a second-straight session as concerns about the semiconductor sector continue, with shares of Dutch chip-equipment maker ASML Holding NV (ASML $35) finding solid pressure after warning about slowing consumer demand and issuing a disappointing forecast for orders. The report follows yesterday’s similar announcement from US chip equipment company Novellus Systems Inc. (NVLS $32), fostering the concerns toward the chip sector. Meanwhile, UK retailer Marks & Spencer Group Plc. (MAKSY $12) is under solid pressure to stem the enthusiasm in the region after the clothing outfit reported smaller-than-expected growth in same-store sales—sales at stores open at least a year. Elsewhere, financial shares, led by Italian firms, are gaining ground amid the relatively calm euro-area debt concerns, despite yesterday’s downgrade of Ireland’s sovereign credit rating by Moody’s Investors Service, which also warned that the debt-laden nation would likely need a second bailout, per Reuters. Irish stocks are moving to the upside in the face of the downgrade.

In economic news in Europe, Germany’s wholesale prices came in cooler than economists anticipated, while eurozone industrial production rose at a slower-than-forecasted rate and UK jobless claims increased more than projected, helping keep today’s gains in check.

The UK FTSE 100 Index is flat, France’s CAC-40 Index is declining 0.2%, Germany’s DAX Index is advancing 0.4%, while Italy’s FTSE MIB Index is gaining 1.1% and Ireland’s Irish Overall Index is increasing 0.4%.

China’s GDP report helps Asian stocks stem the downward momentum

Stocks in Asia finished broadly higher for the first time in three sessions as global debt concerns were more than offset by favorable economic growth data out of China, which cooled concerns about a hard landing in the key Chinese economy. The Shanghai Composite Index rose 1.5% and the Hong Kong Hang Seng Index increased 1.2% after China’s 2Q GDP rose 9.5% year-over-year (y/y), compared to the 9.3% rate of expansion that economists expected, and the 9.7% growth that was seen in 1Q. Also, a separate report showed Chinese industrial production unexpectedly accelerated in June, rising 15.1% y/y, after increasing 13.3% in May, and compared to the 13.1% gain that was projected.

Elsewhere, the equity markets in the region we lifted by the optimism toward China, with Japan’s Nikkei 225 Index rising 0.4%, but gains were limited by weakness in semiconductor stocks on the heels of yesterday’s slashed 1Q outlook by US chipmaker Microchip Technology Inc. (MCHP $33). Meanwhile, South Korea’s Kospi Index gained 0.9%, aided by a rebound in refiners and automakers, while Australia’s S&P/ASX 200 Index rose 0.4%, as the advance was limited by a report that showed the nation’s consumer confidence fell solidly in July.