Morning Market Update

Volatility Continues

Following yesterday’s late-day rally in the US equity markets on the Federal Reserve’s pledge to keep rates low at least through mid-2013, stocks are under some pressure in early action as traders grapple with the thought of extended easy monetary policy and the prospects of a slowing economy. Treasuries are higher with yields extending recent losses, showing little reaction to a steep increase in mortgage applications, which was led by refinancing activity as rates moved lower. In equity news, Dow member Walt Disney Co, along with Macy’s Inc both posted better-than-expected earnings, while Capital One Financial Corp agreed to purchase the US credit-card business of HSBC Holdings Plc. Later this morning, wholesale inventories will be released. Overseas, Asia moved broadly higher on the heels of the rebound in the US yesterday, while Europe is mixed.

As of 8:51 a.m. ET, the September S&P 500 Index Globex future is 16 points below fair value, the Nasdaq 100 Index is 43 points below fair value, and the DJIA is 183 points below fair value. WTI crude oil is $2.06 higher at $81.36 per barrel, and the Bloomberg gold spot price is up $24.55 at $1,765.50 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.3% at 74.10.

Dow member Walt Disney Co. (DIS $35) reported fiscal 3Q EPS ex-items of $0.78, five cents above the consensus estimate of analysts surveyed by Reuters, with revenues rising 7% year-over-year (y/y) to $10.7 billion, exceeding the $10.5 billion that the Street had forecasted. The company said its results demonstrate the continued strength of its media networks segment, including ESPN, as well as its parks and resorts and consumer products businesses. However, DIS’ revenues out of its studio entertainment unit declined slightly compared to the same period a year ago.

Macy’s Inc. (M $25) announced 2Q earnings of $0.55 per share, above the $0.50 that analysts were anticipating, as revenues rose 7.3% y/y to $5.9 billion, roughly inline with what the Street was looking for. The department store’s 2Q same-store sales—sales at stores open at least a year—increased 6.4% y/y.

In M&A news, Capital One Financial Corp. (COF $41) announced that it has reached an agreement to purchase the US credit-card and retail services business of HSBC Holdings Plc. (HBC $45) for a post-tax premium of about $2.4 billion. The gross value of the assets was $30.4 billion as of the end of June, including $29.6 billion of customer loan balances.

Mortgage applications jump, wholesale inventories due out later, Treasuries higher again

The MBA Mortgage Application Index surged 21.7% last week, after the index that can be quite volatile on a week-to-week basis, increased by 7.1% in the previous week. The steep advance came as a 30.4% jump in the Refinance Index more than offset a 0.9% decline in the Purchase Index. The flood of refinancing activity accompanied an 8 basis point (bp) drop in the average 30-year mortgage rate to 4.37%, the lowest rate since November, per Bloomberg.

Treasuries are higher in morning action, with the yield on the 2-year note down 2 bps to 0.17%, the yield on the 10-year note 6 bps lower at 2.18%, and the 30-year bond losing 4 bps to 3.58%. Yields have moved lower amid the recent volatility in the equity markets, with the short-to-mid end of the curve falling initially to new lows in response to yesterday’s monetary policy statement by the Federal Reserve, in which it noted that economic growth so far this year has been “considerably slower” than expected, while also saying it anticipates “exceptionally low levels for the fed funds rate at least through mid-2013.”

Later this morning, the economic calendar will yield the release of wholesale inventories, expected to rise 1.0% month-over-month (m/m) in June, after increasing 1.8% in May.

Europe mixed following US rally

The equity markets in Europe are mixed in afternoon action after paring early gains that came from the strong rebound in the US on the Federal Reserve’s pledge to keep rates low through at least 2013. However Italian banking shares are lower to weigh on the markets across the pond despite the nation’s successful bond auction that showed a decline in yields that it will have to pay, due to the recent bond purchases by the European Central Bank. Meanwhile, some equity news is helping support European stocks, with shares of Nestle SA (NSRGY $64) gaining ground after the world’s largest food company, per Bloomberg, offered an upbeat revenue outlook, while Standard Life Plc. (SLFPY $11) is surging after the insurer posted better-than-expected profits. In central bank news, the Swiss National Bank announced that it will “significantly increase” the supply of liquidity to the financial markets, per Bloomberg, to try to combat a “massive overvaluation” of its currency, which has surged recently amid the volatility in the global markets, culminating with yesterday’s sharp advance after the Fed’s statement. Moreover, Bank of England (BoE) Governor King noted that headwinds facing the UK economy are intensifying “by the day” and officials can expand stimulus if the outlook for growth deteriorates further, per Bloomberg. The comments came as the BoE released its quarterly inflation report that showed easing inflationary pressures.

In other inflation news, Germany’s consumer prices were left unrevised at a 0.4% m/m increase for July, and a 2.4% gain compared to last year. Finally, French industrial and manufacturing production both showed larger-than-expected declines m/m in June.

The UK FTSE 100 Index is 0.4% higher, France’s CAC-40 Index is down 0.7%, Germany’s DAX Index is gaining 1.0%, and Italy’s FTSE MIB Index is falling 1.9%.

US rebound helps stop the bleeding in Asia

Stocks in Asia finished broadly higher, snapping a string of large losses on the heels of the steep advance in the US after the Fed pledged to keep interest rates low for at least two years. Japan’s Nikkei 225 Index rose 1.1% aided by some bargain hunting in the tech sector, led by a surge in shares of Gree Inc. (GREZF $24) after the social networking service company posted stronger-than-expected results. Also, Australia’s S&P/ASX 200 Index jumped 2.6% amid the broad-based gains, led by mining issues, along with retailers, aided by a sharp advance in shares of Harvey Norman after the company posted a smaller-than-anticipated decline in same-store sales. Meanwhile, stocks in China registered gains, paced by the Hong Kong Hang Seng Index, which rose 2.3%, with shares of HSBC one of the best performers supported by its announcement that it has sold its US credit-card business to Capital One Financial Corp. Moreover, China’s Shanghai Composite Index gained 0.9%, following a report that showed the nation’s trade surplus expanded by a larger amount than forecasted, with exports and imports both rising more than economists estimated.

However, South Korea’s Kospi Index underperformed, advancing 0.3%, with shares of Samsung Electronics Co. Ltd. (SSNLF $800) failing to gain ground after the announcement that Apple Inc. (AAPL $374) won a temporary injunction that could stop sales of its tablet computer in most European Union countries. Samsung said it will file its opposition in the Dusseldorf Regional Court, and will “take all necessary measures” to ensure that its mobile devices are available for customers in Europe.