Morning Market Update

M&A helping Markets Extend Recent Winning Streak 

The US equity markets are moving higher in early trading, adding to late last week’s gains, ahead of a key meeting in Europe between Germany and France, while a plethora of M&A news is helping overshadow an unexpected drop in a read on manufacturing activity in New York. Google Inc announced that it has reached an agreement to acquire Motorola Mobility Holdings Inc for about $12.5 billion, and Ralcorp Holdings Inc rejected a revised unsolicited merger proposal of $94.00 per share in cash from ConAgra Foods Inc, while Dow member Bank of America Corp announced that it will exit its international credit card business by agreeing to sell its $8.6 billion Canadian credit card portfolio in Canada to TD Bank Group. Treasuries are mixed after the disappointing report on regional manufacturing, ahead of a report on homebuilder sentiment. Overseas, Asian markets moved higher on the heels of a smaller-than-expected contraction in Japan’s 2Q GDP, while Europe is higher, with Swiss markets leading the way on continued weakness in the franc. 

As of 8:48 a.m. ET, the September S&P 500 Index Globex future is 5 points above fair value, the Nasdaq 100 Index is at fair value, and the DJIA is 43 points above fair value. WTI crude oil is $0.23 lower at $85.15 per barrel, and the Bloomberg gold spot price is down $10.53 at $1,736.15 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.4% at 74.30.

In M&A news, Google Inc. (GOOG $564) announced that it has reached a definitive agreement to acquire Motorola Mobility Holdings Inc. (MMI $24) for $40.00 per share in cash, or a total value of about $12.5 billion. MMI is Motorola’s mobile and wireline digital communications unit, and GOOG said it will run MMI as a separate business, and the deal will enable it to “supercharge” its Android ecosystem.

Ralcorp Holdings Inc . (RAH $79) announced that it has rejected a revised unsolicited merger proposal of $94.00 per share in cash from ConAgra Foods Inc. (CAG $23), determining that the offer “is not in the best interests” of the private-brand food maker and parent of Post cereal products. CAG’s offer is valued at about $5.2 billion, nearly a 10% increase from its previous offer of $86.00 per share. CAG said it is “extremely disappointed” by RAH’s rejection and it will continue to consider its options with respect to this potential transaction.

Finally, Dow member Bank of America Corp. (BAC $7) announced that it will exit its international credit card business by agreeing to sell its $8.6 billion Canadian credit card portfolio in Canada to TD Bank Group, along with certain other assets and liabilities.

In earnings news, Lowes Companies Inc. (LOW $20) reported 2Q earnings ex-items of $0.68 per share, two cents above the consensus estimate of analysts surveyed by Reuters, but revenues, which grew 1.3% year-over-year (y/y) to $14.5 billion, missed the $14.7 billion that the Street had expected. 2Q same-store sales—sales at stores open at least a year—decreased 0.3% y/y. The world’s second largest home improvement retailer said, “despite some recovery in our seasonal business, our performance for the quarter fell short of our expectations.” LOW reduced its full-year guidance.

New York manufacturing activity falls, homebuilder confidence report later this morning

The Empire Manufacturing Index, a measure of manufacturing in the New York region, unexpectedly fell in August, as it moved further into negative territory after dropping to -7.72 from July’s level of -3.76, compared to the estimates of economists surveyed by Bloomberg, which called for an improvement to 0.00. A reading of zero is the demarcation point between contraction and expansion in activity and the surprising decline came as new orders and inventories deteriorated further into negative territory. The report is the first major piece of data looking at manufacturing conditions in August.

Treasuries are mixed in morning action following the data, with the yield on the 2-year note unchanged at 0.18%, the yield on the 10-year note 1 bp lower at 2.24%, and the 30-year bond rising 1 bp to 3.73%.

Later this morning, the US economic calendar will yield the release of the NAHB Housing Market Index, expected to remain at 15 in August, with any reading below 50 indicating more respondents feel conditions are poor.

Today’s economic data kicks off a plethora of data on manufacturing, housing, and inflation conditions in the US. Other reports due out this week include: industrial production and capacity utilization, the Import Price Index, housing starts and building permits, the Producer Price Index, weekly mortgage applications, the Consumer Price Index, the Philly Fed Manufacturing Index, weekly initial jobless claims, existing home sales, and the Conference Board’s Index of Leading Economic Indicators.

Europe modestly higher ahead of Tuesday’s eurozone crisis meeting

The equity markets in Europe are modestly higher in afternoon action amid some cautious optimism ahead of tomorrow’s meeting between Germany and France, in which a discussion on the recently heightened concerns regarding debt contagion in the eurozone are expected. Meanwhile, stocks in Switzerland are moving nicely higher, led by export issues amid continued weakness in the Swiss franc as the Swiss National Bank tries to control the recent strength in the currency. The advance across the pond comes even as some corporate news is on the negative side, with shares of Hennes & Mauritz (HNNMY $6) under some pressure after Europe’s second-largest clothing retailer reported a solid decline in same-store sales in July. Also, shares of Michael Page International Plc. (MPGPF $6) are sharply lower after the UK recruiting company posted earnings that misses analysts’ expectations. Economic news is relatively light today, with the lone report worth noting being a decline in a read on UK home prices in August. Finally, volume may be lighter than usual, with holidays in France and Italy, but French markets are trading today, Italian markets are closed.

The UK FTSE 100 Index is gaining 0.5%, and France’s CAC-40 Index is advancing 0.6%, while Germany’s DAX Index and the Swiss Market Index are trading 0.8% higher.

Asia nicely higher following last week’s wild ride

Stocks in Asia finished solidly higher on the heels of the volatility last week, in lighter-than-normal volume, with markets in South Korea and India closed. Japan’s Nikkei 225 Index gained 1.4% following the release of its 2Q GDP report, which showed a smaller contraction in output than economists had expected. Japan’s GDP shrank by an annualized rate of 1.3%, after contracting 3.6% in 1Q, and compared to the 2.5% drop that was expected. Per Bloomberg, Japan’s Finance Minister Noda said today that its economy will likely resume its expansion in 3Q, as he pledged yesterday to take “bold action” to try to stem the strength in the yen. There are near-term risks, but valuation on a forward price-to-earnings basis is on par with global indexes for the first time in 30 years. Japanese stocks may be poised to outperform global averages. 

Meanwhile, Australian stocks moved nicely higher, with the S&P/ASX 200 Index gaining 2.6% as US and European markets rebounded somewhat on Friday and after a report showed Australian new motor vehicle sales rose solidly in July. Finally, stocks in China finished strong, with the Hong Kong Hang Seng Index rallying 3.3%, while the Shanghai Composite Index gained 1.3%.