Evening Market Update

Bulls Pick Up Steam on Optimism For Eurozone Bailout Fund   

The US equity market rally resumed after a brief pause yesterday, as traders appear convinced that Slovakia will cast the final vote necessary to approve the European bailout fund. Meanwhile, the minutes from the Federal Reserve’s latest monetary policy meeting showed diverging opinions as to what policy tools should be used to boost the stalling US economy. The only other news from the domestic economic front was a rise in mortgage applications, which helped push Treasuries mostly lower. In equity news, Dow member Alcoa unofficially kicked off the 3Q earnings season by reporting lower-than-expected profits after yesterday’s close, while fellow Dow component Chevron said its 3Q earnings should match its 2Q results. Additionally, PepsiCo and Infosys Ltd both beat analysts’ expectations and Dow member Wal-Mart Stores predicted positive same-store sales for the first time in nine quarters. In M&A news, Liz Claiborne announced plans to divest three of its brands for approximately $328 million in cash and Neustar agreed to acquire privately-held Targus Information Corp for $650 million in cash.

The Dow Jones Industrial Average rose 103 points (0.9%) to 11,519, the S&P 500 Index rose 12 points (1.0%) to 1,207, and the Nasdaq Composite gained 22 points (0.8%) to 2,605. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.67 to $85.14 per barrel, wholesale gasoline was flat at $2.74 per gallon, and the Bloomberg gold spot price advanced $14.95 to $1,677.25 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.8% lower at 76.98.

Dow member Alcoa Inc. (AA $10) unofficially kicked off 3Q earnings season late yesterday, posting EPS of $0.15, below the $0.22 consensus estimate of analysts surveyed by Reuters, but revenues grew 21% year-over-year (y/y) to $6.4 billion, compared to the $6.2 billion that the Street had forecasted. The company said aluminum prices fell in 3Q, but with the exception of Europe, it saw growth in its end markets, though at a slower rate than in the first half, as confidence in the global recovery faded. AA added that it continues to forecast a growth rate of 12% for 2011, with a slower pace in the second half and it reaffirmed its long-term forecast for a doubling of aluminum demand by 2020. Shares were lower.

Meanwhile, fellow Dow component Chevron Corp. (CVX $98) reported that 3Q earnings are expected to be comparable with 2Q results, in which it posted profits of $3.85 per share, while analysts projected the company to achieve EPS of $3.41 for 3Q. CVX said lower crude oil prices and “lower liftings” are expected to reduce upstream earnings—exploration and production—while an asset sale gain is expected to boost downstream earnings—refining. However, the company added that both segments are expected to benefit from the strengthening of the US dollar in 3Q. CVX traded modestly higher.

Wal-Mart Stores Inc. (WMT $55) also helped advance the Dow after it said at an analyst meeting that US same-store sales—sales at stores open at least a year—have been positive for the past three months, which would end the company’s streak of nine-straight quarters of declining sales. However, CEO Mike Duke said the company is still seeing a depressed consumer in the U.S., adding “our customers still have concerns about jobs.” Shares moved higher.

PepsiCo Inc . (PEP $63) reported 3Q earnings ex-items of $1.31 per share, one penny above the Street’s forecasts, as revenues rose 13% y/y to $17.6 billion, above the $17.2 billion that analysts had anticipated. The company said worldwide volumes grew, led by emerging markets, and it saw gains across its worldwide snacks and beverage businesses. PEP said it was able to achieve pricing to partially offset commodity cost inflation. PEP reaffirmed its full-year EPS guidance, reflecting uncertainty regarding macroeconomic and consumer trends and the anticipation of high global commodity cost inflation. PEP finished nicely higher.

Infosys Ltd . (INFY $56) traded nicely higher after India’s second-largest software services provider reported a 9.7% y/y rise in fiscal 2Q net profit, to go along with an 17% y/y increase in revenue. The company did cut its revenue forecast for this fiscal year through March 2012, but the forecast still beat the expectations of analysts.

In M&A news, Liz Claiborne Inc. (LIZ $7) agreed to sell its Liz Claiborne, Monet, and Kensie fashion brands for $328 million in cash. The Liz Claiborne and Monet brands are being sold to department store operator J.C. Penny Co.  (JCP $30). The company is likely to change its name after the divestiture is complete, as it will focus on its remaining brands including Juicy Couture, kate spade and Lucky Brand. Shares of JCP were higher, while LIZ was up over 30% on the announcement.

Finally, Neustar Inc. (NST $43) agreed to pay $650 million in cash to acquire privately-held Targus Information Corp., a provider of caller identification services. NST, which routes every phone call and text message in North America, said it expects the deal to add at least 20 cents a share to its 2012 earnings, excluding fees and other items. Shares of NST moved higher.

Fed minutes show dissention, mortgage applications rise

The release of the minutes from the August Federal Open Market Committee (FOMC) meeting showed divergence of opinion continues among policymakers. During the meeting, Fed members discussed the range of policy tools at their disposal to try to boost the economy, before deciding on “Operation Twist,” buying longer-term Treasuries while selling shorter-term securities aimed at lowering rates further out on the yield curve to ease financial conditions. Although many participants viewed this as providing additional monetary policy accommodation, some noted that the potential effects on real economic activity would be “limited or only transitory,” amid the current environment.

Also, the idea of launching another round of large-scale asset purchases that would result in expanding the Fed’s balance sheet was discussed, but a number of participants agreed that this option should be retained in the event that further policy action to support a stronger economic recovery was “warranted.” Meanwhile, the idea of lowering bank reserve rates that it pays out was broached, but most agreed that further information on the likely effects was needed. Additionally, most participants favored taking steps to increase further transparency of monetary policy, but agreed that the post-meeting statements were not well suited to communicate fully the Fed’s thinking about its objectives and policy framework. On the economy, although the Fed noted “significant” downside risks to its outlook, it noted that real business spending “appeared to expand further,” and that information received during the intermeeting period indicated that economic growth remained slow but did not suggest a contraction in activity.

The MBA Mortgage Application Index rose 1.3% last week, after the index that can be quite volatile on a week-to-week basis, declined by 4.3% in the previous week. The increase came as a 1.3% gain in the Refinance Index was accompanied by a 1.1% advance in the Purchase Index. Meanwhile, the rise in mortgage activity came despite an increase in the average 30-year mortgage rate by 7 basis points (bps) to 4.25%.

Treasuries were mostly lower amid the strength in equities and after a disappointing auction of $21 billion in 10-year notes. The yield on the 2-year note was 2 bps lower at 0.29%, while the yield on the 10-year note gained 6 bps to 2.21%, and the 30-year bond rate advanced 9 bps to 3.20%.

Slovakia expected to approve rescue fund by Friday

The European markets regained momentum today, despite Slovakia failing to approve the expansion of the eurozone’s bailout mechanism known as the European Financial Stability Facility (EFSF) yesterday. Slovakia, the last member of the eurozone to ratify the expansion of the EFSF, is set to vote again on the issue in the next couple days, with full ratification of the fund expected by the end of the week. Meanwhile, the economic front aided sentiment across the pond, with a report showing eurozone industrial production unexpectedly rose in August, growing 1.2% month-over-month (m/m), compared to the 0.8% decline that economists had expected. In other economic news, UK jobless claims rose by a smaller-than-anticipated amount, French consumer prices unexpectedly declined, and German wholesale prices rose, but decelerated on a y/y basis.

In Asia/Pacific, Australia’s consumer confidence rose and home loans exceeded economists’ forecasts, India’s industrial production rose by a smaller rate than forecasted, and South Korea’s unemployment rate ticked higher to 3.2%, as expected, while remaining near a three-year low, per Bloomberg. Elsewhere, Chinese markets were boosted by continued optimism that China’s sovereign wealth fund is buying shares of the region’s banking stocks and amid reports that the government was lending further support to the nation’s stock markets.

Back in the Americas, Canada reported a 0.1% rise in its New Housing Price Index for August, which follows a similar increase in July.

The US economic calendar will be light again tomorrow, with releases including the trade balance, expected to widen to a deficit of $45.8 billion in August, while weekly initial jobless claims are forecasted to increase to 405,000 from 401,000 last week.