Evening Market Update

Stocks Calm Before the Earnings Storm  

The US equity markets were mixed in a relatively quiet, range-bound session following yesterday’s broad-based rally. Traders were hoping for more positive news out of the eurozone to extend the advance, but the final required vote from Slovakia to approve the region’s bailout fund was delayed. The Street will now turn its attention to the 3Q earnings season, which unofficially kicked off after the close with Dow member Alcoa missing its EPS estimates. Elsewhere on the equity front, 99 Cents Only Stores agreed to be acquired for $1.6 billion, Dollar Thrifty Automotive Group announced that it terminated its takeover solicitation process, and AMR Corp announced a reduction to its 4Q capacity guidance. Treasuries moved lower, as the lone release on the US economic calendar was a modest increase in small business optimism. 

The Dow Jones Industrial Average fell 17 points (0.1%) to 11,417, the S&P 500 Index rose 1 point (0.1%) to 1,196, and the Nasdaq Composite gained 17 points (0.7%) to 2,583. In light volume, 841 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.05 to $85.36 per barrel, wholesale gasoline rose $0.05 to $2.74 per gallon, and the Bloomberg gold spot price declined $10.10 to $1,666.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.1% lower at 77.51.

After the closing bell, 3Q earnings season unofficially began after Dow member Alcoa Inc. (AA $10) reported 3Q EPS of $0.15, seven cents shy of the consensus estimate of analysts surveyed by Reuters, on revenues of $6.42 billion, which was above the $6.22 billion forecast of analysts.

American Airlines, which is owned by AMR Corp. (AMR $3), announced that it will reduce its 4Q mainline capacity by about 3% year-over-year (y/y), due to the “uncertain economic environment” and ongoing high fuel costs. The airline also announced that it will retire up to 11 Boeing 757 aircraft in 2012 as part of the reductions. AMR traded to the upside.

In M&A news, Dollar Thrifty Automotive Group Inc. (DTG $59) announced that it has not received any proposals for business combinations that eliminated antitrust regulatory risk and it has terminated its solicitation process and will continue to execute its current stand-alone plan. Hertz Global Holdings Inc. (HTZ $10) had submitted a proposal, along with Avis Budget Group Inc. (CAR $11), but recently CAR decided to drop its proposal. DTG moved lower, while HTZ and CAR finished higher.

Moreover, 99 Cents Only Stores (NDN $21) was higher after the discount retailer announced that it has reached an agreement to be acquired by affiliates of Ares Management LLC and Canada Pension Plan Investment Board for $22.00 per share in cash, in a transaction with a total equity value of about $1.6 billion.

Small business optimism improves slightly, while the bond markets return to action

The NFIB Small Business Optimism Index snapped a string of six-straight monthly declines in September, increasing from 88.1 in August to 88.9, and was slightly above the expectation of economists surveyed by Bloomberg, which called for an improvement to 88.8. The increase came as the number of firms reporting expectations of higher selling prices and that the current environment being a good time to expand rose, while businesses were slightly less pessimistic about a better economy, higher sales, and credit conditions. Elsewhere, business plans to increase capital spending ticked lower but remained the index’s biggest positive contributor, and plans to hire moved lower but continued to be in positive territory.

Treasuries were lower, as the yield on the 2-year note rose 2 bps to 0.30%, the yield on the 10-year note was 8 bps higher at 2.16%, and the 30-year bond rate advanced 9 bps to 3.11%.

Slovakian vote on EFSF delayed, Japan reports mixed economic data

The rally in the European markets stalled somewhat today, as the recent increase in optimism that eurozone leaders are hammering out a plan to recapitalize its troubled banking sector to help fight the debt crisis was met with caution. Slovakia was expected to vote today on expanding the capabilities of the region’s bailout fund known as the European Financial Stability Facility (EFSF). However, the approval was delayed after the country’s ruling party said it would abstain from the vote, leaving opposition parties to push the deal through that would make Slovakia the 17th and final country needed to approve the fund. Also, Jean-Claude Trichet, who will end his eight-year term as European Central Bank (ECB) President at the end of this month, offered some cautious commentary. Trichet noted that, “The sovereign stress has moved from smaller economies to some of the larger countries,” adding that the crisis is systemic and must be tackled decisively.” Meanwhile, the Troika, members of the EU, IMF and ECB, noted that Greece is most likely to receive its next installment of bailout aid in early November after the conclusions of the review of the troubled nation’s deficit reduction efforts are approved. But the Troika added that Greece still has to do more on the austerity front. Elsewhere, Italy conducted a debt auction, which drew lower yields and respectable demand.

The UK dominated news on the European economic front, as reports showed the nation’s retail sales in September unexpectedly rose y/y, while the country’s industrial production surprisingly grew month-over-month (m/m) in August. However, UK manufacturing production declined more than expected m/m in August and home prices declined for the month.

In Asia/Pacific economic news, Japanese consumer confidence improved more than expected for September, which offset reports showing the nation’s August trade balance swung to a larger-than-anticipated deficit and a survey on the economic outlook in the country deteriorated for September. Elsewhere, South Korea reported a cooling of the nation’s producer prices for September, while Australia noted a slight improvement in the country’s business confidence in September. Finally, Indonesia’s central bank unexpectedly cut its benchmark interest rate by 25 basis points to 6.50%, with economists expecting the nation to leave its rate unchanged.

Back in the Americas, Brazil reported a 0.4% decline in retail sales for August, a larger decline than economists expected. Meanwhile, Canadian housing starts came in better-than-expected in September, while the August figure was also revised higher.

FOMC minutes on tap for tomorrow

Tomorrow, the US economic calendar will yield the midday release of the minutes from the September Federal Open Market Committee (FOMC) meeting. The Fed noted “significant” downside risks to the economy at the last meeting, and began “Operation Twist,” wherein it will reduce its holdings of shorter-term securities and buy longer-term securities aimed at flattening the yield curve and pushing investors and businesses to move out on the risk spectrum. However, the Central Bank noted that it expects “some pickup” in the pace of recovery over coming quarters but with only a gradual decline in the unemployment rate. Traders will likely pay attention to the degree of disagreement among policymakers—there were three dissenting votes cast at the last meeting—and what, if anything, may be left in the Fed’s toolbox to try to help arrest the discouragingly high unemployment rate.

The only other item on the domestic economic docket will be the MBA Mortgage Application Index, which fell 4.3% last week.

On the international front, reports will include France’s CPI, Germany’s wholesale price index, UK jobless claims, eurozone industrial production, Japan’s machine orders, Australia’s consumer confidence, and Canada’s new housing price index.