Morning Market Update

Rally Pauses Ahead of Earnings Season

After yesterday’s sharp gains, US stocks are under some pressure in early action ahead of the unofficial launch of 3Q earnings season with Dow member Alcoa Inc’s report after today’s closing bell. Meanwhile, Treasuries are lower in morning trading after the bond markets were closed during yesterday’s steep gains in the equity markets, and following a modest improvement in small business optimism. In equity news, AMR Corp’s American Airlines reduced its 4Q capacity guidance, while Dollar Thrifty Automotive Group Inc announced that it terminated its takeover solicitation process and will continue as a stand-alone company. Overseas, Asian stocks finished broadly higher amid the increased optimism that eurozone leaders are nearing a plan to combat the debt crisis, while European equities are under some pressure ahead of a vote by Slovakia on the expansion of the region’s bailout fund. 

As of 8:45 a.m. ET, the December S&P 500 Index Globex future is 8 points below fair value, the Nasdaq 100 Index is 7 points below fair value, and the DJIA is 57 points below fair value. WTI crude oil is declining $1.16 to $84.25 per barrel, and the Bloomberg gold spot price is down $17.30 at $1,659.35 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.3% at 77.79.

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.

In M&A news, Dollar Thrifty Automotive Group Inc. (DTG $60) 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.

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 are lower in early action following the data and the sharp gains in the equity markets yesterday when the bond markets were closed for Columbus Day. The yield on the 2-year note is up 1 bp to 0.30%, the yield on the 10-year note is 6 bps higher at 2.14%, and the 30-year bond rate is advancing 4 bps to 3.06%.

Europe under pressure following string of gains

The equity markets in Europe are lower in afternoon action following four-straight winning sessions. 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 is being met cautiousness ahead of a vote by Slovakia, the last eurozone member to vote on expanding the capabilities of the region’s bailout fund known as the European Financial Stability Facility (EFSF). 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, the UK is dominating the news on the 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.

The UK FTSE 100 Index is down 0.9%, France’s CAC-40 Index is declining 0.8%, Germany’s DAX Index is decreasing 0.7%, Switzerland’s Swiss Market Index is trading 0.3% lower, and Greece’s Athex Composite Index is dropping 2.2%.

Asia moves higher on European optimism

Stocks in Asia finished broadly higher following the solid gains in Europe and the US yesterday amid optimism that eurozone leaders are nearing a coordinated effort to recapitalize the nation’s banks and combat the debt crisis threatening the region. Japan’s Nikkei 225 Index rose 2.0% amid the increased eurozone optimism and following a report that showed 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’s Kospi Index rose 1.6% as a cooling of the nation’s producer prices for September complimented the aforementioned positive European debt sentiment.

Also, stocks in China moved higher, with the Shanghai Composite Index rising 0.2%, while Hong Kong’s Hang Seng Index advanced 2.4% on strength in banking stocks following the announcement that a state-owned investment firm began buying shares of the nation’s four largest banks. Meanwhile, Australia’s S&P/ASX 200 Index gained 0.6% following 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. Indonesia’s Jakarta Composite Index rose 2.3%.