Morning Market Update

Stocks Find Support as Europe Shrugs Off Slovakian Vote  

The US equity markets are higher in early action as European stocks are gaining ground, despite Slovakia’s failure to ratify the eurozone’s bailout facility, aided by an unexpected increase in the region’s industrial production. Meanwhile 3Q earnings season unofficially began late yesterday, with Dow member Alcoa Inc missing the Street’s earnings expectations, while PepsiCo Inc exceeded analysts’ forecasts. Elsewhere, Dow component Chevron Corp announced that 3Q earnings are expected to be comparable to 2Q results. Treasuries are lower amid the early morning advance in the equity markets, following a rise in mortgage applications, and ahead of the release of the minutes from the Federal Reserve’s latest monetary policy meeting. Elsewhere overseas, Asian stocks finished mixed, with China rallying on optimism of government support for stocks, while Japanese equities moved lower amid manufacturing shutdowns due to a flood in Thailand. 

As of 8:43 a.m. ET, the December S&P 500 Index Globex future is 8 points above fair value, the Nasdaq 100 Index is 23 points above fair value, and the DJIA is 77 points above fair value. WTI crude oil is advancing $0.43 to $86.24 per barrel, and the Bloomberg gold spot price is up $25.99 at $1,688.29 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.8% at 77.02.

Dow member Alcoa Inc. (AA $10) unofficially kicked off 3Q earnings season, 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.

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, with analysts projecting the company to achieve EPS of $3.41. 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.

PepsiCo Inc . (PEP $61) 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, along with revenues during the quarter, driven by gains across its worldwide snacks and beverage businesses, and it was able to achieve pricing to partially offset commodity cost inflation. PEP reaffirmed its full-year EPS guidance.

Mortgage applications rise, Fed minutes on tap for the afternoon

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 are mostly lower in morning trading following the data, with the yield on the 2-year note flat at 0.31%, while the yield on the 10-year note is gaining 7 bps to 2.22%, and the 30-year bond rate is advancing 9 bps to 3.19%.

However, the highlight of the US economic calendar today will likely be the afternoon 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 said 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.

Data helping boost European stocks despite failed bailout vote by Slovakia

The equity markets in Europe are higher in afternoon action, despite Slovakia failing to approve the expansion of the eurozone’s bailout mechanism known as the European Financial Stability Facility (EFSF) yesterday. However, 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 and the full ratification of the fund by the eurozone is expected. Meanwhile, the economic front is aiding 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. The data is helping offset Dow member Alcoa Inc’s disappointing 3Q profit report. Moreover, equity news in Europe is also supporting the advance, as shares of Burberry Group Plc. (BURBY $40) are nicely higher after the UK’s largest luxury retailer, per Bloomberg, posted stronger-than-expected sales. Additionally, ASML Holding (ASML $36) is higher after the chipmaker reported earnings that exceeded expectations.

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.

The UK FTSE 100 Index is rising 0.4%, France’s CAC-40 Index is gaining 1.4%, Germany’s DAX Index is advancing 1.1%, Switzerland’s Swiss Market Index is increasing 0.3%, and Greece’s Athex Composite Index is trading 4.2% higher.

Asia mixed as China rallies but flooding in Thailand hampered Japan

Stocks in Asia finished mixed with Chinese equity markets rallying on 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. The Shanghai Composite Index gained 3.0%, while the Hong Kong Hang Seng Index rose 1.0%. However, Japan’s Nikkei 225 Index decreased 0.4% amid declines in Japanese manufacturers, particularly in the auto sector, as floods in Thailand caused factory closures. Also, Australia’s S&P/ASX 200 Index fell 0.6%, following a five-session winning streak, amid some weakness in mining issues, despite reports showing the nation’s consumer confidence rose and home loans exceeded economists’ forecasts. Elsewhere, South Korea’s Kospi Index gained 0.8% led by solid advances in the auto sector, supported by optimism regarding a free trade agreement with the US, and despite that country’s unemployment rate ticking higher to 3.2%, as expected, while remaining near a three-year low, per Bloomberg. Finally, the rally in China helped India’s BSE Sensex 30 Index rise 2.6%, even as a report showed Indian industrial production rose by a smaller rate than forecasted.