Morning Update

Global Economic Concerns Weigh on Sentiment

After slightly rebounding yesterday from last week’s solid declines, stocks are back under some pressure as concerns about the impact of tighter lending in China on the global economic recovery are resurfacing to pressure sentiment in early trading. Additionally, uneasiness regarding Japan’s sovereign credit quality on the heels of an outlook downgrade by Standard & Poor’s and a smaller-than-expected increase in 4Q UK GDP are adding to the global economic concerns. Meanwhile, stocks have come off the worst levels of the day as traders are trying to digest a plethora of major earnings reports, headlined by mixed profit releases from several Dow members, along with bottomline announcements from Apple and Texas Instruments, which both exceeded the Street’s estimates. Some on the Street are treading with some caution ahead of the Federal Reserve’s monetary policy announcement tomorrow and ahead of a key report on consumer confidence. Treasuries are gaining ground in morning action amid the aforementioned economic uneasiness, and following a report that showed US home prices fell more than expected. Overseas, Asian markets came under solid pressure, while European shares are also in red despite a better-than-expected reading of business confidence in Germany—Europe’s largest economy.

As of 8:52 a.m. ET, the March S&P 500 Index Globex future is 3 points below fair value, the Nasdaq 100 Index is 1 point below fair value, and the DJIA is 16 points below fair value. Crude oil is down $0.88 at $74.38 per barrel, and the Bloomberg gold spot price is lower by $10.83 at $1,087.58 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.4% at 78.52.

Dow member Verizon Communications (VZ $31) reported 4Q EPS ex-items of $0.54, matching the estimate of Wall Street analysts, with revenues of $27.1 billion—a 9.9% year-over-year (y/y) increase—which also matched expectations. The company’s wireless unit added 2.2 million total net customer additions and its wireline business grew by 153,000 customers each for its internet and TV units.

The Travelers Companies (TRV $49) posted 4Q operating EPS of $2.12, versus the consensus estimate of $1.49, with revenues increasing 11% y/y to $6.5 billion, topping the Street’s forecast of $5.3 billion. The Dow member said throughout the year its underwriting results were strong and its high quality investment portfolio continued to perform well.

DuPont (DD $33) announced 4Q EPS ex-items of $0.44, three pennies ahead of what the Street was expecting, with sales up 10% y/y to $6.4 billion, above the $6.2 billion that was forecasted. The Dow member said volume grew 10%, with increases in all regions.

Dow component Johnson & Johnson (JNJ $63) posted 4Q EPS ex-items of $1.02, five cents above the consensus of Wall Street analysts, with revenues growing 9% y/y to $16.6 billion, compared to the $15.7 billion that was expected.

Apple Inc. (AAPL $203) reported fiscal 1Q EPS of $3.67, compared to the $2.07 consensus of analysts, with revenues jumping 32% to $15.68 billion, versus the $12.1 billion that was expected. Sales of Macintosh computers rose 33% y/y on a per unit basis, sales of iPhones rose 100% versus last year, while sales of iPods declined by 8%. AAPL issues 2Q guidance that topped analysts’ expectations.

Texas Instruments (TXN $24) announced 4Q EPS of $0.52, compared to the $0.49 that analysts were anticipating, with revenues of $3.00 billion, roughly inline with the $2.98 billion that the Street forecasted. TXN said in 4Q, demand was strong across end markets without the usual holiday slowdown. TXN added that with demand continuing to be solid and inventories well below historical levels, its outlook for 1Q reflects the likelihood of sequential growth instead of the typical seasonal decline.

Fed meeting begins, home prices fall more than expected

Just before the opening bell, the S&P/Case-Shiller Home Price Index was released showing a decline in home prices of 5.3% year-over-year (y/y) in November, versus the -5.0% that had been expected. Treasuries remain higher.

Later today, the economic calendar will yield the Conference Board’s Consumer Confidence Index, expected to increase from 52.9 in December to 53.5 in January. Also, the two-day Federal Open Market Committee (FOMC) meeting begins today and will conclude with the release of the policy statement mid-day Wednesday. No changes are expected to interest rate policy at the meeting. Market participants continue to watch for any clues that indicate the timing of when the Fed expects to contemplate tightening, focusing on the language used by the Fed with regard to the “extended period” for keeping rates at an exceptionally low rate.

Europe under pressure on mixed economic reports and China concerns

Stocks in Europe are lower in afternoon action, led by basic materials and financials amid concerns about the impact of efforts by the Chinese government to soak up excess liquidity by reining in bank lending on the demand for resources and the overall recovery in the global economy. Additionally, a report that showed UK 4Q GDP exited the recession is doing little to soothe sentiment as the British gauge of output came in below the forecasts of economists surveyed by Bloomberg. UK advance 4Q GDP rose 0.1% quarter-over-quarter (q/q), compared to a 0.2% decline in 3Q and the expectation of a 0.4% advance. However, a gauge of business confidence in Germany—Europe’s largest economy—came in at an 18-month high. The German Ifo Business Climate Index rose to 95.8 in January, besting the 95.1 forecast of economists, and following the slightly downwardly revised 94.6 it reached in December. In other economic news, Germany’s import prices unexpectedly rose month-over-month (m/m) in December, France’s consumer spending rose solidly in December—easily topping expectations—while Italy’s consumer confidence missed forecasts and its retail sales came in unexpectedly flat in November. Britain’s FTSE 100 Index is 0.6% lower, France’s CAC-40 Index is off 0.6%, and Germany’s DAX Index is down 0.4%.

In equity news in the Eurozone, shares of Siemens (SI $89) are higher after Europe’s largest engineering firm posted 1Q operating earnings that exceeded analysts’ expectations, which was the highest quarterly profit in more than two years, per Bloomberg.

Asia falls on Chinese lending concerns and stronger yen

Stocks in Asia were broadly lower, led by renewed concerns about the impact of China’s pledge to fight excess liquidity to stem the formation of asset bubbles on the global economic recovery. China’s Shanghai Composite and Hong Kong’s Hang Seng indexes both fell 2.4% on reports that major Chinese banks have begun to restrict lending in response to the government’s increased bank reserve requirements—the amount firms must set aside in reserve—and its fight to stave off the overheating of the economy. Meanwhile, a stronger yen versus the dollar added to the aforementioned uneasiness, with the Nikkei 225 Index finishing 1.8% lower on weakness in export issues as the strengthening Asian currency dampened optimism about revenues of companies that rely on sales in the US. Moreover, after the closing bell, Standard & Poor’s lowered its outlook on Japan’s sovereign credit rating, citing “The policies of the new Democratic Party of Japan government point to a slower pace of fiscal consolidation than we had previously expected.” On the economic front, the Bank of Japan kept its key its benchmark lending rate unchanged at 0.10%.

Elsewhere, South Korea’s Kospi Index fell about 2% after a report showed the nation’s 4Q GDP grew at a much smaller pace than expected, rising 0.2% q/q, compared to 3Q’s 3.2% advance, and versus the Bloomberg consensus of a 0.5% gain. Additionally, markets in Australia and India were closed, and Taiwan’s Taiex Index fell 3.5% to pace the decline amid the concerns about China as technology shares led the decline. In other economic news, Hong Kong’s trade deficit widened more than forecasted.