Morning Update

Government Debt Concerns Resurface

Markets are lower after traders weigh the prospects for economic growth while elevated debt pressures fiscal spending at the same time monetary stimulus is beginning to be unwound. Debt concerns resurfaced after an International Monetary Fund (IMF) official said that reversing existing stimulus measures will not be sufficient to bring deficits back in order and that advanced economies face “acute” challenges to reduce debt, and as Germany’s Merkel dampened speculation about aid to Greece. Meanwhile, the intra-meeting move by the central bank in India to raise rates on Friday is also weighing on sentiment. In equity news, Tiffany reported earnings below Street estimates, the Wall Street Journal is reporting that Google will be making an announcement on its plans in China as early as today, and software maker Novell rejected a takeover offer. Outside of the Street, the US House passed legislation to overall health care, moving the measure to Senate reconciliation. Treasuries are mixed.

As of 8:48 a.m. ET, the March S&P 500 Index Globex future is 6 points below fair value, the Nasdaq 100 Index is 5 points below fair value, and the DJIA is 42 points below fair value. Crude oil is down $1.28 at $79.40 per barrel, and the Bloomberg gold spot price is down $3.70 at $1,103.30 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.2% at 80.86.

Shares of Tiffany & Co (TIF $45) are lower after the company reported 4Q EPS of $1.10, lower than the analyst estimate of $1.13. Revenues of $981.4 million were higher than the Street forecast of $971 million, as gross margin fell to 58.7% from 59.4% due to increased sales of wholesale diamonds, which have lower margins. The CEO said that the results reflected growth in most countries, product categories and price points, and despite the global economic challenges, credited the strong earnings and cash flow growth to “decisive measures” taken to control spending and growing international awareness of the Tiffany brand.

The Wall Street Journal is reporting that Google (GOOG $560) will announce its next steps in China this week, possibly as soon as Monday, citing a person briefed on the matter. Google’s business in China has been subject to much discussion since January, when the company said it would stop censoring search results after it was the target of a cyber attack it believed originated in China. A Google spokeswoman declined to comment.

Software company Novell Inc. (NOVL $6) are higher after rejecting a $1.8 billion unsolicited bid by hedge fund Elliott Associates, saying that it undervalues the company and that it will look for alternatives to enhance shareholder value. Shares are higher

Health care stocks are mixed after the US House passed legislation to overhaul health care yesterday in a 220-211 vote that amends a Senate bill passed in December to make changes to the language in the Senate version, and the Senate now must approve this bill under the process called reconciliation that requires a simple majority vote.

Economic calendar quiet today, but heavy for the week

The lone economic release scheduled in the US today is the Chicago Fed National Activity Index, which fell to -0.64 in February from 0.02 in January. Treasuries are mixed.

The economic calendar will heat up starting tomorrow, with existing-home sales, expected to have decreased 0.9% m/m in February to an annual rate of 5.0 million units, while new home sales are expected to show a 1.9% increase in February to an annual rate of 315,000 units when released on Wednesday. Durable goods orders will also be reported on Wednesday, expected to rise 0.5% m/m in February after increasing 3.0% in January, while ex-transportation, orders are also forecasted to have grown 0.5% m/m, after falling 0.6% in January. Friday brings the third and final reading of Gross Domestic Product (GDP) for 4Q, considered a proxy for corporate profits. Economists are expecting no changes to the growth rate of 5.9%, on personal consumption growth of 1.7%, and a GDP Price Index of 0.4%, while core PCE (personal consumption expenditures) grew 1.6%.

Europe falters on continued concern about government debt

European markets are lower after an International Monetary Fund (IMF) official noted the continued struggle nations will face reducing government debt and after German Chancellor Angela Merkel dampened speculation about the prospects for aid to Greece. Merkel told investors they shouldn’t expect this week’s European Union (EU) summit to agree on an aid package and that EU leaders should not create “illusions” for markets by increasing expectations for Greek aid. Merkel said that “Greece isn’t insolvent and therefore the question about assistance isn’t the one we need to be talking about now,” and said that no decision for aid has been made regarding an EU or IMF solution, saying that she remains open to either option should circumstances arise. Her comments came after the Greek Prime Minister George Papandreou and European Commission President Jose Barroso said that the EU should spell out its rescue plan at the March 25-26 summit.

Adding to concerns about elevated levels of government debt, John Lipsky, first deputy managing director of the IMF, said that advanced economies will face “acute” challenges to reduce public debt, and that unwinding existing stimulus measures won’t come close to bringing deficits back to prudent levels. In economic news, the euro-zone consumer confidence measure will be released later today.

Britain’s FTSE 100 Index is 0.9% lower, France’s CAC-40 Index is down 1.0%, Germany’s DAX Index is declining 0.7%, and Greece’s Athex Composite Index lower by 3.0%.

Asia reacts to India’s rate hike by posting declines

Stocks in Asia were lower in the first chance markets had to react to an unexpected rate hike in India, which occurred after markets had closed on Friday and after an IMF official said economies will face challenges in tackling public debt. The intra-meeting nature of the action by the Reserve Bank of India (RBI) to concerns about inflation in the nation caught traders off-guard. In the first move in nearly two years, the central bank of India increased the benchmark reserve repurchase rate to 3.5% from a record-low 3.25% and the repurchase rate to 5.0% from 4.75%. In a statement, the RBI said that while food prices have moderated, they “remain at elevated levels,” and the “acceleration in prices of non-food manufactured goods and fuel items in recent months has been of particular concern.” As such, the central bank believes that anchoring inflation expectations and containing overall inflation have become imperative, and a normalization of monetary policy from levels consistent with a crisis situation is warranted. The RBI said that as “liquidity in the banking system will remain adequate, credit expansion for sustaining the recovery will not be affected.”

Shares of commodity-based companies led declines as Asian markets weighed the possibility that other countries in the region may need to begin to remove the monetary stimulus put in place during the crisis, which could slow economic growth and demand for equities. Hong Kong’s Hang Seng Index fell by 2.1%, led by real estate developer shares, after Beijing suspended some land sales in the mainland capital, in an attempt to stabilize the property market. Elsewhere, PetroChina Co (PTR $115), China’s largest energy company according to Bloomberg, and Royal Dutch Shell Plc (RDS.A $58) agreed to buy Australian-based Arrow Energy Ltd (ARWEF $5) for a revised A$3.5 billion ($3.2 billion), seeking to gain access to the company’s unconventional coal-seam gas reserves. Japan’s Nikkei 225 Index was closed for a holiday, while India’s BSE Sensex 30 Index fell 1.0%, Australia’s S&P/ASX 200 lost 0.9%. Elsewhere, South Korea’s Kospi Index decreased 0.8% and the Shanghai Composite Index bucked the downward trend by rising 0.2%.