Morning Market Update

Recent Rally Sputters

Stocks are under pressure in morning action as the recent momentum that has taken the S&P 500 Index to an eighteen-month high and allowed the Dow Jones Industrials to flirt with 11,000 has stalled. Resurfacing concerns about Greece in the euro-zone, growing expectations that China could be getting close to tightening its monetary policy, and cautious outlooks on the labor and housing markers revealed in yesterday’s Fed minutes are conspiring to weigh on sentiment. Treasuries are nearly unchanged ahead of a 10-year debt auction and before Fed Chairman Ben Bernanke’s afternoon speech. In equity news, Family Dollar Stores Inc topped the Street’s earnings expectations, while Monsanto Co. missed and issued disappointing guidance. Overseas, Asia was mostly higher but China was mixed, while European markets are under pressure amid the aforementioned uneasiness.

As of 8:51 a.m. ET, the June S&P 500 Index Globex future is 4 points below fair value, the Nasdaq 100 Index is 5 points below fair value, and the DJIA is 30 points below fair value. Crude oil is down $0.75 at $86.09 per barrel, and the Bloomberg gold spot price is up $1.70 at $1,136.00 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.3% to 81.66.

Family Dollar Stores Inc. (FDO $38) reported fiscal 2Q EPS of $0.81, three cents above the consensus estimate of Wall Street analysts, with previously reported revenues rising 4.9% year-over-year (y/y) to $2.1 billion, which was expected. Shares are higher after the discount retailer also issued 3Q and full-year EPS guidance that exceeded forecasts.

Monsanto Co. (MON $70) announced fiscal 2Q EPS ex-items of $1.70, three pennies below the Street’s forecast, with revenues falling 3.6% y/y to $3.9 billion, roughly inline with the forecasts of analysts. The agriculture firm said it expects full-year EPS to come in at the low end of its previously reported range of between $3.10-3.30. The Street is expecting the company to report full-year EPS of $3.28.

Mortgage apps fall, Fedspeak on tap

The lone economic report this morning was the release of the US MBA Mortgage Application Index, which declined 11.0% last week, after the index, which can be quite volatile on a week-to-week basis, rose 1.3% in the previous week. The decrease came amid a 16.9% drop in the Refinance Index, more than offsetting a modest 0.2% gain in the Purchase Index. Moreover, the decline in the overall index came amid a 27 basis-point increase in the average 30-year mortgage rate, which moved to 5.31%, and remains above the record low of 4.61% that was reached at the end of March 2009.

Later this afternoon, consumer credit will be released, and is expected to decline by $0.7 billion for February, compared to the unexpected increase of $5.0 billion in January, which was the first gain in a year.

Meanwhile, Treasuries are nearly unchanged, with the short end of the curve modestly higher, ahead of a $21 billion 10-year Treasury auction, expected in afternoon trading. Also, the modest move in the bond markets come before Federal Reserve Chairman Ben Bernanke’s afternoon speech in Dallas today on economic challenges. Traders may be looking for any clues on the timing of further monetary policy actions to move closer to normalcy given the current economic backdrop. Yesterday, the minutes from the March 16 Federal Open Market Committee (FOMC) meeting were released and the report showed the Participants tried to clarify its “extended period” language, as it said, “A number of members noted that the Committee’s expectation for policy was explicitly contingent on the evolution of the economy rather than on the passage of any fixed amount of calendar time.” Moreover, the release said, “consequently, such forward guidance would not limit the Committee’s ability to commence monetary policy tightening promptly if evidence suggested that economic activity was accelerating markedly or underlying inflation was rising notably; conversely, the duration of the extended period prior to policy firming might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further.”

Europe lower amid revision of GDP and lingering Greece worries

Stocks in Europe are lower in afternoon action as the recent run in the euro-area equities has been paused amid an unexpected revision to the euro-zone 4Q GDP and as concerns about Greece’s debt issues are resurfacing. Greek uneasiness is back in focus, courtesy of reports yesterday that the debt-ridden nation is looking to renegotiate the financial aid package that euro-area members, along with the IMF, had agreed to provide if Greece fails to raise capital on its own. However, no official confirmation of the reports has come to light. Basic resources are among the biggest drags on the markets in Europe, exacerbated by the downward revision to the euro-zone’s 4Q GDP, which was changed to a flat reading, compared to the 0.1% expansion that was previously reported and was expected to remain by economists surveyed by Bloomberg. Other economic data was mixed, with Services PMI’s in Italy, France, Germany, and the euro-zone all exceeding economists’ forecasts, while the Services PMI in the UK came in below expectations. Elsewhere, German factory orders came in flat month-over-month (m/m) in February, compared to the decline of 0.5% that was expected, and euro-zone producer prices rose less than forecast. Trading may be a bit cautious ahead of tomorrow’s monetary policy announcements from the Bank of England and the European Central Bank, which are expected to keep their respective benchmark interest rates unchanged at 0.5% and 1.0%, respectively.

In equity news, automakers Daimler AG (DAI $48), Renault SA (RNSDF $47), and Nissan Motor Co. (NSANY $18) announced that they will create a partnership, in which they will swap 3.1% equity stakes and jointly develop engines and small-car technologies.

Britain’s FTSE 100 Index is 0.3% lower, France’s CAC-40 Index is down 0.7%, Germany’s DAX Index is declining 0.4%, and Italy’s FTSE MIB Index is off 0.7%.

Asia modestly higher but China stocks are mixed

Stocks in Asia finished mostly higher in lackluster trading, taking the lead from the subdued session in the US as traders contemplate the recent multi-month highs in major global markets, waiting for the next catalyst to continue the economic recovery. Japan’s Nikkei 225 Index was up 0.1%, led by financials after the Bank of Japan left its benchmark interest rate unchanged at 0.1%, saying “Japan’s economy has been picking up mainly due to improvement in overseas economic conditions and to various policy measures, although there is not yet sufficient momentum to support a self-sustaining recovery in domestic private demand.” The BoJ also noted that financial conditions have shown “increasing signs of easing,” and Bloomberg reported that BoJ Governor Masaaki Shirakawa said at a news conference after the decision that, “We have confirmed that the economy is currently picking up steadily and on top of that, we are seeing some signs of future progress.” Elsewhere, stocks in China were mixed, as Hong Kong’s Hang Seng Index rose 1.8% after the market opened for the first time this week, returning from a holiday break and reacting to last week’s upbeat labor data and this week’s better-than-expected service sector report from the US. However, China’s Shanghai Composite Index declined 0.3%, amid rising concerns that the government may be getting close to tightening monetary policy.

In equity news, shares of MacArthur Coal (MACDF $14) came under pressure after the company rejected US coal company Peabody Energy Corp’s (BTU $46) sweetened A$14 per share, or about A$3.6 billion ($3.3 billion) bid to acquire the Australian mining firm. This was the second rejection by MACDF of a BTU takeover offer and MACDF said it will continue its planned takeover of Gloucester Coal Ltd (GCRLF $9). Adding to the story, Noble Group Ltd (NOBGF $2) offered to buy GCRLF if its takeover by MACDF fails to go through. Australia’s S&P/ASX 200 Index rose 0.2%.

Rounding out the day in Asia, South Korea’s Kospi Index was flat, Taiwan’s Taiex Index gained 0.4%, and India’s BSE Sensex 30 Index increased 0.2%.