Morning Market Update

M&A, Earnings, and Economic Reports for the Day Lead the Way

After a flat day in the US equity markets yesterday, stocks are moving decisively to the upside in morning action as Dow members Wal-Mart Stores Inc and Home Depot Inc posted better-than-forecasted profits, while a $38.5 billion M&A proposal from BHP Billiton to acquire Potash Corp of Saskatchewan is helping boost early sentiment. Meanwhile, Treasuries are lower amid the solid gains in the equity markets, showing little reaction to lower-than-expected readings on housing starts and building permits and a slightly hotter-than-forecasted report on core producer prices. However, industrial production and capacity utilization is set to be released later this morning. Overseas, Asia was mixed in lackluster action, while Europe is shrugging off a disappointing report on investor confidence in Germany, and is moving higher.

As of 8:53 a.m. ET, the September S&P 500 Index Globex future is 8 points above fair value, the Nasdaq 100 Index is 11 points above fair value, while the DJIA is 57 points above fair value. Crude oil is up $0.86 at $76.10 per barrel, and the Bloomberg gold spot price is up $0.13 at $1,225.28 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.4% at 82.17.

Dow component Wal-Mart Stores Inc. (WMT $50) announced 2Q earnings of $0.97 per share, one penny above the Reuters estimate, but revenues increased 2.8% year-over-year (y/y) to $103 billion, shy of the Street’s $105 billion estimate. US same-store sales—sales at stores open at least a year—declined 1.8% y/y, but it said its international unit continued to drive growth for the company, with net sales increasing 11% to $26 billion, with strong contributions from Mexico, Brazil and China. WMT raised its full-year EPS outlook and issued 3Q earnings guidance that matched expectations.

Fellow Dow member Home Depot Inc. (HD $27) reported 2Q EPS of $0.72, two cents above the consensus estimate of analysts, but revenues, which increased 1.8% y/y to $19.4 billion, came in below the $19.6 billion that the Street was looking for. Same-store sales rose 1.7% y/y, with US same-store sales rising 1.0%. The world’s largest home improvement retailer increased it full-year EPS outlook but lowered its revenue forecast, and both figures came in below analysts’ forecasts.

In North American M&A news, Potash Corp. of Saskatchewan Inc. (POT $112) announced that its Board of Directors has received and unanimously rejected an unsolicited proposal to be acquired by BHP Billiton Ltd. (BHP $72) for $130 per share in cash. The Canadian agriculture firm said the $38.5 billion proposal is grossly inadequate and it is not in the best interests of its shareholders.

Housing starts and permits come up short, PPI rises, while industrial production up next

Housing starts for July came in below expectations, increasing from a downwardly revised 537,000 annual rate of units in June to a rate of 546,000 units, and compared to expectations of economists surveyed by Bloomberg, which called for starts to come in at 560,000. Additionally, building permits fell more than expected, dropping 3.1% month-over-month (m/m) in July, to an annual rate of 565,000, while June’s figure was downwardly revised to 583,000. The expectation was for permits to dip to 580,000 units.

Meanwhile, the Producer Price Index showed prices at the wholesale level rose 0.2% m/m in July, after decreasing 0.5% in June, matching economists’ forecasts. Meanwhile, the core rate, which excludes food and energy, increased 0.3% m/m, above the forecast of economists calling for core prices to increase 0.1%. On a year-over-year basis, headline producer prices were 4.2% higher, and the core rate was up 1.5%.

Treasuries remain lower in morning trading following the housing and inflation reports and ahead of the release of industrial production, expected increase 0.5% in July after rising 0.1% in June, and capacity utilization is forecasted to come in at 74.6% in July after running at 74.1% capacity in June.

Europe solidly higher despite lackluster read on investor expectations

Stocks in Europe are nicely higher in afternoon action, led by basic materials on higher metals prices, even after a disappointing economic sentiment report out of Germany—Europe’s largest economy. The German ZEW Survey of Economic Sentiment, which is a gauge of expectations among investors and analysts six months from now, fell from 21.2 in July to 14.0 in August, the lowest level since April 2009, and below the 20.0 reading that economists had expected. However, separate reports showed the German ZEW Survey of the Current Situation surged well above forecasts, and the euro-zone ZEW Survey of Economic Sentiment unexpectedly rose for the month. Financials are also helping pace the advance across the pond, in the wake of debt auctions in Spain and Ireland, which showed solid demand, and amid an advance in shares of Aegon (AEG $6) after the insurer said it will pay back a chunk of state aid it received.

Meanwhile, the equity front is offering other positive news to aid the solid gains in Europe, with shares of brewer Carlsberg (CABGY $17) nicely higher after its better-than-expected 2Q profits and increased guidance, while Wienerberger (WBRBY $3) is sharply higher after the world’s largest brickmaker, per Bloomberg, swung to a 2Q profit. Mining firms are able to gain ground even as BHP Billiton shares are down after its unsolicited bid for agriculture firm Potash.

In other economic news in the region, the UK Consumer Price Index declined 0.2% m/m in July, after rising 0.1% in June, matching expectations, while on a y/y basis, consumer prices were up 3.1%, down from 3.2% in June, also matching expectations. The y/y rate is above the 3% UK government target rate.

The UK FTSE 100 Index is 1.0% higher, France’s CAC-40 Index and Germany’s DAX Index are gaining 1.2%, Spain’s IBEX 35 Index is rising 0.6%, while Ireland’s Irish Overall Index is advancing 1.0%.

Asia mixed in lackluster session

Stocks in Asia finished mixed following the subdued session in the US yesterday, with Japan’s Nikkei 225 Index declining 0.4% to an eight-month low on the heels of yesterday’s disappointing 2Q GDP and amid continued concerns about the recent strength in the yen. The yen recently hit a fifteen-year high versus the US dollar, dampening the outlook for profits of companies that rely heavily on sales abroad, and Reuters reported that Japanese Prime Minister Kan and Bank of Japan Governor Shirakawa are likely to meet next week to discuss recent market developments. Meanwhile, equity markets in China moved modestly to the upside, with the Hong Kong Hang Seng Index inching 0.1% higher, while the Shanghai Composite Index traded up 0.4%. In economic news in the region, Hong Kong’s unemployment rate declined more than anticipated, falling from 4.6% in June to 4.3% in July, and compared to the 4.5% rate that was expected. Also, the Conference Board reported that its Chinese Leading Index improved m/m in June.

Elsewhere, Australian stocks lead advancers in Asia, with the S&P/ASX 200 Index rising 0.9% following the release of the Reserve Bank of Australia’s minutes from its monetary policy meeting earlier this month. The RBA said the global economy had continued its expansion, though conditions differed across regions and growth in Australia’s trading partners had been very strong. Moreover, the RBA said its forecast for GDP growth was a gradual increase to the 3.75-4.00% range in 2011 and 2012, and inflation was expected to be around 2.75% over the next year or so. The central bank added that developments over the latest month had not materially changed its assessment and there was still more uncertainty over the global outlook than there had been earlier in the year, so it judged that the existing level of its benchmark interest rate as still appropriate. Rounding out the day in Asia, South Korea’s Kospi Index increased 0.7%, Taiwan’s Taiex Index dipped 0.1%, and India’s BSE Sensex 30 Index finished flat.