Morning Market Update

Modestly Lower After Friday’s Rally

The US equity markets are slightly below the unchanged mark in morning action, on the heels of Friday’s steep gains that followed a smaller-than-forecasted downward revision to 2Q GDP and reassuring comments from Federal Reserve Chairman Ben Bernanke that the Fed stands ready to provide further support if the economy falters further. Traders may be trading with some caution ahead of a busy week for the US economic calendar, highlighted by Friday’s release of the labor report, which will provide the latest look at the change in jobs to nonfarm payrolls. The modest decline is coming despite a larger-than-expected increase in personal spending, and some continued M&A news, with Dow member Intel Corp announcing it has reached an agreement to acquire the wireless unit of Infineon Technologies and 3PAR reporting that it favors the takeover bid from Dow component Hewlett-Packard over Dell Inc’s previously accepted proposal. Overseas, Asia was broadly higher as the Bank of Japan further eased monetary policy following an emergency meeting, while European markets are under pressure despite favorable euro-zone economic data.

As of 8:54 a.m. ET, the September S&P 500 Index Globex future is 4 points below fair value, the Nasdaq 100 Index is 6 points below fair value, while the DJIA is 30 points below fair value. Crude oil is down $0.39 at $74.78 per barrel, and the Bloomberg gold spot price is down $2.85 at $1,235.25 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is unchanged at 82.89.

M&A news is dominating the headlines in morning action, with Dow member Intel Corp. (INTC $18) announcing that it has reached an agreement to acquire the wireless solutions business of Infineon Technologies AG (IFNNY $6) in an all cash transaction valued at about $1.4 billion. INTC said the wireless unit will operate as a standalone business and the acquisition expands its current Wi-Fi and 4G WiMAX offerings to include IFNNY’s 3G capabilities.

Elsewhere, the competition to acquire storage system provider 3PAR Inc. (PAR $32) continues to heat up after it announced that Dow component Hewlett-Packard Co.’s (HPQ $38) unsolicited acquisition proposal of $30 per share constitutes a “superior proposal” to Dell Inc.’s (DELL $12) $27 per share offer. PAR said its Board of Directors has notified DELL of its intention to terminate the merger agreement with the company, immediately following the expiration of the three business day period for DELL to counter any offer.

Separately, HPQ announced that it has authorized an additional $10 billion share repurchase program.

Personal spending exceeded expectations, inflation remained benign

Personal income rose 0.2% in July, versus the Bloomberg survey of economists, which called for a 0.3% increase, while June’s flat reading was unrevised. Personal spending was up 0.4% in July, compared to expectations of a 0.3% rise, and June’s flat figure was also left unchanged. The savings rate moved lower to 5.9% in July, after a downwardly revised 6.2% for June.

Also, the PCE Price Index, which is released with the income and spending data, was up 1.5% year-over-year (y/y) in July, after June’s 1.4% increase was unrevised, and above the consensus forecast of a 1.4% increase. The core PCE Price Index, which excludes food and energy, was 0.1% higher month-over-month (m/m), matching what economists expected, while y/y core prices moved 1.4% higher, inline with the consensus. Treasuries are higher, maintaining gains following the income and spending data.

Today’s data kicked off a heavy week for the economic calendar, which will be headlined by Friday’s release of nonfarm payrolls, expected to fall 100,000 in August, after declining by 131,000 in July, while excluding government employment, which has been falling as temporary Census workers decline, private sector payrolls are expected to increase 47,000, after expanding by a disappointing 71,000 in July. The unemployment rate is estimated to increase to 9.6% from 9.5%, as workers re-enter the workforce as job openings increase.

However, traders will have plenty of data in the meantime this week, with Tuesday’s midday release of the minutes from the August Federal Open Market Committee (FOMC) meeting, likely garnering heavy attention. The Fed moved to stem a decline in its balance sheet at the last meeting, by keeping its holdings constant, after downgrading its assessment of the economy and the jobs market, saying that the pace of recovery was slower than expected. While there was only one formal dissenting vote at the meeting, the Wall Street Journal reported that seven of the seventeen policymakers at the meeting either spoke against the proposal or had reservations, and market participants will be scouring the minutes for enlightenment about these discussions. Last week in a speech in Jackson Hole, Wyoming, Federal Reserve Chairman Ben Bernanke indicated that the Fed stands ready to provide more stimulus if needed, but “the preconditions for a pickup in growth in 2011 appear to remain in place.”

Moreover, readings on the economy in August will continue with Wednesday’s ISM Manufacturing Index, expected to decline to 52.8 in August from 55.5 in July, while the ISM Non-Manufacturing Index, to be released on Friday, is forecasted to decline to 53.2 in August from 54.3 in July. The level that separates expansion from contraction is 50.0.

Other releases on the US economic calendar include the S&P/CaseShiller Home Price Index, ADP employment change, MBA Mortgage Applications, the Conference Board’s measure of consumer confidence, final 2Q productivity, initial jobless claims, factory orders, and pending home sales.

Europe gives up early advance despite favorable euro-zone data and M&A news

Stocks in Europe have erased early gains and are moving lower, with industrials and financials leading the way even amid some M&A news and upbeat economic data. Sanofi-Aventis (SNY $29) made its $18.5 billion $69 per share cash bid to acquire Genzyme (GENZ $68) public, which GENZ unanimously rejected. Shares of both biotechnology firms are higher.

Meanwhile, the decline in European stocks comes even as a report showed euro-zone economic confidence improved to the highest level in more than two years, rising from 101.1 in July to 101.8 in August, above the 101.6 that economists had expected. Also, a separate report showed euro-zone services confidence unexpectedly increased. In other economic news in the region, a UK housing survey declined in August, Spain’s CPI rose 1.8% y/y in August to match forecasts, while a report on euro-zone industrial confidence remained unchanged as expected.

However, action may be light across the pond and the movements exaggerated as the markets in the UK are closed for a holiday.

France’s CAC-40 Index is down 0.3%, and Germany’s DAX Index 0.2% lower, while Spain’s IBEX 35 Index is advancing 0.3%.

Asia moves solidly higher after strong gains in US

Stocks in Asia finished nicely higher across the board following the strong advance on Friday in the US and as the Bank of Japan held an emergency monetary policy meeting, in which it introduced a new 10-trillion yen ($118 billion) six-month fixed-rate funds-supplying operation to “encourage a decline in market interest rates and further enhance easy monetary conditions.” The BoJ said Japan’s economy shows further signs of a moderate recovery, and it is likely to be on a recovery trend, but in the mean time, uncertainty about the future, especially for the US economy, has heightened more than before, and the foreign exchange and stock markets have recently been unstable. “In these circumstances, the Bank judged it necessary to pay more attention to the downside risks to the outlook for Japan’s economic activity and prices,” the central bank added. The BoJ’s action comes as the yen has surged to the highest level in close to 15-years versus the US dollar and the appreciation of the Asian currency has dampened the outlook for economic prosperity in Japan due to the negative impact it has on companies that rely heavily on exports. However, the yen is moving higher versus the greenback despite the BoJ announcement, suggesting that traders may have been expecting more action from the central bank to combat the yen’s recent steep advance. The Nikkei 225 Index rose 1.8%, but finished off the best levels of the day as the yen erased an early advance and fell below the unchanged mark compared to the US dollar and other major currencies.

Meanwhile, South Korea’s Kospi Index increased 1.8% to help pace the broad-based advance in the region, following the announcement that the government announced measures over the weekend to boost the property market, and steelmaker Posco (PKX $103) agreed to acquire a controlling stake in fellow South Korean firm Daewoo International Corp. for 3.4 trillion won ($2.8 billion). In other economic news in the region, New Zealand’s trade deficit expanded much more than expected, and separate reports showed the nation’s business confidence and activity outlook both deteriorated, but the NZX 50 Index managed to gain 1.0%. Moreover, a report showed Australia’s new home sales fell solidly m/m in July, but a read on 2Q company operating profit rose more than triple the amount forecasted, and the S&P/ASX 200 Index rose 1.9%. Elsewhere, stocks in China moved nicely higher, with the Shanghai Composite Index rising 1.6% and the Hong Kong Hang Seng Index advancing 0.7%. Rounding out the day, Taiwan’s Taiex and India’s BSE Sensex 30 Indexes both advanced 0.2%.