Morning Market Update

Global Recovery Pessimism Pressuring Markets

The global equity markets are extending yesterday’s losses as uneasiness toward the global economic recovery is souring sentiment, exacerbated by light trading in front of the Labor Day weekend and cautiousness ahead of some key data releases later today and the rest of the week. Treasuries are gaining ground on the mid-to-long end of the curve, giving back most of Friday’s jump in yields, on some risk aversion that has taken yields to near record lows as of late. The bond markets showed little reaction to a better-than-expected increase in housing prices, as traders await reads on manufacturing activity in the Mid-West and consumer confidence, but the headlining event may come in afternoon action with the release of the minutes from the most recent US Federal Reserve monetary policy meeting. US equity news is relatively light, with Dollar General Corp topping the Street’s profits expectations and raising its full-year outlook, while Monsanto Co narrowed its full-year forecast. Overseas, Asia finished broadly lower, with heavy losses seen in Japan, while European stocks are trading in the red.

As of 8:49 a.m. ET, the September S&P 500 Index Globex future is 7 points below fair value, the Nasdaq 100 Index is 11 points below fair value, while the DJIA is 58 points below fair value. Crude oil is down $0.90 at $73.80 per barrel, and the Bloomberg gold spot price is up $6.64 at $1,243.61 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% at 83.09.

Dollar General Corp. (DG $27) reported 2Q EPS ex-items of $0.42, above the $0.38 Reuters estimate, with revenues increasing 10.8% year-over-year (y/y) to $3.2 billion, roughly matching the consensus analyst estimate. Same-store sales—sales at stores open at least a year—rose 5.1% y/y, aided by customer traffic and average transaction amounts. The company increased its full-year guidance and same-store sales outlook.

Agriculture firm Monsanto Co. (MON $56) narrowed its full-year EPS guidance from a previous outlook of between $2.40-2.60 to a range of $2.40-2.45, compared to the $2.50 that analysts were expecting the firm to report.

Home prices rise above forecasts, Fed meeting details about to set sail

Just before the opening bell, the S&P/Case-Shiller Home Price Index was released showing an increase in home prices of 4.23% y/y in June, above the increase of 3.50% that economists surveyed by Bloomberg had expected. Month-over-month (m/m), home prices were 0.28% higher, compared to forecasts, which called for a gain of 0.20%. Treasuries remained higher following the report, amid the global economic uneasiness, which is fostering some flight-to-safety buying and Friday’s jumps in yields on the mid-to-long end of the curve have almost been eliminated in the early part of the week.

Later this morning, the economic calendar will yield the releases of the Consumer Confidence Index, forecasted to tick higher from 50.4 in July to 50.7 in August, and the Chicago PMI, expected to decelerate from 62.3 in July to 57.0 in August.

However, the headlining economic event may come in the form of the midday release of the minutes from the August Federal Open Market Committee (FOMC) meeting. The Fed downgraded its assessment of the economy and the jobs market at the meeting, saying that the pace of recovery was slower than expected, and moved to stem a decline in its balance sheet by keeping its holdings constant. The balance sheet was set to decline as mortgage-backed securities either matured or were pre-paid (primarily as consumers refinanced their loans), and this would have effectively tightened policy.

Hoenig was the only formal dissenting vote at the meeting, but the Wall Street Journal has reported that seven of the seventeen policymakers at the meeting either spoke against the proposal or had reservations, and market participants will be dissecting the minutes for illumination about these discussions. However, some of the impact of the report is likely to be outweighed by Bernanke’s Jackson Hole speech last Friday, in which he gave a detailed analysis of the economy and potential policy actions. The Fed Chair said that the FOMC has not agreed on specific criteria or triggers for further action, potentially because despite weaker data recently, he believes “the preconditions for a pickup in growth in 2011 appear to remain in place.”

Europe lower as recovery concerns stymie sentiment

Stocks in Europe are under pressure in afternoon action, with oil & gas issues among the worst performers as fears about the global economic recovery are pressuring sentiment amid a plethora of data across the pond and ahead of some key reports out of the US this week. Financials are also pacing the decline in Europe amid some disappointing equity news. Raiffeisen International Bank Holding (RAIFF $39) is solidly lower after the firm reported smaller-than-anticipated 2Q profits, and shares of EFG Eurobank Ergasias (EGFEY $4) are posting a sizeable decline after Greece’s second-largest lender, per Bloomberg, achieved lower first-half profits on increased provisions for bad loans. In other equity news, shares of AstraZeneca Plc (AZN $50) are lower after its new respiratory drug did not get approval by the US Food and Drug Administration (FDA), as the government agency is asking for more information on the treatment.

Meanwhile, there is a slew of economic reports in the region for traders to digest, with the unemployment change in Germany—Europe’s largest economy—declining by a smaller amount than expected, and the nation’s unemployment rate remaining at 7.6%, as expected. Also, the euro-zone unemployment rate remained at 10% to match forecasts, while an estimate of consumer prices in the euro-area showed the pace of price increases slowed. In other employment and inflation data, Italy’s consumer prices unexpectedly rose, and the nation’s unemployment rate declined from 8.5% to 8.4%. Elsewhere on the European economic front, UK consumer confidence unexpectedly improved, while Italy’s business confidence and retail sales rose more than expected, while UK consumer credit surprisingly rose.

The UK FTSE 100 Index is down 1.0%, France’s CAC-40 Index is 1.2% lower, Germany’s DAX Index is declining 0.9%, Italy’s FTSE MIB Index is off 0.7%, and Greece’s Athex Composite Index is decreasing 1.7%.

Asia falls despite flood of favorable data

Stocks in Asia were broadly lower, led by a 3.6% drop in the Japanese Nikkei 225 Index on worries about the global recovery and continued disappointment that the Bank of Japan’s emergency monetary policy action yesterday was not enough to arrest the recent surge in the yen versus the dollar and other major currencies. The steep advance in the Japanese currency has stymied the outlook for companies that rely heavily on sales abroad and is threatening the economic prosperity in Japan. The sizeable decline in Japan and elsewhere in Asia came despite a plethora of positive economic data in the region, with Japanese industrial production and retail trade both exceeding expectations, along with reads on industrial production in South Korea and retail sales and building approvals in Australia. The South Korean Kospi Index fell 1.0% and Australia’s S&P/ASX 200 Index dropped 1.1% in the face of the better-than-expected reports. Other reports that failed to stem the losses in Japan included larger-than-forecasted growth in housing starts and improved small business confidence, but vehicle production in the nation slowed. Meanwhile, India’s BSE Sensex 30 Index, which dipped 0.3%, was one of the region’s best performers, aided by a report that showed the nation’s 2Q GDP expanded a the fastest pace since 2007, per Bloomberg.

Elsewhere, the equity front offered little to help combat the broad-based pressure in the region as shares of Hon Hai Precision Industry Co. (HNHPF $8) fell solidly after the Taiwanese contract manufacturer of electronics—which makes Apple Inc.’s (AAPL $243) iPad—posted disappointing 2Q profits. Moreover, Hong Kong contract manufacturer of mobile phones, Foxconn International Holdings (FXCNY $15), came under pressure after it reported a first-half loss. Taiwan’s Taiex Index dropped 1.6% and Hong Kong’s Hang Seng Index declined 1.0%. Rounding out the day, China’s Shanghai Composite Index dipped 0.5%.