Evening Market Update

Rocky Start to the Week

A number of M&A deals were unable to provide any catalyst to equity markets to start the week as stocks finished lower. Treasuries were higher amid the lack of any economic news, but the rest of the week will provide a host of reports for traders digest. In M&A activity, Dow member Wal-Mart Stores announced a non-binding proposal to acquire South African retailer Massmart Holdings Limited, Southwest Airlines said that it has reached an agreement to acquire AirTran Holdings, and Unilever Plc agreed to purchase US hair-care firm Alberto-Culver. In other equity news, Seattle Genetics and its Japanese partner Takeda Pharmaceutical Co. Ltd announced positive results for a Hodgkin’s lymphoma treatment, and Ford’s CEO offered positive comments on its profitability.

The Dow Jones Industrial Average fell 48 points (0.4%) to close at 10,812, the S&P 500 Index shed 7 points (0.6%) to 1,142, and the Nasdaq Composite lost 11 points (0.5%) to 2,370. In moderate volume, 904 million shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil inched $0.03 higher to $76.52 per barrel, wholesale gasoline was flat at $1.94 per gallon, and the Bloomberg gold spot price advanced $1.10 to $1,297.05 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.6% to 79.35.

In M&A news, Dow member Wal-Mart Stores Inc. (WMT $54) announced that it has made a preliminary, non-binding proposal which could, if successful, lead to the world’s largest retailer making a cash offer to acquire South African retailer Massmart Holdings Limited (MMRTY $43) for about 148 South African rand per share, totaling 32 billion rand ($4.6 billion). WMT said South Africa presents a compelling growth opportunity for the company, as it possesses attractive market dynamics, favorable demographic trends and a growing economy, while offering a platform for growth and expansion in other African countries. WMT was modestly lower, while MMRTY was higher in the global markets in which it trades.

Elsewhere, Southwest Airlines Co. (LUV $13) announced that it has reached an agreement to acquire AirTran Holdings Inc. (AAI $7)—the parent of AirTran Airways—in a transaction valued at more than $1.37 billion. The companies said the acquisition expands LUV’s route network to Atlanta and around the nation, and will give AirTran Airways opportunities to grow in ways that simply would not be possible without the agreement. LUV was solidly higher, while shares off AAI were up over 50%.

Meanwhile, UK consumer products firm Unilever Plc. (UL $29) reported that it has agreed to acquire US-based hair care firm Alberto-Culver Co. (ACV $38) for $37.50 per share in cash, or about $3.7 billion. UL said ACV’s brands such as TRESemme, VO5, Nexxus, and St. Ives will compliment its existing portfolio of brands like Dove and Vaseline, helping build its strong global positions in both the hair care and skin care categories. UL was higher and ACV was up nearly 20%.

Outside of the M&A front, Seattle Genetics Inc. (SGEN $14) was sharply higher after the drugmaker—and its Japanese development partner Takeda Pharmaceutical Co. Ltd. (TKPHF $46)—announced that their experimental antibody-drug conjugate showed 75% of Hodgkin’s lymphoma patients in a pivotal trial achieved an objective response to the treatment. The companies plan to file for approval from the US Food & Drug Administration (FDA) in the first half of 2011.

In addressing the Confederation of British Industry, Ford (F $12) CEO Alan Mulally said that he expects the US automaker to post a “strong profit” in 2010, and positive cash flow and an improvement in performance in 2011. Mulally also said that the company will likely cut its lineup to as little as 20 models, allowing it to focus on improving quality and engineering. Shares of F were mostly unchanged on the day.

Economic calendar empty, home prices on tap for tomorrow

Treasuries finished higher as today’s economic calendar this was void of any major releases. The yield on the two-year note lost 2 bps to 0.42%, the yield on the 10-year note fell 10 bps to 2.51%, and the 30-year bond yield declined 10 bps to 3.70%.

Although the week has plenty of major economic releases for traders to digest, the first half will be relatively light, headlined by tomorrow’s release of the S&P/Case-Shiller Home Price Index, forecasted to rise 3.10% year-over-year (y/y) in July, while falling 0.10% month-over-month (m/m).The home pricing report lags the sales data by a month, and this release may be negatively impacted by the expiration of the homebuyer tax credit, which also led to the 27% plunge in existing home sales for July reported in August. Last week, however, August existing home sales came in better than expected, suggesting we could see some support for home prices going forward.

Also on tomorrow’s US economic docket is the Richmond Fed Manufacturing Index, forecasted to fall to a level of 6 in September from 11 in August, as well as consumer confidence.

Moody’s downgrades Irish bank, economic news light

Moody’s cut its ratings on government-controlled Anglo Irish Bank’s senior unsecured debt by three notches to one level above junk status, due to a small risk the government would not continue to support that class of debt, per Reuters. Bloomberg reported that the bank may, worst case, be in need of up to 7 billion euros ($9.5 billion) of additional capital, citing those familiar with the matter. Ireland’s Prime Minister is set to announce on Oct. 1 the latest costs and figures related to bailing out the ailing bank in order to calm investor anxiety over the nation’s need to acquire emergency funds from the European Union.

The economic calendar across the pond was relatively light, with a UK housing price survey showing that home values declined 0.4% m/m in September, the third consecutive monthly drop in the measure and the largest decline in 18 months, euro-zone money supply increasing more than economists expected in August, Sweden’s trade balance unexpectedly swinging to a deficit, and Spain’s mortgages falling in July, but at a slower pace than the prior period.

In Asia/Pacific, Hong Kong’s trade deficit narrowed much more than anticipated in August, the leading indicators in Taiwan and China deteriorated in August, and the rate of industrial profits in China fell solidly.

Tomorrow, the international economic calendar will provide consumer confidence in Germany and Italy, consumer spending in France, CPI figures from Spain and Germany, and the UK’s current account balance and the final revision to 3Q GDP.