Evening Market Update

Equities Lose Steam Despite Housing Read

US equities have turned lower heading into afternoon action as traders grapple with lingering sovereign debt concerns in the euro-area and some cautiousness ahead of some key data, headlined by Friday’s US labor report and monetary policy meetings by central banks in Japan, the euro-zone, and the UK. A stronger-than-expected pending home sales report was not enough to foster some resiliency in the equity markets, while a slightly-larger-than-forecasted drop in factory orders is not helping the bulls’ cause. Treasuries are higher amid the aforementioned data and light treading by traders. In equity news, Sanofi-Aventis SA announced that it has taken its previous bid to acquire Genzyme Corp hostile, while AutoNation Inc reported strong September new vehicle sales. Overseas, some profit-taking in the energy sector pressured Europe, but a favorable report regarding Greece’s budget deficit helped limit losses.

The Dow Jones Industrial Average lost 78 points (0.7%) to close at 10,751, the S&P 500 Index declined 9 points (0.8%) to 1,137, and the Nasdaq Composite fell 26 points (1.1%) to 2,345. In modest volume, 941 million shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil fell $0.11 to $81.47 per barrel, wholesale gasoline was flat at $2.09 per gallon, and the Bloomberg gold spot price moved $4.15 lower to $1,314.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.5% higher at 78.45.

In M&A news, French drugmaker Sanofi-Aventis SA(SNY $33) announced that it is taking its bid to acquire Genzyme Corp. (GENZ $71) “hostile,” by commencing a tender offer for all outstanding shares of common stock of GENZ for $69 per share in cash. The transaction is the same price as its previous offer and is valued at approximately $18.5 billion, and is expected to expire at 11:59 p.m. ET on December 10, 2010. SNY said its “strong preference” is to engage in constructive discussions with GENZ, but GENZ’s continued refusal to do so has led SNY to commence the tender offer. GENZ announced today that its Board of Directors urged shareholders to take “no action” and it is reviewing the offer and will advise shareholders of its position. SNY was lower, while GENZ was modestly higher.

AutoNation Inc.(AN $24) reported that its September retail new vehicle unit sales increased 35% year-over-year (y/y), with domestic vehicles up 54%, imports rising 34%, and premium luxury 14% higher during the month. Also, AN said for 3Q, new vehicle unit sales rose 3% compared to the same period last year, which included the “highly successful Cash for Clunkers program.” Shares finished higher.

Bloomberg reported that the US Justice Dept. has filed a civil anti-trust lawsuit against Dow member American Express Co. (AXP $39), as well as Visa (V $73) and MasterCard (MA $223), alleging that the credit card companies’ rules toward merchants that accept their cards are anti-competitive, and “impede merchants from promoting or encouraging the use of competing credit or charge cards with lower acceptance fees.” The Wall Street Journal is reporting that V and MA have entered into settlement agreements with the Justice Department, but AXP will fight the allegations and “will not settle”, according to a company spokesperson. According to Bloomberg, spokespersons for both V and MA declined to comment. All three firms were lower on the day.

Factory orders fall more than anticipated but pending home sales jump again

Factory orders declined slightly more than expected, decreasing 0.5% month-over-month (m/m) in August, compared to the decrease of 0.4% that economists surveyed by Bloomberg had expected, and July’s increase was favorably revised, from a 0.1% increase to a 0.5% gain. August durable goods orders—reported last week—were downwardly revised from a 1.3% decrease to a 1.5% drop. Nondefense capital goods ex-aircraft, considered a good proxy for business spending, jumped 5.1% higher, following the 5.3% tumble that was seen in July.

Meanwhile, pending home sales increased more than anticipated, gaining 4.3% m/m in August, compared to the increase of 2.5% that economists were anticipating. But compared to last year pending home sales are down 18.4% and the m/m jump of 5.2% in the gauge of the pipeline of existing home sales that was seen in July was revised to a 4.5% gain.

Treasuries were higher despite the upbeat housing report as the equity markets lost ground. The yield on the two-year note lost 2 bps at 0.40%, the yield on the 10-year note declined 4 bps to 2.48%, and the 30-year bond yield shed 1 bp to 3.71%.

Greece provides optimistic budget, central bank announcements on horizon

Greece unveiled its 2011 draft budget, forecasting the nation’s deficit will narrow to 7% of GDP in 2011, compared to the 7.6% of GDP target set under a fiscal adjustment plan agreed to with the International Monetary Fund (IMF) and its euro-area peers, according to Reuters. Greek Prime Minister George Papaconstantinou said that the budget was “yet another big step toward tidying up our public finances and setting the foundation for stable growth.” A final budget is set to be released on Nov. 18.

In economic news in across the pond, euro-zone producer prices rose by 0.1% m/m in August, compared to the 0.2% increase that economists had forecasted, UK PMI Construction unexpectedly rose for September, a reading of euro-zone investor confidence increased more than anticipated for October, and Spain’s unemployment increased by a smaller amount that expected in September.

Economic news in the Asia/Pacific region was light with only a report out of Hong Kong showing that the nation’s retail sales rose more than anticipated y/y in August.

Service sector data set for tomorrow

The economic data for the week will begin to heat up tomorrow with the release of the ISM Non-Manufacturing Index, forecasted to increase to 52.0 in September from 51.5 in August. The level that separates expansion from contraction is 50.0. The ISM Manufacturing Index posted a modest 1.9 point decrease in September to 54.4, but the headline number hid underlying weakness in many components, including a 4.2 point increase in inventories despite a 2.0 point decline in new orders, employment falling 3.9 points and supplier deliveries (a component of the leading indicator index) declining by 4.3 points. These same components of the non-manufacturing report will also likely garner the lion’s share of attention. But, given the fact that the manufacturing sector has been in expansion mode for so long, and that activity in the non-manufacturing sector makes up much more of the overall economy—about 75% of total activity—tomorrow’s data may carry more weight than its manufacturing counterpart on the Street as traders grapple with whether economic conditions will warrant further stimulus from the Federal Reserve.

Internationally, France, Italy, Germany and the euro-zone will release services PMI figures, while the euro-zone will also provide retail sales data, and Australia reports retail trade.

In upcoming central bank action, the Bank of Japan is not expected to change its near-zero benchmark interest rate when it meets tomorrow, but there is some speculation that the central bank could announce more stimulus efforts to try to support the economy and arrest the surge in the yen that has threatened the Japanese economy.

Elsewhere, the Reserve Bank of Australia is expected to increase its benchmark interest rate by 25 basis points to 4.75% at the conclusion of its monetary policy meeting tomorrow, resuming its rate hike campaign, which has been on hold for four-straight months.