Morning Market Update

Caution Cornering the Bulls to Start the Week

The global equity markets are under some pressure amid uneasiness regarding elevated global terrorist alert levels and before a plethora of potential market moving data, headlined by Friday’s US labor report and monetary policy meetings by central banks in Japan, the euro-zone, and the UK. Treasuries are slightly higher amid the early cautiousness, and ahead of data on US factory orders and pending home sales. 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, Asia was mixed with banking issues weighing down Japan, while some profit-taking in the commodity sector is pressuring Europe.

As of 8:50 a.m. ET, the December S&P 500 Index Globex future is 4 points below fair value, the Nasdaq 100 Index is at 7 points below value, while the DJIA is 32 points below fair value. Crude oil is down $0.11 at $81.47 per barrel, and the Bloomberg gold spot price is down $4.38 at $1,314.73 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.4% at 78.33.

In M&A news, 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.

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.”

Manufacturing and housing data occupy docket, but labor report takes week’s top billing

Treasuries are modestly higher as today’s US economic calendar will not kick off until after the opening bell, with the releases of factory orders, which are forecasted to show a decline 0.4% for August, following the 0.1% gain that was seen in July, and the release of pending home sales, expected to increase 2.8% month-over-month (m/m) in August, after jumping 5.2% for July.

The economic 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.

However, the highlight of the week will be the release of nonfarm payrolls on Friday, expected to be flat in September, after declining by 54,000 in August, while excluding government employment, which has been falling as temporary Census workers are relieved, private sector payrolls are expected to increase 77,000, after expanding by 67,000 in August. The unemployment rate is estimated to increase to 9.7% from 9.6%, as workers re-enter the workforce as job openings increase.

Other releases on the US economic calendar this week include: MBA Mortgage Applications, the ADP Employment Change, initial jobless claims, consumer credit, and wholesale inventories.

Europe mostly lower as profit taking in commodities weighs

Stocks in Europe are mostly lower in afternoon action, led by materials and oil & gas issues, as traders are booking some profits in the groups ahead of some key reports in the US this week and as the European Central Bank and Bank of England are set to conduct monetary policy meetings this week. Both the ECB and BoE are forecasted to leave their benchmark interest rates unchanged near record lows, but any new announcement of further stimulus efforts or outlook regarding the timing of returning to more normal policy conditions will be closely scrutinized. Meanwhile, automakers are also lagging to help pace the decline in Europe following a report that showed German new-car sales fell in September by 18%, per Bloomberg. However, UBS AG (UBS $17) and Credit Suisse Group (CS $43) are higher to support financials, which are the lone major sector in the green today to help limit the decline in the equity markets, despite a Swiss government-appointed expert panel warning that the two banks will need to have to almost double their current capital positions compared with the Basel Committee on Banking Supervision’s recently agreed global capital rules, according to risk facing the firms, per Bloomberg.

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. Elsewhere, Greece is expected to unveil its 2011 draft budget as it tries to cut its deficit below a 7.6% of GDP target set under a fiscal adjustment plan agreed with the International Monetary Fund (IMF) and its euro-area peers, according to Reuters.

The FTSE 100 Index is 0.2% lower, France’s CAC-40 Index is down 1.0%, Germany’s DAX Index is declining 1.1%, Spain’s IBEX 35 Index is decreasing 0.2%, Switzerland’s Swiss Market Index is falling 0.4%, and Greece’s Athex Composite Index is 0.3% in the red.

Asia mixed as Japan slips

Stocks in Asia were mixed with Japanese stocks being pressured by weakness in banking issues on uneasiness toward the need for the group to increase capital positions, exacerbated by a Swiss government-appointed expert panel noting that banks in the region may need to boost capital. Japan’s Nikkei 225 Index gave up an early advance and finished 0.3% lower, as caution ahead of tomorrow’s monetary policy meeting by the Bank of Japan may have also impacted today’s action. The BoJ is not expected to change its near-zero benchmark interest rate 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. Japan's central bank waited too long to respond to the real estate bubble that occurred in the late 80’s and 90’s and did so with too little force. While the speculative bubble burst in 1991, the central bank did not reduce rates until 1995, dropped them to zero only in 1999 and waited until 2003 to step up purchases of assets. Additionally, stimulus was removed too early and likely triggered a double-dip recession.

However, Australia’s S&P/ASX 200 Index and Hong Kong’s Hang Seng Index led the way to the upside, rising 1.0% and 1.2%, respectively on continued optimism about the health of the Chinese economy on Friday’s strong manufacturing report and as the Chinese Premier Wen Jiabao said the nation will “rely on stimulating domestic demand to stabilize and further grow the Chinese economy,” per Bloomberg. Stocks in Hong Kong, which did not trade on Friday due to a holiday, also received a lift by a report that showed the nation’s retail sales rose more than anticipated y/y in August. Australian equities managed to gain solid ground even as 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. Stocks in mainland China were closed for a holiday and will return to action on Friday. Elsewhere, South Korea’s Kospi Index increased 0.1%, and India’s BSE Sensex 30 Index gained 0.2%, while Taiwan’s Taiex Index was flat.