Morning Market Update

Equities Strengthen as Bank of Japan Eases

The US equity markets are gaining back some of yesterday’s losses in morning action as the Street digests some mixed reports out of Europe and the surprising monetary policy easing announcement from the Bank of Japan. Japan’s central bank said it will keep its rates near zero until “price stability is in sight,” and it will examine the establishment of a program to purchase up to 5 trillion yen ($60 billion) in various assets to help foster economic improvement in the face of a surging yen. Treasuries are modestly higher ahead of a key report on the non-manufacturing sector, which could shape the movement in the markets after the opening bell. In equity news, agriculture firm Mosaic Co posted mixed fiscal 1Q performance, and Dow member Chevron Corp announced that it will begin its previously announced campaign to purchase its common stock in 4Q. Overseas, Asia was mixed with Japan catching a tailwind on the aforementioned central bank announcement, while Australia moved lower after its central bank unexpectedly kept its benchmark interest rate unchanged, compared to expectations of a rate hike.

As of 8:51 a.m. ET, the December S&P 500 Index Globex future is 10 points above fair value, the Nasdaq 100 Index is at 24 points above value, while the DJIA is 85 points above fair value. Crude oil is up $0.81 at $82.28 per barrel, and the Bloomberg gold spot price is up $16.00 at $1,331.25 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.7% at 77.94.

Mosaic Co. (MOS $59) reported fiscal 1Q EPS of $0.67, three cents shy of the Reuters estimate, but revenues jumped 50% year-over-year (y/y) to $2.2 billion, exceeding the $2.0 billion that the Street had expected. The agriculture firm said its gross margin as a percent of sales improved to 23%, versus 15% last year. MOS added that recent market developments reinforce the long-term attractiveness of the crop nutrient sector as farmers need to plant record areas and harvest ever increasing yields to meet the world’s accelerating appetite for grains and oilseeds.

Dow member Chevron Corp. (CVX $81) announced that it would begin purchases of its common stock in 4Q 2010 under an ongoing share repurchase program communicated previously, and is targeting a buyback rate of $500 million to $1 billion a quarter. CVX said initiating repurchases at this time is evidence of its ongoing capital discipline and strong cash flows, including from newly developed oil and gas projects.

Non-manufacturing data dominates US economic calendar

Treasuries are modestly higher in morning action as traders await a key report on the non-manufacturing sector after the opening bell, 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. Last week, 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—today’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. 

The Federal Reserve continues to fight an uphill battle trying to restore confidence to the business sector. Recent Fed comments, reiterated in the statement from the last Federal Open Market Committee (FOMC) meeting, indicate that the Fed clearly stands ready to implement another round of quantitative easing, to the extent economic conditions so justify. The FOMC expressed concern that inflation wasn't high enough, and that they have a goal of actually raising the inflation rate. Clearly, the possibility of deflation remains a concern, and the Fed stands ready with its finger on the trigger should the economy need another jolt of cash. However, the quantity of money isn't the problem—it's the "velocity" of money—getting money circulating in the economy. Companies have plenty of cash on their balance sheets (and interest rates remain historically low should they need more), but they remain reluctant to use it. This is the conundrum the Fed faces: It can push money into the economy, but can't force lending, borrowing, spending or investing, leading to a continued low velocity of money.

Europe modestly higher on mixed data

Stocks in Europe are modestly higher in afternoon action as sentiment received a boost from some upbeat equity reports and the surprising move to ease monetary policy by Japan, while grappling with a mixed bag of economic data. Services PMI releases across the pond were mostly better-than-expected, with separate readings from the euro-zone, UK, Germany, and Italy all exceeding expectations, while France’s report came in softer-than-forecasted. Moreover, an unexpected drop in euro-zone retail sales is tempering some of the enthusiasm and limiting gains in the equity markets.

However, shares of TUI Travel Plc. (TTVLF $3) are nicely higher to help pace the advance in the region, after Europe’s largest travel company offered an upbeat outlook for bookings for the upcoming winter holiday. Also, the world’s third largest retailer, Tesco Plc. (TSCDY $21), offered upbeat commentary about the recovery after it posted better-than-forecasted first-half profits, to help the mood overseas, but shares have given up an early advance.

The UK FTSE 100 Index is up 0.2%, Germany’s DAX Index is advancing 0.1%, France’s CAC-40 Index is 0.7% higher, and Italy’s FTSE MIB Index is gaining 0.5%.

Asia mixed as central banks surprise

Stocks in Asia were mixed with Japan’s Nikkei 225 Index rising 1.5% after the Bank of Japan unexpectedly eased its monetary policy. The BoJ decided to implement “a comprehensive monetary easing policy,” which is comprised of three measures, such as keeping interest rates at around 0.00 – 0.10%, clarifying policy time horizon based on the “understanding of medium-to long-term price stability,” and examining the establishment of an asset purchase program. The BoJ said it will maintain the virtually zero interest rate policy until it judges, on the basis of the “understanding of medium-to long-term price stability,” that price stability is in sight. The Japanese central bank also said its asset purchase campaign of up to 5 trillion yen ($60 billion) will consist of buying government securities, commercial paper, corporate bonds, exchange traded funds (ETFs), and Japan real estate investment trusts (J-REITs) and to conduct the fixed-rate funds-supplying operation against the pooled collateral. The BoJ added that, “Although Japan’s economy still shows signs of a moderate recovery, the pace of recovery is slowing down partly due to the slowdown in overseas economies and the effects of the yen’s appreciation on business sentiment.”
 

Japan has been mired in a state of deflation, or falling prices, for more than a decade. In a deflationary spiral, consumers postpone purchases because they expect prices to be lower in the future. As a result, companies are forced to cut prices to try to spur demand. At the same time, lack of demand means companies are reluctant to hire, further depressing consumer spending. The end result is that growth is pushed off. In Japan, this deflationary force will likely continue as the aging population reduces spending. However, despite her outlook for Japan’s economic growth likely remaining low, but there are still innovative Japanese companies that warrant attention from investors.

Meanwhile, the Reserve Bank of Australia also surprised traders by keeping its benchmark interest rate unchanged at 4.5% for the fifth-month in a row, where economists had anticipated an increase to 4.75%. The RBA said the global economy grew faster than trend over the year to mid 2010, but will probably “ease back to about trend pace over the coming year.” Moreover, the central bank noted that in Europe and the US, “growth prospects appear to be modest” in the near term, but recent information is consistent with “a more sustainable, but still strong, pace of growth in China and most of the Asian region.” Also, it pointed out that commodity prices that are most important to Australia remain very high. The RBA concluded that the current stance of monetary policy is “appropriate for the time being,” but if economic conditions evolve as it expects, it is likely that “higher interest rates will be required, at some point, to ensure inflation remains consistent with the medium-term target.” Australia’s S&P/ASX 200 Index declined 0.4% after coming off the worst levels of the day that followed the announcement. Other economic reports in Australia included: a smaller-than-forecasted increase in retail sales, a wider-than-anticipated trade surplus, and a deceleration in the amount of nation’s job advertisements versus the previous month.

Rounding out the day, South Korea’s Kospi Index was flat, while the Hong Kong Hang Seng Index increased 0.1%, with stocks in mainland China remaining closed for a holiday.