Morning Market Update

M&A Cant Keep Stocks Away From the Fray

The global equity markets are under some pressure on wavering global recovery sentiment following news that China is tightening restrictions on its banking sector, and continued cautiousness ahead the afternoon release of the minutes from the September monetary policy meeting by the US Federal Reserve. Even the announcement that Dow member Pfizer Inc will acquire King Pharmaceuticals Inc for $3.6 billion is failing to push the equity markets into the green in morning action. Treasuries are higher amid the uneasy sentiment, showing little impact from a report that showed small business optimism ticked higher. In other equity news, Fastenal Co reported better-than-anticipated 3Q results. Overseas, Asia was lower as Japanese stocks led the way after a plethora of blows to sentiment, while Europe is under pressure amid the aforementioned cautiousness, despite a successful debt auction in Greece.

As of 8:53 a.m. ET, the December S&P 500 Index Globex future is 2 points below fair value, the Nasdaq 100 Index is 3 points below fair value, while the DJIA is 17 points below fair value. Crude oil is down $0.08 at $82.13 per barrel, and the Bloomberg gold spot price is down $2.10 at $1,351.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.2% at 77.68.

M&A news continues to fly, with Dow member Pfizer Inc. (PFE $17) announcing that it has reached an agreement to acquire King Pharmaceuticals Inc. (KG $10) for $3.6 billion in cash, or $14.25 per share, representing a 40% premium to KG’s closing price yesterday. PFE said the acquisition will advance the firm’s strategic objectives by strengthening its position within the rapidly growing pain relief market. Also, PFE said the deal is expected to be accretive to its adjusted EPS and will provide additional revenue diversification across existing business units.

On the earnings front, industrial and construction supply firm Fastenal Co. (FAST $55) reported 3Q EPS of $0.51, one penny above the Reuters estimate, with revenues increasing 23.4% year-over-year (y/y) to $604 million, above the $596 million that the Street was anticipating.

Small businesses ticks higher, inside look at Fed meeting on the horizon

After posting the first increase since May for the previous month, the NFIB Small Business Optimism Index inched higher from 88.8 in August to 89.0 in September, but below the expectation of economists surveyed by Bloomberg, which called for the index to improve to 89.6. The slight increase came as the number of firms reporting expectations of a better economy improved but remained in negative territory, while those expecting the higher sales and selling prices deteriorated. Moreover, firms’ plans to hire weakened. Treasuries are higher following the report.

In the afternoon, however, the US economic calendar will yield possibly the headlining economic event of the week, with the midday release of the minutes from the September Federal Open Market Committee (FOMC) meeting. In the statement following the meeting, the Fed changed its outlook on inflation, saying it is currently at levels "somewhat" below the level consistent with its dual mandate of price stability and maximum employment, and indicated that they are prepared to provide additional accommodation if needed. With the fed funds target rates already at 0-0.25%, the Fed's most likely form of additional accommodation would come in the form of asset purchases of bonds, commonly known as quantitative easing (QE).

St. Louis Fed President Bullard said that QE was not a given at the November FOMC meeting, as economic data, while soft, wasn’t clearly negative, while New York Fed President Dudley said the expected rate of progress on the economy and job growth was “unacceptable.” Traders will be looking for any nuances as to the uniformity of opinions and satisfaction with current and forecasted economic data and if QE was tied to any quantifiable measures of weakness. Moreover, any debate as to what the best plan of deployment of QE—all at once as was the case in the first round of easing, or in increments—would likely garner some attention. Finally, Bernanke and others have noted the risks to doing more QE, and a discussion of these will also be monitored.
 

 While the Fed can push money into the economy, it can't force lending, borrowing, spending or investing, which are tied to both demand and confidence. We’ve noted some positive signs of confidence in the form of M&A activity, dividend increases and stock buybacks, and we’re eager to hear commentary from management teams during earnings season, which will begin to heat up after the closing bell today with the results from Dow member Intel Corp. (INTC $20). The market posted a strong run in September on better-than-expected economic data and the prospect for another round of QE. As such, the stock market is likely overbought near-term and could pullback.

Europe under pressure on weakness in energy and materials

Stocks in Europe are lower in afternoon action, led by declines in oil & gas and basic materials on uneasiness regarding the global recovery amid reports that China raised the reserve requirements for some of the nation’s large commercial banks. Also, steelmakers are lower to help pace the decline in sympathy toward a large South Korean competitor after it slashed its full-year profit outlook. In other equity news across the pond, shares of Punch Taverns Plc. (PCTVY $2) are down sharply after the UK’s largest pub owner, according to Bloomberg, took a large impairment charge on the value of its establishments and after excluding one-time items, the company posted a y/y drop in full-year profits. Meanwhile, a successful debt auction in Greece is having little impact on trading in the equity markets, but austerity protests in France are pressuring equities in the nation.

From the European economic calendar: retail sales growth in the UK slowed in September, Germany consumer prices were unrevised at a slight month-over-month (m/m) decline for September, while German wholesale prices rose much more than expected, and Sweden’s consumer prices rose more than expected. Additionally, separate reports in UK housing prices were mixed, while other releases showed core consumer and retail prices in the UK were hotter than anticipated, and Britain’s trade deficit narrowed by a smaller amount than expected.

The UK FTSE 100 Index is down 0.7%, France’s CAC-40 Index is down 1.2%, Germany’s DAX Index is declining 0.5%, Sweden’s OMX Stockholm 30 Index is decreasing 0.4%, and Greece’s Athex Composite Index is off 0.4%.

Asia pressured by reports of Chinese tightening and as Japan gets hit from multiple fronts

Stocks in Asia were mostly lower, with financials and commodity issues finding pressure following a report from Reuters that China temporarily raised the reserve requirements—the amount of deposits that banks must keep in reserve—for six large commercial banks. Sources told Reuters that the action is intended to soak up some of the cash from the economy to avoid the formation of asset bubbles and an overheating of the economy, but at the same time, avoiding over-tightening. The People’s Bank of China declined to comment. Stocks in Japan led the decline, with the Nikkei 225 Index falling 2.1% following a holiday, which closed markets yesterday, and a plethora of blows to sentiment in the region. This was the first day for Japanese markets to react to the mixed US labor report on Friday, the yen hit a fresh fifteen-year higher versus the dollar during today’s session, and a read on Japanese consumer confidence deteriorated in September. Moreover, shares of Fast Retailing Co. (FRCOY $15) came under sharp pressure to add insult to injury in the region after Asia’s largest clothing chain, per Bloomberg, issued a forecast calling for a disappointing drop in full-tear profit, due to decelerating sales at its Uniqlo clothing stores.

However, stocks in China finished mixed, with the Shanghai Composite Index increasing 1.2%, while Hong Kong’s Hang Seng Index declined 0.4%. Meanwhile, Australia’s S&P/ASX 200 Index fell 1.7% on the aforementioned weakness in commodities and following a deterioration in a reading of consumer confidence in the region, which prompted some profit-taking as the in sits near a five-month high. Additionally, South Korea’s Kospi Index dropped 1.2%, pressured by a solid decline in shares of POSCO (PKX $120) after the steelmaker cut its annual profit forecast. Elsewhere, Taiwan’s Taiex Index fell 1.1%, and India’s BSE Sensex 30 Index declined 0.7%, pressured by a report that showed than nation’s industrial production rose by a smaller amount than expected.