Morning Market Update

Upward Direction as Profits Continue to Top Expectations

The global equity markets are mostly higher as earnings reports around the globe continue to best analysts’ forecasts, supporting sentiment, as the economic calendar is light on major releases today. Dow members American Express Co and Verizon Communications Inc both topped the Street’s profit projections, while Amazon.com also exceeded analysts’ top and bottom lines forecasts. Treasuries are mostly lower as the US economic calendar is dormant, and as traders may be treading with some caution ahead of the weekend G20 meeting of finance ministers in South Korea, where currency action is likely to dominate discussions. Overseas, Asia was mostly higher, while an upbeat report from Ericsson and an unexpected increase in German business confidence are helping promote some resilience in Europe.

As of 8:55 a.m. ET, the December S&P 500 Index Globex future is 2 points above fair value, the Nasdaq 100 Index is 2 points above fair value, while the DJIA is 15 points above fair value. Crude oil is up $0.92 at $81.48 per barrel, and the Bloomberg gold spot price is up $0.37 at $1,326.04 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% at 77.39.

Dow member American Express Co. (AXP $40) reported 3Q EPS of $0.90, three cents above the consensus estimate of analysts surveyed by Reuters, with revenues growing 17% year-over-year (y/y) to $7.0 billion, compared to the $6.8 billion that the Street was expecting. The credit card company said revenues reflected higher cardmember spending and higher travel commissions and fees, which were offset by lower interest income due to a smaller loan portfolio and lower yields on both the securitized and non-securitized portions of its portfolio. AXP added that cardmember spending rose 14% y/y with the largest increases coming from businesses, but lending volumes remain below pre-recessionary levels as cardmembers continued to manage their finances carefully and pay down outstanding debt. The company said it remains “cautious” about the economic outlook.

Fellow Dow component Verizon Communications Inc. (VZ $33) announced 3Q EPS of $0.56, two pennies above the Street’s expectations, but revenues declined 2.9% y/y to $26.5 billion, compared to the $26.3 billion that analysts were forecasting. The company added 997,000 total net customer additions at its wireless unit, while its internet and TV customers grew by 226,000 and 204,000, respectively. VZ said it sees second-half profits at the high end of its previous outlook.

Amazon.com Inc. (AMZN $165) posted 3Q earnings of $0.51 per share, three cents above the expectation of analysts, with revenues rising 39% y/y to $7.6 billion, above the $7.4 billion that had been anticipated on the Street. The online retailer said sales at its North American unit jumped 45% y/y, while international segment sales grew 32%, led by steep growth in sales of electronics and other general merchandise. AMZN said its new generation Kindle devices are the fastest selling Kindles of all time and the bestselling products on Amazon.com and its UK website. However, the company issued 4Q operating earnings guidance that came in below analysts’ expectations.

Economic calendar is void of major release to end the week

Treasuries are nearly unchanged in early action as there are no major US reports scheduled for release today to close out the week for the economic front, which saw global central bank actions command the lion’s share of attention, highlighted by China surprising interest rate hike—the first since 2007. Also, Germany’s Chancellor Angela Merkel suggested that “exit strategies” should be considered as the impact of the global financial crisis wanes, while the minutes from the Bank of England’s most recent monetary policy meeting showed members were split three ways as to the direction its policy should take, with some feeling that the “likelihood that further monetary stimulus would become necessary in order to meet the inflation target in the medium term had increased in recent months.” Moreover, traders continued to expect the Federal Reserve to deploy further stimulus efforts as the release of the Fed’s Beige Book revealed national economic activity continued to rise, but at a “modest pace.” The Beige Book is a tool used by the Fed as it summarizes anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for November 2-3.

In the meeting minutes from the last FOMC meeting, many participants noted that unless unemployment and inflation levels improved adequately, it would be appropriate to take action to support economic recovery. The Beige Book noted positives such as consumer spending and manufacturing, although good news for the economy, they are minor and are unlikely to sufficiently change the Fed’s outlook that it will take more than five years for the economy to return to levels that are consistent with the Fed’s dual mandate of maximum employment and price stability.

Europe overcoming early pressure on upbeat earnings and economic data

Stocks in Europe have pared a majority of early losses and most major equity markets in the region are now higher in afternoon action, led by technology shares amid a solid advance in shares of Ericsson AB (ERIC $11) after the mobile network equipment company reported stronger-than-expected 3Q profits, aided by a sales surge in North America. Meanwhile, shares of French automotive supplier Valeo SA (VLEEY $25) are sharply higher to help the resilience in Europe after it raised its full-year guidance for the second time in four months, per Dow Jones Newswires. Moreover, the European economic calendar is supporting sentiment as a gauge of business confidence in Germany—Europe’s largest economy—unexpectedly improved. The Ifo Business Climate Index increased to 107.6 in October—the highest since May 2007—from 106.8 in September, and compared to the expectation of economists surveyed by Bloomberg, which called for a decline to 106.5. In other economic news, Italian retail sales were flat for August, inline with expectations. The upbeat data is offsetting the impact of a solid drop in shares of Alfa Laval (ALFVF $17) after the engineering firm posted 3Q sales that missed expectations.

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

Asia mostly higher on positive corporate sector sentiment

Stocks in Asia were higher in most major equity markets as the focus was on the mostly better-than-expected start to global earnings season, which lifted sentiment, with the economic calendar void of any major reports in the region. South Korea led the way, with the South Korean Kospi Index gaining 1.2%, aided by steep advance in shares of LG Display Co. (LPL $18) after the world’s second largest maker of LCD for flat-panel TVs and other devices posted profits that exceeded analysts’ forecasts, which overshadowed the company’s cautious outlook. Meanwhile, Japan’s Nikkei 225 Index rose 0.5% and Australia’s S&P/ASX 200 Index gained 0.6%, but the Hong Kong Hang Seng Index and the Shanghai Composite Index declined 0.6% and 0.3%, respectively. In other equity news, American International Group Inc. (AIG $41) raised about $17.8 billion through its ownership in its main Asian unit, AIA, which had the biggest IPO in Hong Kong today.

Traders may have treaded with some care ahead of the weekend’s G20 meeting of finance ministers in South Korea, with the currency markets likely being the main focus, as the Japanese yen continues to trade at the highest level versus the US dollar since 1995 and with rhetoric between China and the US heating up pertaining to the appreciation of the Chinese currency.  The protectionist trend continued as the US Congress passed legislation urging China to appreciate the renminbi, with consequences of broad tariffs for noncompliance. This politically motivated move is one of many recent actions to suppress exports from China into the United States, including duties on copper and steel pipes, and aluminum. China began to allow its currency to move in late June, but the renminbi will not undergo a large one-time adjustment, because it would be destabilizing to China's economy—exporters in particular. China's manufacturing sector is the main source of employment, and is already pressured due to the global slowdown. The Chinese government will do whatever it takes to protect jobs. To the extent renminbi appreciation detracts from exporters' competitiveness, the government could make conducting business in China by foreigners increasingly difficult by extending approval times, requiring additional paperwork or implementing new regulations.