Evening Market Update

Caution Reigns Ahead of Elections & FOMC Meeting

Despite early enthusiasm supported by unexpected improvements in manufacturing activity out of China and the US, stocks sold off late in the day to finish nearly unchanged, as caution ahead of tomorrow’s US midterm elections and start of the FOMC meeting appears to be at the top of traders’ minds. On the earnings front, Humana beat analysts’ forecasts, but Corning fell short of expectations. Elsewhere, shares of Avanir Pharmaceuticals nearly doubled after the company’s drug received approval from the US Food & Drug Administration (FDA), while healthcare firm McKesson Corp announced that it has reached an agreement to acquire privately-held US Oncology for about $2.2 billion. Treasuries erased early gains that came from the disappointing personal income and spending report, finishing mostly lower following the upbeat US ISM Manufacturing Index data.

The Dow Jones Industrial Average rose 6 points (0.1%) to 11,125, the S&P 500 Index gained 1 point (0.1%) to 1,184, while the Nasdaq Composite lost 3 points (0.1%) to 2,505. In modest volume, 960 million shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil rose $1.52 to $82.95 per barrel, while wholesale gasoline added $0.03 to $2.09 per gallon, and the Bloomberg gold spot price lost $8.75 to $1,350.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was unchanged at 77.29.

Humana Inc. (HUM $59) reported 3Q EPS ex-items of $2.01, above the $1.66 consensus estimate of analysts surveyed by Reuters, with revenues increasing 9.2% year-over-year (y/y) to $8.4 billion, compared to the $8.5 billion that was anticipated on the Street. The health insurer said it had “strong” performance in both its government and commercial segments. “With the success of our one-to-one retail approach to membership growth solidly aligned with the continued expansion on Medicare and potential retail opportunities in the individual market, Humana faces the post-reform future with confidence,” the company said. HUM raised its full-year EPS outlook. Shares finished nearly unchanged.

Corning Inc. (GLW $19) announced 3Q EPS ex-items of $0.51, one penny short of analysts’ forecasts, with revenues rising 8% y/y to $1.6 billion, roughly inline with the forecast on the Street. However, sales were down 6% quarter-over-quarter (q/q) as glass volume at its display technologies unit fell 8% versus 2Q. GLW said its LCD glass business adjusted with the supply chain correction that occurred in 3Q, but global retail demand for LCD products continued to show y/y growth in all markets other than televisions in the US. Shares were higher despite the results.

Avanir Pharmaceuticals Inc. (AVNR $5) was up nearly 100% after the company received approval from the US Food & Drug Administration (FDA) of its drug Nuedexta, the first approved treatment in a condition that involves involuntary, sudden, and frequent episodes of laughing and/or crying.

In M&A news, healthcare firm McKesson Corp. (MCK $68) announced that it has reached an agreement for the company to acquire privately-held US Oncology in a cash transaction valued at about $2.16 billion, including the assumption of debt. The deal is expected to close by December 31 and is subject to the customary conditions, including all necessary regulatory clearances. Shares of MCK were higher.

Manufacturing unexpectedly improves, while personal income and spending miss

The ISM Manufacturing Index unexpectedly improved, increasing from 54.4 in September to 56.9 in October, compared to the fall to 54.0 that was expected by economists surveyed by Bloomberg. The reading marks the fifteenth-consecutive month the manufacturing sector has been above the 50 level that separates contraction versus expansion, and indicates the overall economy grew for the eighteenth-straight month. The report added to today’s favorable readings on manufacturing activity in China to boost the outlook for the global economic recovery. Also, underlying components of the report that led the unexpected increase in the index came from favorable areas as new orders jumped from 51.1 to 58.9, production improved from 56.5 to 62.7, and exports advanced from 54.5 to 60.5, to further support sentiment. Moreover, the employment component also increased from 56.5 to 57.7.

Meanwhile, personal income fell 0.1% in September, versus the 0.2% gain that economists had expected, while August’s 0.5% increase was revised to a 0.4% advance. Personal spending was 0.2% higher in September, compared to expectations of a 0.4% advance, but August’s 0.4% rise was revised to a 0.5% increase. The savings rate moved lower to 5.3% in September, after a downwardly revised 5.6% for August.

Also, the PCE Price Index, which is released with the income and spending data, was up 1.4% y/y in September, matching expectations, after August’s 1.5% increase was revised to a 1.4% gain. The core PCE Price Index, which excludes food and energy, was flat month-over-month (m/m), compared to the 0.1% increase that economists expected, while y/y core prices moved 1.2% higher, below the consensus 1.3% estimate.

In other economic news, construction spending unexpectedly increased, rising 0.5% in September, compared to the 0.5% decline that was expected, but August’s 0.4% increase was revised to a 0.2% drop. Residential spending was rose, while nonresidential spending was flat.

Treasuries erased early gains that came on the disappointing income and spending data and finished mostly lower following the upbeat manufacturing report. The yield on the two-year note was flat at 0.34%, the yield on the 10-year note was 3 bps higher at 2.64%, and the 30-year bond yield gained 3 bps to 4.01%.

China manufacturing favorable, Europe reports mixed

Prompting early enthusiasm in the global markets, the PMI Manufacturing report in China unexpectedly rose from 53.8 in September to 54.7 in October, versus the expectation of economists, which called for the index to remain unchanged. Moreover, the HSBC Manufacturing PMI improved from 52.9 in September to 54.8 in October. A reading above 50 denotes expansion in manufacturing activity. Elsewhere in the region, South Korea reported stronger-than-forecasted exports.

Across the pond, data was mixed as UK home prices fell the most since January 2009, per Bloomberg, while a separate report showed UK manufacturing activity unexpectedly moved further into expansion territory.

US midterm elections, start of FOMC meeting to dominate headlines tomorrow

Tomorrow’s events are likely to be the start of what may be the most-watched items of the week, the outcomes of each which will be played out on Wednesday. US citizens will go to the polls to cast their votes in a midterm election that may be one of the contentious ever and could not only change the political landscape—but the business and market climate as well. Also, the two-day Federal Open Market Committee (FOMC) meeting begins, and will culminate with the midday statement release on Wednesday. No changes are expected to the fed funds target rate, currently at a level between 0-0.25%, but rising expectations about the potential for the Fed to begin another round of asset purchases due to the weak economic data have been building since Fed Chair Ben Bernanke’s speech at Jackson Hole at the end of August, and his speech in Boston on October 15, where he said that the “risk of deflation is higher than desirable.” Additionally, Fed officials have added to the speculation, particularly New York Fed President William Dudley, who has been saying since the beginning of October that unemployment and inflation levels and the timeframe over which they will return to levels consistent with the Fed’s mandate are “unacceptable.” However, the size of the potential purchase program has been widely debated, and estimates as high as $1–2 trillion over the next six months could set the market up for disappointment.

Tomorrow’s international economic calendar will include: PMI manufacturing from Italy, Spain, France, Germany, and the euro-zone, as well as employment data from Spain. As well, the Reserve Bank of Australia and The Reserve Bank of India will meet to discuss monetary policy, whereas the RBA is expected to keep rates unchanged, while a 25 bp increase to 6.25% in India’s Repo rate is expected.