Evening Market Update

Market Tally Ends in Bulls’ Favor

Equities finished in the green as traders looked ahead to the results of today’s US midterm elections with the hopes that it could prove favorable for future business activity and the markets. As well, heightened expectations of further stimulus by the Fed following its two-day policy meeting, which began today, aided sentiment and added pressure to the US dollar, which also elevated commodity prices. Treasuries finished mostly higher amid the strength in equities, and as there were no major economic reports on today’s docket. Earnings remained at the forefront of equity news, as MasterCard bested the Street’s profit forecasts and Dow component Pfizer also topped expectations but sales fell short of estimates, while Kellogg matched expectations and Archer Daniels Midland reported profits that were below what analysts were expecting. Elsewhere on the equity front, United Parcel Service upped package shipping rates effective 2011, and Oracle said it will acquire eCommerce software firm Art Technology Group in a deal worth $1 billion.

The Dow Jones Industrial Average rose 64 points (0.6%) to 11,189, the S&P 500 Index gained 9 point (0.8%) to 1,194, and the Nasdaq Composite was 27 points (0.1%) higher to 2,534. In modest volume, 914 million shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil gained $0.95 to $83.90 per barrel, wholesale gasoline added $0.02 to $2.11 per gallon, and the Bloomberg gold spot price rose $2.60 to $1,356.45 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.4% lower at 76.77.

Dow member Pfizer Inc. (PFE $17) reported 3Q EPS ex-items of $0.54, three cents above the consensus estimate of analysts, with revenues jumping 39% year-over-year (y/y) to $16.2 billion, but below the $16.7 billion that the Street was looking for. Cost cutting helped bottomline results and international revenues, which represented more than half of the company’s total revenues, increased 33%, while US revenues rose 48%. However, worldwide sales of cholesterol drug Lipitor—the company’s largest revenue generator—fell 11% y/y, negatively impacted by generic competition as the drug lost exclusivity in the international markets. PFE raised its full-year EPS outlook. Shares were lower.

MasterCard Inc. (MA $246) announced 3Q earnings of $3.94 per share, above the $3.54 that analysts had anticipated, with revenues increasing 4.7% y/y to $1.4 billion, roughly inline with the Street’s forecasts. The credit card transaction firm said it benefitted from “strong volume growth from markets outside of the US,” as cross-border volumes rose 15.4% and gross dollar volume gained 8.5%. Meanwhile, worldwide purchase volume was up almost 8%, while the number of processed transactions increased 0.6%. MA was higher.

Kellogg Co. (K $50) achieved 3Q profits of $0.90 per share, matching the consensus estimate on the Street, but revenues declined 4% y/y to $3.2 billion, inline with analysts’ expectations. The company said 3Q “softness” was due to weaker performance in some of its core cereal markets, continued competitive intensity, and the impact of the cereal recall. Shares were lower.

United Parcel Service Inc. (UPS $68 ¹) reported that it will increase its rate for UPS ground packages and on all air express and US origin international shipments by 4.9%. The new pricing will take effect January 3, 2011. UPS was higher.

Archer Daniels Midland Co.(ADM $31) closed lower after the agriculture firm posted fiscal 1Q EPS of $0.54, but excluding certain items such as changing inventory valuations, Reuters calculated the company’s profits of $0.73, compared with the Street’s forecast of $0.75. But revenues increased about 13% y/y to $16.8 billion, above the $15.6 billion that analysts were expecting. The company said it performed solidly in both corn and oilseeds but its agricultural services results were impacted by crop supply shifts early in the quarter as a result of drought conditions and government actions in the Black Sea region. ADM said as it looks at markets today, “global demand is generally strong.”

Oracle Corp. (ORCL $30) announced that it has reached an agreement to acquire Art Technology Group (ARTG $6), a leading provider of eCommerce software, for $6.00 per share, or about $1.0 billion. The transaction is subject to stockholder and regulatory approval. ORCL was higher, while shares of ARTG gained over 45%.

Market will weigh election, services growth and Fed action tomorrow

Treasuries finished mostly higher as there were no major economic releases scheduled on today’s docket. The yield on the two-year note was flat at 0.34%, the yield on the 10-year note was 3 bps lower at 2.60%, and the 30-year bond yield lost 6 bps to 3.94%.

Traders will be digesting the results of the mid-term elections tomorrow morning, along with the October reading of the ISM Non-Manufacturing Index, which will be released after trading begins, at 10 a.m. EST. The forecast is that the measure of services activity will increase to 53.5 in October from 53.2 in September. The level that separates expansion from contraction is 50.0. The services index has been more volatile on a month-to-month basis than the ISM Manufacturing Index, but the stronger-than-expected reading on manufacturing yesterday has buoyed optimism that growth could be set to reaccelerate after hitting a soft patch over the summer.

Meanwhile, market reaction will likely focus on the midday statement that is issued at the conclusion of the two-day Federal Open Market Committee (FOMC) meeting. No changes are anticipated to the fed funds target rate, but there is an expectation the Fed will embark on another round of asset purchases, or quantitative easing (QE). Fueling speculation are comments from Fed Chair Ben Bernanke on October 15 where he said that the “risk of deflation is higher than desirable,” as well as speeches from New York Fed President William Dudley, who said that unemployment and inflation levels and the timeframe over which they will return to levels consistent with the Fed’s mandate are “unacceptable.” The size of the potential purchase program has been widely debated, but market expectations seem to be centered on an initial purchase of around $500 billion. As the market has moved in anticipation of the announcement, the Fed has a delicate communication balancing act – to appease markets, while also keeping its options open.

The Fed’s prior purchase program was viewed as ineffective in stimulating growth, as the regular transmission of an increase in liquidity has not resulted in money flowing throughout the economy due to a weakened consumer, as well as skittish banks. As such, there have been many questions about the rationale for QE2. The impact of QE2 would be to lower Treasury rates, which form the basis for many lending rates as a preventive measure to stave off the threat of a renewed downturn in the economy. However, the real thrust is likely to come from a weaker dollar due to the increased supply of money, boosting the prospects of exporters, and a “wealth effect” that could come as low yields push investors into riskier assets, creating higher stock prices and thus boosting consumer sentiment.

Other releases on the US economic calendar tomorrow include the weekly MBA Mortgage Applications Index, September factory orders, expected to increase 1.6% after falling by 0.5% in August, and the ADP Employment Change report, where private sector jobs are forecast to rise by 20,000 in October following a 39,000 decline in September.

Australia hikes rates, manufacturing favorable in Europe

The Reserve Bank of Australia (RBA) surprisingly increased in its benchmark lending rate by 25 basis points to 4.75%, whereas most economists expected the central bank to keep rates unchanged following its monetary policy meeting. In its statement, the RBA said the risk of inflation rising again over the medium term remains and it concluded that the “balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent.” Also, India’s central bank increased its main lending rates by 25 basis points, but the move was expected by economists as the Asian nation has seen a surge in economic growth and rising food prices.

There was a plethora of favorable revisions to PMI Manufacturing data across the pond for October, with Italy, Germany and the euro-zone all topping economists forecasts, while France’s manufacturing activity gauge was left unrevised.

The international economic docket tomorrow will offer up Services PMI reports out of the UK and Italy, while Australia will release building approvals.