Evening Market Update

Stocks Shun China Tightening, Finish with Modest Gains

China's move to tighten monetary policy cast a shadow over early trading, but the move had been largely expected all week and US equities were able to move back above the flatline, finishing modestly higher by days-end. Financials, however, came under some pressure as the Ireland debt situation continued to provide a bit of uneasiness to investors. Treasuries finished mostly higher amid a dormant US economic calendar, and as traders mulled over a speech by US Federal Reserve Chairman Ben Bernanke in which he defended the Fed's latest policy actions. In equity news, Dell booked 3Q profits that were well above analysts' forecasts, Salesforce.com saw its shares surge on better-than-expected 3Q earnings and a favorable 4Q outlook, while H.J. Heinz reported softer-than-expected revenues, and Harrah's Entertainment shelved its IPO, citing market conditions. Elsewhere, positive profit reports from Foot Locker and AnnTaylor, and an increased dividend by Nike, helped to put the consumer discretionary sector in positive territory today.

The Dow Jones Industrial Average rose 22 points (0.2%) to 11,204, the S&P 500 Index added 3 points (0.3%) to 1,199, and the Nasdaq Composite gained 4 points (0.2%) to 2,518. In moderate volume, 1.1 billion shares were traded on the NYSE and 1.8 billion shares were traded on the Nasdaq. Crude oil fell $0.44 to $81.98 per barrel, wholesale gasoline lost $0.03 to $2.20 per gallon, and the Bloomberg gold spot price eked $0.50 higher to $1,353.58 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was 0.2% lower at 78.44. For the week, including dividends, the DJIA rose 0.1%, while both the S&P 500 Index and the Nasdaq Composite were flat.

Dell Inc. (DELL $14) reported 3Q EPS ex-items of $0.45, above the $0.32 consensus estimate of analysts surveyed by Reuters, with revenues increasing 19% year-over-year (y/y) to $15.4 billion, but below the Street’s expectation of $15.8 billion. The PC maker said global demand for all commercial products and services and solid supply chain execution led to its strong operating income and growth in revenues, and said it expects to see continued strength from the ongoing client refresh among large corporate accounts and strong growth in enterprise products and services. Moreover, the company said 4Q revenue is expected to track in-line to slightly up from 3Q, which missed analysts’ expectations, but it did raise its full-year earnings outlook. DELL gave up an early advance and finished lower.

Shares of Salesforce.com (CRM $137) surged over 18% after it reported fiscal 3Q earnings ex-items of $0.32 per share, a penny above what analysts were anticipating, with a 31% rise in subscription and support and a 10% increase in professional services accounting for a 30% jump in overall revenues to $429.1 million, also above expectations for $410.5 million. The online customer-relationship software maker also said it expects 4Q EPS of $0.27-0.28, inline with the median forecast, on sales of $447.0 million, which exceeds the Street’s estimates.

H.J. Heinz Co. (HNZ $48) came under some pressure after the condiment company reported fiscal 2Q revenues fell 1.2% y/y to $2.6 billion, which was below the $2.7 billion that analysts had expected. However, the company posted earnings of $0.78 per share, two cents above the Street’s forecast, as emerging markets delivered double-digit organic sales growth, which excludes acquisitions, divestitures, and currency fluctuations.

Harrah's Entertainment Inc. announced that it is not pursuing its initial public offering of common stock at this time “due to market conditions.” Harrah’s is the world’s largest casino operator and is the parent of Caesars and the World Series of Poker.

The consumer discretionary sector received a boost from sharp gains in shares of retailers Foot Locker Inc. (FL $18) and AnnTaylor Stores Corp. (ANN $26) after both firms handily beat the Street’s profits projections. Moreover, shares of Nike Inc. (NKE $86) were nicely higher to help the group after the company boosted its quarterly dividend by 15% to $0.31 per share. 

Economic docket dormant but Fed Chief offers some commentary on the global recovery

Treasuries finished mostly higher as there were no major releases scheduled for today on the US economic calendar, and as traders are digested a policy tightening move in China and a speech by Federal Reserve Chairman Ben Bernanke. The yield on the two-year note was flat at 0.50%, the yield on the 10-year note lost 3 bps to 2.87%, and the 30-year bond yield declined 5 bps to 4.24%. The Fed Chairman noted in a speech at a European Central Bank conference in Germany that tensions among nations over economic policies have emerged and intensified, potentially threatening our ability to find global solutions to global problems. Bernanke pointed out that the two-speed nature of the global recovery implies that different policy stances are appropriate for different groups of countries, but over time it would be desirable to devise an international monetary system that more consistently aligns the interest of individual countries with the interests of the global economy as a whole.

Bernanke defended the Fed’s monetary policy actions, as the recent announcement of $600 billion in further asset purchases has come under some scrutiny in the global markets, by pointing out that insufficiently supportive policies in the advanced economies could undermine the recovery not only in those economies, but for the world as a whole. Also, the Fed Chief seemed to address the growing tensions between China and the US regarding currency market fluctuations, saying, “…for large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account.”

China tightens monetary policy, uncertainty surrounding Ireland remains

After the close of trading in Asia, the Chinese government announced that it will increase the reserve ratio requirements-the fifth increase this year-by 50 basis points for the banking industry, resulting in banks having to set aside larger amounts of capital in reserve, aimed at absorbing some of the cash in the system to try to slow inflation and prevent the formation of asset bubbles. The move was widely expected, and has prompted many analysts to speculate that an increase in the Asian nation’s benchmark interest rate by year-end is in the offing. As well, Hong Kong introduced additional taxes and raised down payment requirements on residential properties, in an attempt to cool down the speculation in the real estate market.

The Asian economic calendar was light with a larger-than-expected decline in Japan’s All-Industry Index being the lone major report during trading hours in the region.

In Europe, uncertainty regarding whether Ireland will receive financial support for its troubled banking sector from the near $1 trillion euro-area bailout fund remained in focus. Also, concerns shifted to whether a rescue of the debt-ridden nation of Ireland will prevent contagion in the euro-zone and what kind of concessions Ireland will have to make as a result of any sort of bailout. Ireland’s low corporate tax policies are among the chief concerns, as the nation may need to tweak its policy to help repay any financial support it receives, and ultimately putting taxpayers on the hook for having to repay what the country’s central bank said may be “tens of billions” of euros.

Meanwhile, the euro-zone economic calendar was also relatively scant, with a larger-than-expected rise in producer prices in Germany and a smaller-than forecasted decline in Italian industrial orders being the only pertinent reports on the docket.

Markets finish where we started as sentiment surfs wave of emotions

Stocks finished modestly changed as sentiment seemed to cycle from pessimism to optimism as the week wore on. The bears attacked with global recovery uneasiness centering on the impending policy tightening by China and whether Ireland will receive a bailout for its struggling banking sector. However, the bulls countered with a successful IPO of General Motors Co. (GM $34), an unexpected jump in the Philly Fed Manufacturing Index, and an upbeat forecast from Dow member Wal-Mart Stores Inc. (WMT $54). Throughout the week, materials and financials were volatile as traders reacted to the swings in sentiment but the groups finished in negative territory leading to a mixed performance for the equity markets.

Traders will have a cornucopia of data to feast on

The holiday-shortened week’s first release is Tuesday's second reading of 3Q gross domestic product (GDP), expected to be revised up to 2.4% from a 2.0% quarter-over-quarter (q/q) annualized rate, after expanding by 1.7% in the second quarter. The largest component of GDP, personal consumption, is expected to be revised slightly lower to 2.5% from 2.6% in 3Q, after advancing 2.2% in 2Q. Inflation readings are expected to be generally inline with the initial estimate, with the GDP Price Index rising 2.3%, and the core PCE Index, which excludes food and energy, forecasted to increase 0.8%, well below the Fed’s informal target of 1.5-2.0%.

Housing data will include Tuesday's existing home sales, which reflect closings from contracts entered one to two months earlier, forecasted to fall 1.1% month-over-month (m/m) in October to an annual rate of 4.48 million units after rising 10.0% in September. Meanwhile, Wednesday’s release of new home sales is expected to grow 2.6% in October to an annual rate of 315,000 after expanding by 6.6% m/m in September.

Tuesday's midday release of the minutes from the November Federal Open Market Committee (FOMC) meeting may bring fewer surprises than recent releases, as uncertainty over whether the Fed would announce a new program of asset purchases, or quantitative easing (QE), was put to rest at the November meeting. The Fed said that in light of disappointingly slow economic progress in output and employment, as well as a downward trend in measures of core inflation, the Fed deemed a program of $600 billion in new purchases was necessary to promote a stronger recovery.

Economic data posted somewhat unsustainable upward moves in early 2010 and hit a soft patch in the summer. However, economic data looks to be settling into a new steady-state, and leading indicators suggest reasons for optimism. Despite progress, economic growth remains sluggish, below the rate needed to generate a material decline in the unemployment rate, and excess slack in the economy is creating downward pressure on prices, precipitating the Fed’s move to pursue QE2. With the news on QE2, elections, and earnings releases generally completed, we’re heading into the time of year where investors review their asset allocations – we remind investors to make sure your allocation aligns with your risk tolerance and tax situation, and that equity investments should be made with a three-to-five year time horizon.

Other releases on the US economic calendar include the volatile durable goods orders report, expected to be up 0.1% in October after rising 3.3% m/m in September, while ex-transportation, orders are forecasted to have grown 0.7% m/m, after falling 0.8% in September. The week also includes the Chicago Purchasing Manager survey of manufacturing and services sectors, the MBA Mortgage Applications Index, personal income and spending, weekly initial jobless claims, and the final University of Michigan Consumer Sentiment Index reading for November. Markets will be closed on Thursday, but will be open for a shortened session on Friday.

Reports elsewhere include Canadian CPI and retail sales, euro-zone consumer confidence, manufacturing and services PMIs, and industrial new orders, German and UK final 3Q GDP reports, and the German IFO survey of business confidence. Additionally, Japan announces department store sales and CPI, Australia releases its leading index and Hong Kong announces its trade balance.