Evening Market Update

Ireland Bailout Details Unable to Soothe Fears

Despite a late-day rally and some relatively positive holiday shopping results, US stocks finished lower with traders finding little solace in the details of the euro-area bailout of Ireland. An empty economic calendar may have also added to the trepidation, as a full-slate of economic reports are scheduled for the rest of the week, headlined by Friday’s US labor report. Meanwhile, President Obama announced a proposed two-year salary freeze for federal civilian government employees in the hopes of reducing the deficit. On the equity front, Dow component Wal-Mart Stores announced that it has offered to acquire a 51% stake in South African retail company Massmart Holdings Ltd for roughly $2.3 billion, fellow Dow member Kraft Foods initiated an arbitration process over a contractual dispute with Starbucks, and BP Plc sold off some assets to raise money to cover costs associated with the Gulf of Mexico oil spill. Treasuries were mixed with the mid-to-long-end of the curve higher amid anxiety over potential contagion in the euro-area, and as there were no economic reports slated for release today.

The Dow Jones Industrial Average fell 40 points (0.4%) to 11,052, the S&P 500 Index declined 2 points (0.1%) to 1,188, and the Nasdaq Composite lost 9 points (0.4%) to 2,525. In modest volume, 924 million shares were traded on the NYSE and 1.7 billion shares were traded on the Nasdaq. Crude oil rose $1.97 to $85.73 per barrel, wholesale gasoline gained $0.06 to $2.22 per gallon, and the Bloomberg gold spot price added $3.31 to $1,367.06 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.5% higher at 80.78.

Dow member Wal-Mart Stores Inc. (WMT $54) announced that it has offered to acquire a 51% stake in South African retail company Massmart Holdings Ltd. (MMRTY $40) for 148 South African rands per share in cash or $2.3 billion. WMT said the deal will help it accelerate its growth and expansion in South Africa and the company is convinced that this is an important region with attractive growth characteristics. WMT finished unchanged, while MMRTY was lower.

Retailers remain in focus as consumers turn to the internet for their holiday shopping needs on “Cyber Monday,” and the National Retail Federation (NRF) is reporting that $45 billion was spent online and in stores over the Thanksgiving holiday weekend, compared to $41.2 billion last year. Also, the NRF said total retail traffic was up 8.7% year-over-year (y/y), and spending per person increased to $365.34 from $343.31 in 2009. However, ShopperTrak said traffic rose 2.2% y/y and sales were nearly flat, rising 0.3% y/y, per Reuters.

Dow member Kraft Foods Inc. (KFT $30) announced that it initiated an arbitration proceeding to challenge Starbucks Corp’s (SBUX $31) attempt to end a retail grocery coffee business agreement. KFT said the contract remains in effect “indefinitely,” but SBUX said KFT failed to meet its responsibilities of the agreement. Shares of both companies were lower.

BP Plc.(BP $41) announced that it has agreed to sell its 60% stake in Pan American Energy LLC to Argentina’s Bridas Corp—a privately-held company that is partially owned by China’s Cnooc Ltd. (CEO $222)—for about $7.1 billion. The transaction is part of BP’s efforts to raise funds to cover the cost of the Gulf of Mexico oil spill. In US trading, shares of BP were lower while CEO was higher.

Economic calendar light to start the week

Treasuries finished mixed with the mid-to-long end of the curve gaining ground amid the uneasiness toward the debt situation on Europe and as there were no major US economic releases on today’s calendar. The yield on the two-year note was flat at 0.51%, the yield on the 10-year note lost 4 bps to 2.83%, and the 30-year bond yield declined 6 bps to 4.15%.

The economic calendar will begin to heat up tomorrow, with the release of the S&P/Case-Shiller Home Price Index, anticipated to show a 1.0% rise y/y in September, while falling 0.4% month-over-month (m/m). Given the lagging nature of the report—it lags housing sales data by a month—and the plethora of major reports slated for this week, the release may not move markets substantially. Also, the backdrop of highly-elevated supply of homes on the market and the flood of foreclosures that loom on the horizon, the outlook for meaningful housing price recovery still seems distant.

Other reports to grace the US economic calendar tomorrow include the Chicago Purchasing Manager’s survey of manufacturing and services sectors, forecast to decline to 59.9 in November from 60.6 in October, and consumer confidence for November.

In other news, in an effort to initiate negotiations toward cutting the deficit, President Barack Obama unveiled a proposal that would freeze the salaries for all federal civilian employees for 2011 and 2012. Pending congressional approval, the plan would affect nearly two million federal workers and save $28 billion over five years and over $60 billion over a 10-year period, according to the administration’s deputy budget director. The announcement comes one day before a bipartisan gathering of congress and the White House where key budgetary issues are likely to be the main focus.

Ireland bailout details released

The price tag for the International Monetary Fund (IMF) and European Union’s (EU) financial rescue of Ireland was unveiled, showing that the debt-ladden country will receive an 85 billion euro ($112 billion) loan package, with 10 billion euros going immediately to the nation’s struggling banking sector, and 25 billion euros in reserve if the sector needs more. The remaining 50 billion euros will be used to backstop the Irish government’s public sector. Ireland will pay an average of 5.8% on its loans, compared to the 5% Greece had to pay in May, and the country’s ultra-low, competitive, corporate tax rate was left unchanged at 12.5%, per Bloomberg. The funds for Ireland breakdown as follows: 45 billion euros from European governments, 22.5 billion euros from the IMF and 17.5 billion euros from an Irish cash reserve & national pension fund.

Separately, European finance ministers announced an agreement to establish a permanent mechanism for dealing with future debt problems of nations that are in the sixteen-member euro-zone. The plan, to be in effect in mid-2013, will resemble the current EU bailout program but could shift some of the downside risk to investors such as banks or hedge funds, but may continue to protect private creditors, against the wishes of Germany.

In European economic news, UK mortgage approvals fell to an eight-month low in October, per Bloomberg, but higher than what economists had anticipated, while a gauge of euro-zone economic confidence improved more than expected for November. Elsewhere, the European Commission released its twice-yearly economic outlook, in which it said growth in the euro-zone economy will decelerate in 2011 before picking up again in 2012. Moreover, the UK cut its growth forecasts for 2011 and 2012.

In the Asia/Pacific region, economic news was light with a larger-than-expected decline in Japan’s retail trade and a deterioration in the nation’s small business confidence being the only items on the docket. Geopolitical concerns in Korea following last week’s skirmish remained in focus, as South Korea and the US continue to conduct military exercises in the region and China called for “urgent talks” between both Koreas, the US, Russia and itself. In political news, Taiwan’s ruling party won a key local election, which prompted some speculation that the country will extend its pro-China policies that may support investment, per Bloomberg.

Tomorrow’s international economic calendar will offer a number of reports out of Japan, including the country’s personal income, industrial production, housing starts, construction spending and employment figures. Elsewhere in the region, Australia reports building approvals and its current account balance, Thailand releases its trade balance, and India will offer 3Q GDP. In Europe, economic releases include German employment numbers and Italian CPI, while the euro-zone will also provide employment and CPI reports.