Evening Market Update

Euro-area Debt Issues Continue to Plague Markets

Persistent euro-area debt fears and a lackluster report on US home prices pressured US equities early, but better-than-expected US consumer sentiment and Midwest business activity data helped the markets to gain some footing throughout the day. However, a late-day report that Standard & Poor’s may cut the credit ratings of Portugal took the wind out of the sails of the upward momentum, while weakness in tech shares kept the Nasdaq from participating in the upswing. Treasuries ended higher amid the debt anxiety, while the US dollar continued its run against the euro and was higher against most major currencies. In equity news, the European Commission initiated an anti-trust investigation against Google, Swiss engineering firm ABB Ltd agreed to acquire Baldor Electric Co for over $4 billion, while Seagate Technology ditched negotiations surrounding a deal to take the company private while authorizing the repurchase of up to an additional $2 billion of its outstanding ordinary shares. 

The Dow Jones Industrial Average fell 47 points (0.4%) to 11,006, the S&P 500 Index declined 7 points (0.6%) to 1,181, and the Nasdaq Composite lost 27 points (1.1%) to 2,498. In heavy trading, 1.5 billion shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil lost $1.62 to $84.11 per barrel, wholesale gasoline declined $0.03 to $2.19 per gallon, while the Bloomberg gold spot price jumped $18.98 to $1,385.30 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.6% higher at 81.29.

The European Commission (EC) has launched an investigation into allegations that Google Inc. (GOOG $556) has abused its dominant position in online search by giving priority to its own company services over competitors. The EC said the initiation of the investigation does not imply that it has proof of any infringements. GOOG said it will work with the EC to address any concerns. Separately, some of the pressure on GOOG is coming from the New York Times reporting that GOOG is close to reaching an agreement to acquire privately-held online discount firm Groupon Inc for up to $6 billion, according to people familiar with the matter. However, GOOG and Groupon have not commented on the report.

In M&A news, industrial electric motor maker Baldor Electric Co. (BEZ $63) announced that it has agreed to be acquired by Swiss engineering firm ABB Ltd (ABB $19) for $63.50 per share, for a total transaction value of $4.2 billion, including the assumption of $1.1 billion in debt. BEZ was sharply higher, while ABB was modestly in the green.

Meanwhile, Seagate Technology Inc. (STX $13) reported that it has terminated discussions regarding a potential going-private transaction and the hard-disk drive company’s Board of Directors has authorized the repurchase of up to an additional $2 billion of its outstanding ordinary shares. The company also issued 2Q revenue guidance that matched the Street’s expectations. Shares finished lower.

Home prices soft, but consumer confidence and Chicago PMI positive

Just before the opening bell, the S&P/Case-Shiller Home Price Index was released showing an increase in home prices of 0.59% year-over-year (y/y) in September, compared to the gain of 1.00% that economists surveyed by Bloomberg had expected. Month-over-month (m/m), home prices were 0.80% lower, compared to forecasts, which called for a decline of 0.40%. In addition to September’s price data, S&P/Case-Shiller released its national Home Price Index figures for 3Q, showing a 2% quarter-over-quarter (q/q) drop to 135.48, and a fall of 1.51% y/y. 

Moreover, Chairman of the Index Committee at Standard & Poor’s, David M. Blitzer, offered commentary that did little to help the outlook for the housing market as he noted that “many analysts will argue that a double-dip will be confirmed before Spring,” and due to the large supply of houses on the market and further, “hidden,” supply due to delinquent mortgages, pending foreclosures or vacant homes, a “sustained recovery could be a ways off.”

However, other reports on today’s economic calendar helped soothe some of the sting of euro-area debt concerns and today’s lackluster housing report. The Conference Board’s Consumer Confidence Index, improved by a larger amount than expected, rising from a downwardly revised 49.9 in October to 54.1 in November, while the Chicago Purchasing Managers Index, unexpectedly gained ground, increasing from 60.6 in October to 62.5 in November. The releases showed consumers are seeing improved employment conditions and are expecting better economic conditions six months from now, while new orders in the Midwest jumped to the highest level since May 2007.

Treasuries finished higher on the exacerbated global concerns and disappointing housing data, but did pare gains following the consumer sentiment and Midwest business activity releases. The yield on the two-year note lost 3 bps to 0.46%, the yield on the 10-year note was 2 bps lower at 2.81%, and the 30-year bond yield declined 2 bps to 4.12%.

Mixed bag of economic news in Europe, debt worries persist

Economic reports across the pond were mixed today, headlined by employment figures in Europe’s largest economy. German unemployment declined by 9,000 to 3.14 million during November, marking the seventeenth straight monthly drop and the lowest level since December 1992, albeit less than the 20,000 decrease forecast by economists. As well, the adjusted jobless rate remained at 7.5%. Other reports in the region included: France’s producer prices rising 0.8% month-over-month (m/m) in October, double what economists expected, euro-zone consumer prices and its unemployment rate that both met forecasts, while Italy’s unemployment rate rose more than anticipated. Elsewhere, UK consumer confidence unexpectedly fell.

Japan dominated the economic docket in the Asia/Pacific region, with mostly disappointing results. Construction orders and household spending in the Asian nation both declined, housing starts fell short of economists’ expectations, and the jobless rate unexpectedly rose. However, while the country’s industrial production declined during October, the shortfall was less than what was forecasted.

Meanwhile, India’s 3Q GDP grew by a larger amount than expected, South Korea’s Leading Index decelerated and industrial production in the nation unexpectedly fell, while Australia’s trade deficit posted a wider-than-expected deficit during 3Q, but the country’s building approvals increased by a larger-than-forecasted amount.

Back in the Americas, Canada’s GDP unexpectedly contracted in September, declining 0.1% m/m, compared to the 0.1% gain that economists had anticipated, and its 3Q GDP figure came in below expectations, increasing 1.0% on an annualized basis, compared to the 1.5% expansion that was anticipated.

Plethora of economic reports in store for tomorrow

Tomorrow, the week’s fully-loaded economic calendar will begin to heat up with the releases of the ISM Manufacturing Index, forecasted to dip slightly from 56.9 in October to 56.5 in November, and the Federal Reserve’s Beige Book, a compilation of anecdotal economic data from all twelve Fed districts, used to prepare for the next Federal Open Market Committee (FOMC) meeting scheduled for December 14. The ISM manufacturing data has shown the overall economy has expanded for eighteen-consecutive months and the Beige Book has consistently denoted continued improvements in economic activity. However, the most attention on these reports will likely focus on components dealing with areas of the economy related to the dual mandate of the Federal Reserve, such as inflation and employment. The minutes from the most recent Fed meeting on November 3—where it announced $600 billion in further asset purchases known as QE2—showed participants viewed progress in output and employment as “disappointingly slow,” and while they saw only a small risk of deflation, inflation would be below the level consistent with maximum employment and price stability for “some time.”

Tomorrow’s heavy economic docket will also include: the ADP Employment Change report, forecast to show an increase of 70,000 private sector jobs during November following a 43, 000 rise in October, 3Q nonfarm productivity and unit labor costs, where economists expect a 2.3% rise in productivity and a 0.2% decline in labor costs, construction spending, which is forecast to fall 0.3%, and the MBA Mortgage Applications Index.

Internationally, Germany will release retail sales data, the UK reports housing prices, and manufacturing PMI numbers will come from France, Italy, Germany, the UK and the euro-zone. Further east, Australia will report 3Q GDP, China offers PMI figures, and India will release CPI figures and its trade balance.