Morning Market Update

Escaping the Red Before Midterm Elections and the Fed

The US equity markets are nicely higher in early action as the spotlight is locked onto today’s US midterm election results and ahead of tomorrow’s conclusion of the Federal Reserve’s monetary policy meeting, in which further economic stimulus efforts are highly expected to be deployed. Treasuries are mostly higher as traders await the results and as there are no major economic reports scheduled for release today. Meanwhile, earnings continue to dominate the equity news, with Dow member Pfizer Inc, along with MasterCard Inc topping the Street’s profit forecasts, while Kellogg Co matched expectations. Outside of earnings, United Parcel Service Inc increased its 2011 package shipping rates. Overseas, Asia was mixed amid a subdued session, showing little reaction to a surprise interest rate increase in Australia, while Europe is gaining solid ground on upbeat earnings from the oil & gas sector, highlighted by favorable results from BP Plc.

As of 8:44 a.m. ET, the December S&P 500 Index Globex future is 9 points above fair value, the Nasdaq 100 Index is 14 points above fair value, while the DJIA is 70 points above fair value. Crude oil is up $1.04 at $83.99 per barrel, and the Bloomberg gold spot price is up $4.98 at $1,358.83 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.6% at 76.75.

Dow member Pfizer Inc. (PFE $18) 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. International revenues, which represented more than half of the company’s total revenues, increased 33%, while US revenues rose 48%. PFE raised its full-year EPS outlook.

MasterCard Inc. (MA $239) 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%.

Kellogg Co. (K $51) 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.

United Parcel Service Inc. (UPS $67 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.

Fed meeting and US midterm elections commanding the lion’s share of attention

Treasuries are modestly higher in morning action as there are no major economic releases scheduled for today’s docket. Today’s focus will likely be on the US midterm elections and the commencement of the two-day monetary policy meeting by the Federal Open Market Committee (FOMC). No changes are expected to the fed funds target rate, currently at a level between 0-0.25%, but Wednesday’s policy statement concluding the meeting will likely garner the most attention. Expectations have ramped up about the potential for the Fed to begin another round of asset purchases due to the weak economic data that has 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.

Energy equities lift European stocks

Stocks in Europe are mostly higher in afternoon action, with oil & gas issues leading the way on the heels of a better-than-expected profit report from BP Plc. (BP $41), which is nicely higher even after the company increased its forecast for the cost of the Gulf of Mexico oil spill to near $40 billion. Also lending some support to the oil & gas sector, shares of BG Group Plc. (BRGYY $96) are gaining solid ground after the UK natural gas producer reported higher profits and increased its Brazilian oil & gas reserves forecast. However, the advance in stocks is being limited by some cautious trading ahead of the results from the midterm elections in the US and amid uncertainty regarding the size and scope of any further monetary policy actions by the US Federal Reserve.

Meanwhile, there was a plethora of favorable revisions to PMI Manufacturing data for October, with figures from Italy, Germany—Europe’s largest economy—and the euro-zone all topping economists forecasts, while France’s manufacturing activity gauge was left unrevised.

The UK FTSE 100 Index is 1.2% higher, France’s CAC-40 Index and Germany’s DAX Index are advancing 0.9%, while Italy’s FTSE MIB Index is 1.0%.

Asia subdued ahead of elections and Fed action in the US

Stocks in Asia finished mixed in a lackluster session as traders were reluctant to make moves ahead of the key events from the US political and economic fronts. Japan’s Nikkei 225 Index finished 0.1% higher as some weakness in the yen helped support the equity markets but was offset by a steep decline in shares of memory chip maker Elpida Memory Inc. (ELPDF $11) after it issued preliminary earnings that came up well short of analysts’ forecasts. The company said the results were negatively impacted by a stronger yen and declining DRAM—memory found in computers and video game consoles—chip prices. Meanwhile, stocks in China were mixed, with the Hong Kong Hang Seng Index increasing 0.1% and the Shanghai Composite Index declining 0.3%.

Even a surprise interest rate hike in Australia did not move the markets, as the S&P/ASX 200 Index was 0.1% higher following the Reserve Bank of Australia’s 25 basis point increase in its benchmark lending rate to 4.75%. 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 BSE Sensex 30 Index was 0.1% lower, showing a modest reaction to the nation’s central bank increasing its main lending rates by 25 basis points, as expected by economists. Rounding out the day, South Korea’s Kospi Index rose 0.2% and Taiwan’s Taiex Index declined 0.4%.