Morning Market Update

Overseas Unease Bringing Bulls to Their Knees

The US equity markets are under some pressure in early action amid concerns that inflationary pressures may lead to more tightening in China, exacerbated by festering euro-area debt uneasiness, with Ireland in traders’ crosshairs. Treasuries are higher on the concerns, while a much cooler-than-anticipated report on US producer prices helped bonds extend gains and is supporting the Fed’s view that inflation is somewhat low. Meanwhile, equity news is being dominated by Dow members as Wal-Mart Stores Inc matched the Street’s earnings expectations and raised its EPS outlook, while Home Depot topped analysts’ profit forecasts and issued mixed guidance. Overseas, Asia was mostly lower amid the aforementioned tightening uneasiness in China, and as South Korea unexpectedly increased its benchmark interest rate, while debt fears and China concerns are pressuring stocks in Europe and overshadowing a favorable German investor sentiment report.

As of 8:50 a.m. ET, the December S&P 500 Index Globex future is 6 points below fair value, the Nasdaq 100 Index is 15 points below fair value, while the DJIA is 46 points below fair value. Crude oil is $1.32 lower at $83.54 per barrel, and the Bloomberg gold spot price is down $4.48 at $1,356.13 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is flat at 78.59.

Dow component Wal-Mart Stores Inc. (WMT $54) announced 3Q EPS ex-items of $0.90, matching the consensus estimate of analysts surveyed by Reuters. Revenues grew 2.6% year-over-year (y/y) to $101.2 billion, compared to the $101.6 billion that the Street had anticipated, while US same-store sales—sales at store open at least a year—decreased 1.3% y/y. Same-store sales at its Sam’s Club rose 2.4% y/y including fuel. WMT raised its full-year EPS outlook.

Fellow Dow member Home Depot Inc. (HD $31) reported 3Q EPS of $0.51, three cents above the forecast of analysts, with revenues growing 1.4% y/y to $16.6 billion, roughly inline with the Street’s forecast. The world’s largest home improvement retailer said its 3Q same-store sales grew 1.4% y/y, the fourth-consecutive quarter of growth, and it is exercising good control over its expenses. HD lowered its full-year revenue outlook but it increased its full-year EPS guidance.

Producer prices muted, industrial production and homebuilder sentiment on deck

The Producer Price Index showed prices at the wholesale level rose 0.4% month-over-month (m/m) in October, after increasing 0.4% in September, and below the forecast of economists surveyed by Bloomberg, which called for a 0.8% rise. Meanwhile, the core rate, which excludes food and energy, fell 0.6% m/m, compared to the 0.1% increase that economists had expected. On a year-over-year basis, headline producer prices were 4.3% higher, and the core rate was up 1.5%.

Later this morning, the economic calendar will yield the releases of industrial production and capacity utilization, with production expected to increase 0.3% in October and utilization forecasted to increase from 74.7% in September to 74.9%. Also, the NAHB Housing Market Index will be reported, and the gauge of homebuilder sentiment is anticipated to improve from 16 in October to 17 in November, with any reading below 50 indicating more respondents feel conditions are poor.

Treasuries are higher, extending an advance following the inflation data and yields are paring some of the recent gains that saw the 10-year rate reach over a three-month high.

Europe under pressure on China tightening and euro-area debt fears

Stocks in Europe are solidly lower in afternoon action, led by a steep decline in materials issues amid heightening concerns about the potential for more monetary policy tightening in China. Meanwhile, financials are also solidly lower to help pace the decline in the region amid lingering concerns about the sovereign health of Ireland and its potential impact on the rest of the euro-zone nations. Speculation is growing that Ireland will need to tap the near $1 trillion bailout fund set up by the European Central Bank and the International Monetary Fund (IMF) to help its struggling banking sector, but the nation has repeatedly said it does not need assistance. Euro-zone finance ministers are set to hold discussions at the scheduled meeting in Brussels today.

The aforementioned uneasiness across the pond is overshadowing a favorable report on investor confidence in Germany—Europe’s largest economy—as the ZEW Survey of Economic Sentiment increased for the first time in seven months. The index that tracks German investor and analyst expectations six months from now rose from -7.2 in October to 1.8 in November, compared to the slight improvement to -6.0 that economists had expected. In other economic news, France’s wages and nonfarm payrolls grew more than expected in 3Q, while UK and euro-zone consumer prices both increased more than anticipated in October. Moreover, the euro-zone ZEW Survey of Economic Sentiment improved by an amount that exceeded expectations.

The UK FTSE 100 Index and France’s CAC-40 Index are 1.3% lower, and Germany’s DAX Index is declining 0.7%, while Ireland’s Irish Overall Index is decreasing 0.6%.

Asia lower as tightening proves to be frightening

The equity markets in Asia were lower, with Chinese stocks leading the way as the Shanghai Composite Index fell 4.0% and the Hong Kong Hang Seng Index dropping 1.4% amid concerns that the government will unveil further efforts to try to control inflationary pressures. Reuters reported that a Chinese media outlet said China’s National Development and Reform Commission is preparing a “one-two punch” of actions such as food price controls and measures to crack down on speculation in agricultural commodities to contain inflation. The tightening concerns overshadowed a report that showed the Conference Board’s Leading Index for China improved 0.6% m/m in September. Meanwhile, South Korea’s Kospi Index declined 0.8% after its central bank unexpectedly increased its benchmark interest rate for the second time in as many meetings, raising the seven-day Repo Rate by 25 basis points to 2.50%, with economists expecting the rate to remain unchanged. Also, the South Korean central bank removed its pledge to keep its policy “accommodative” for the first time since the global financial crisis, per Bloomberg.

Elsewhere, Japan’s Nikkei 225 Index declined 0.3% as the recent weakness in the yen continued to help limit losses, while reports showed the nation’s home loans increased 3.6% y/y in 3Q and the nation’s machine tool orders were revised higher to a surge of 71.0% y/y in October. However, Australia’s S&P/ASX 200 Index gained 0.3% despite the concerns about a slowdown in China, as the minutes from the most recent monetary policy meeting by the Reserve Bank of Australia revealed that the RBA may be taking a wait-and-see approach before raising rates again.