Morning Market Update

Korean Conflict Stymies Sentiment

The global equity markets are solidly lower as sentiment is being pressured by reports that North and South Korea exchanged fire, exacerbating already squeamish sentiment as euro-area debt concerns fester. The uneasiness is overshadowing an upwardly revised US 3Q GDP report as well as a string of better-than-expected PMI service and manufacturing reports in Europe. Treasuries are higher amid the negative tone in the markets, showing little reaction to the US GDP report, ahead of key releases on housing, manufacturing, and the Fed’s most recent monetary policy meeting. Moreover, the soured sentiment is overshadowing Dow member Hewlett-Packard Co’s better-than-forecasted 4Q results and a dividend hike from Hormel Foods Corp, which also posted favorable 4Q performance. Overseas, Asia was broadly lower, while Europe is under broad-based pressure led by financials.

As of 8:49 a.m. ET, the December S&P 500 Index Globex future is 12 points below fair value, the Nasdaq 100 Index is 16 points below fair value, while the DJIA is 100 points below fair value. Crude oil is $1.38 lower at $80.36 per barrel, and the Bloomberg gold spot price is down $6.55 at $1,359.90 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.7% at 79.14.

Dow member Hewlett-Packard Co. (HPQ $43) reported fiscal 4Q EPS ex-items of $1.33, above the $1.27 consensus estimate of analysts surveyed by Reuters, with revenues growing 8% year-over-year (y/y) to $33.3 billion, compared to the $32.7 billion that the Street was expecting. The company said it saw broad-based y/y growth in its commercial segment driven by 25% growth in its enterprise storage and servers business as well as strength in commercial PC clients and printers. Moreover, the company posted 50% y/y organic—excluding acquisitions, divestitures, and foreign exchange—growth in its networking segment. HPQ increased its full-year EPS outlook, which topped expectations, but it issued a 1Q outlook that came in below the Street’s forecasts.

Hormel Foods Corp. (HRL $48) is nicely higher after the company announced an increase in its annual dividend from $0.84 per share to $1.02 per share. The announcement came before the company released its fiscal 4Q results, which showed it achieved EPS of $0.90, above the $0.79 analyst forecast, on revenues of $2.1 billion, exceeding the $1.9 billion expectation.

3Q GDP revised higher, housing and Fed meeting details on the horizon

The second look at 3Q Gross Domestic Product, the broadest measure of economic output, was released this morning and showed an upwardly revised 2.5% annualized rate of growth, compared to the 2.0% increase initially reported, and after expanding by 1.7% in 2Q. Economists surveyed by Bloomberg forecasted a 2.4% rate of growth. Personal consumption rose 2.8%, up from 2.6% in the preliminary report and above the 2.5% estimate.

The GDP Price Index remained at a 2.3% increase as expected by economists, and the core PCE Index, which excludes food and energy, was left unrevised at a 0.8% rate of growth, also inline with economists’ estimates. Treasuries are higher after the GDP report.

Meanwhile, shortly after trading begins, existing home sales will be released, 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.

The day will cap off with the afternoon release of the minutes from the November Federal Open Market Committee (FOMC) meeting. The minutes may bring fewer surprises than recent releases, as the Fed ended speculation over whether a new program of asset purchases, or quantitative easing (QE), would be pursued by announcing another $600 billion in new purchases at the 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 new program was necessary to promote a stronger recovery.

Bernanke indicated in a recent Washington Post op-ed piece that the program may ease financial conditions by lowering corporate bond rates and boosting stock prices, which in turn would increase consumer wealth and confidence, creating a virtuous circle that could spur spending and corporate profits.

The other release on today’s US economic calendar is the Richmond Fed Manufacturing Index, expected to increase to 6 in November from October’s reading of 5, where zero marks the level that divides expansion from contraction.

Europe under pressure on Korean conflict and festering debt concerns

Stocks in Europe are under broad-based pressure in afternoon action amid exacerbated nervousness following reports that North and South Korean militaries have exchanged fire. Also, the euro-area debt concerns continue to stymie sentiment even after the weekend’s announcement that Ireland agreed to a bailout from the European Union (EU) and International Monetary Fund (IMF). Uneasiness regarding the fate of other debt-ridden nations and political uncertainty in Ireland as a result of austerity measures that will be needed to receive financial support are pressuring the European financial sector, which is down solidly today. Some of the concerns were evident by a short-term debt auction in Spain today, which had demand at the low end of expectations and rates were solidly higher compared to similar maturities in previous auctions, per Reuters.

Meanwhile, the unnerved sentiment is overshadowing some favorable economic data in Europe. PMI readings of the service and manufacturing sectors in France, Germany—Europe’s largest economy—and the euro-zone all exceeded economists’ forecasts. Moreover, Italy’s consumer confidence unexpectedly improved, Spain’s trade deficit narrowed, and Germany’s 3Q GDP was left unrevised at a 0.7% rate of growth compared to 2Q, and a 3.9% expansion y/y.

The UK FTSE 100 Index is down 1.1%, France’s CAC-40 Index is 1.6% lower, Germany’s DAX Index is declining 0.9%, Italy’s FTSE MIB Index is decreasing 1.4%, Spain’s IBEX 35 Index is dropping 2.5%, and Ireland’s Irish Overall Index falling 3.0%.

Asia pressured by persistent euro-area debt concerns

The major equity markets in Asia were broadly lower as initial optimism that came from the agreement by Ireland to receive euro-area bailout funds was replaced by contagion in other parts of the euro-zone. Also, lingering uneasiness regarding the possibility of further policy tightening by the Chinese government added to the negative backdrop. Stocks in China led the decline, with the Shanghai Composite Index falling 1.9% and Hong Kong’s Hang Seng Index dropping 2.7%. Meanwhile, volume was lighter than usual, which may have amplified the moves in Asia, as Japanese markets were closed for a holiday. Elsewhere, Australia’s S&P/ASX 200 Index fell 1.2% and South Korea’s Kospi Index declined 0.8%. However, the biggest story in the region, which came after most markets were closed for the day, was reports that North Korea had fired artillery shells at a South Korean island, causing causalities and prompting South Korea to return fire.