Weekend Market Summary

Global Concerns Leave Stocks Seeing Red

The US equity markets closed out the week on a sour note as persistent euro-area debt fears and concerns about further policy tightening in China weakened sentiment. A better-than-expected reading in US consumer sentiment was the lone report on the domestic docket and Treasuries were mixed as the Fed began its quantitative easing program with the purchase of $7.2 billion in bonds. On the equity front, Dow member Intel Corp announced a 15% quarterly dividend increase, while fellow Dow component Walt Disney barely missed the Street’s earnings and revenue expectations. In other equity news, J.C. Penney and Nvidia Corp both beat analysts’ profit projections and issued better-than-expected guidance.

The Dow Jones Industrial Average fell 91 points (0.8%) to 11,193, the S&P 500 Index lost 14 points (1.2%) to 1,199, and the Nasdaq Composite declined 37 points (1.5%) to 2,518. In moderate volume, 1.0 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil fell $3.21 to $84.60 per barrel, wholesale gasoline was $0.02 lower at $2.21 per gallon, and the Bloomberg gold spot price plunged $40.28 to $1,368.38 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was flat at 78.08. For the week, including dividends, the DJIA fell 2.2%, the S&P 500 Index lost 2.2%, and the Nasdaq Composite declined 2.4%.

Dow member Intel Corp. (INTC $22) reported that its Board of Directors has approved a 15% increase in its quarterly cash dividend to $0.18 per share, beginning with the dividend that will be declared in 1Q 2011. The company added that it “remains on track to have our best year ever and we continue to generate strong cash flows.” Shares were higher.

Fellow Dow component Walt Disney Co. (DIS $38) reported fiscal 4Q EPS ex-items of $0.45, which fell short of analysts’ estimates of $0.46, on a 1.3% year-over-year (y/y) decline in revenues to $9.74 billion, also below estimates for $9.95 billion. The company’s largest unit, which includes its television stations ESPN and ABC Family, saw a 6.6% decline in revenues during the quarter, while its parks and resorts division suffered an 8.1% fall on higher costs, as well as lower attendance and hotel occupancy. Shares traded higher, recovering from yesterday’s steep drop in the final minutes of trading after the company’s results were leaked unexpectedly.

J.C. Penney Co. Inc. (JCP $31) achieved 3Q EPS of $0.19, two cents above the Street’s expectation, with revenues roughly flat at $4.2 billion, compared to the $4.3 billion that analysts had anticipated. Same-store sales—sales at stores open at least a year—rose 1.9% y/y, posting the third-straight quarter of growth. JCP issued a range for its 4Q EPS guidance with a midpoint that exceeded expectations, while it reaffirmed its full-year outlook. JCP finished lower.

Nvidia Corp. (NVDA $13) reported fiscal 3Q earnings of $0.15 per share, a penny higher than the Street’s forecast, but 21% lower than the same period a year ago. The graphic video chip maker said revenues fell 6.6% to $843.9 million, roughly inline with analysts’ expectations, as demand for its products continued to wane. The company issued 4Q revenue guidance that topped forecasts and shares were up solidly.

Consumer sentiment exceeds forecast, G-20 concludes, Fed begins QE2 purchases

Talks among G-20 leaders concluded, however by the close of the discussions, any deal to address economic imbalances was shelved, because there is disagreement among the participants as to what is driving the imbalances globally and what role other variables, like currencies, play in such gaps. The issue dominated the summit, as members were hoping to prevent what has been christened a “currency war” leading up to the meeting, and to build upon the agreement to not pursue competitive currency devaluations that came following the group’s October gathering. The official communiqué of the meeting noted that the world leaders committed to undertake macroeconomic policies, including fiscal consolidation where necessary, to ensure ongoing recovery, sustainable growth, and enhance stability in financial markets.

In domestic economic news, the University of Michigan Consumer Sentiment Index rose slightly more than expected, increasing from 67.7 in October to 69.3 for November, compared to the increase to 69.0 that was expected. The better-than-expected reading came as the economic conditions component of the survey rose from 76.6 in October to 79.7 in November, complimented by the economic outlook, which increased from 61.9 to 62.7. The report also revealed that inflation expectations for the one-year time horizon advanced from 2.7% to 3.0%, while the five-year time horizon remained at 2.8%.

Treasuries were lower following the sentiment report and as the Federal Reserve began the first installment of monetary easing by purchasing $7.2 billion of Treasuries, with most securities maturing between November 2014 and April 2016.The yield on the two-year note was 8 bps higher at 0.51%, the yield on the 10-year note gained 14 bps to 2.78%, while the 30-year bond yield advanced 4 bps to 4.25%.

Debt anxieties ease a tad, worries switch to China

European economic news was highlighted by a plethora of 3Q GDP data, as France, Italy and the euro-zone all reported revisions that were below economists’ expectations, while Germany—Europe’s largest economy—showed a slight uptick in its report. Additionally, consumer confidence in the UK ticked slightly lower. Euro-area debt concerns were addressed at the G-20 summit of world leaders, in an effort to soothe investors’ nerves over Ireland’s situation, amid speculation that the European Union (EU) will need to step in to bailout the nation. In a combined statement issued by France, Germany, Italy, Spain and the UK, officials said that any mechanism to resolve the crisis that would force bondholders to share in the cost would not apply to outstanding debt and would only come into effect after 2013. German Chancellor Angela Merkel reiterated that the EU financial aid package put into effect in May was “in place” if needed.

In Asia/Pacific, fears continue that China will need to tighten monetary policy after a slew of data yesterday showed that growth and prices in the Asian nation continue to move at a heated clip. Exacerbating sentiment, Reuters reported that a public dispute has broken out between two arms of the Chinese government over the possibility that official statistics are being adjusted to hide the true rate of inflation. According to the report, a think tank supported by the government published an article saying that for the past five years, the Consumer Price Index has understated the true inflation rate by more than 7%. A spokesperson for the National Bureau of Statistics said, “Obviously, the article’s conclusion does not hold any water.” In other news in the region, India reported a larger-than-than expected drop in industrial production. Meanwhile, back in the Americas, Brazil’s retail sales slowed less than expected in September, but still expanded for the fifth-straight month.

US markets slip as attention shifts to overseas events

With last week providing some clarity to the political landscape in Washington and the scope of the Federal Reserve’s QE2 campaign, the focus of the markets this week seemed to broaden globally. However, the picture was lackluster, with sovereign debt concerns regarding the peripheral euro-area nations such as Ireland re-emerging and hotter-than-expected inflation data in China stoking uneasiness regarding potential further tightening of the Asian economy that has been instrumental to the global recovery. The US dollar bucked its recent trend and moved higher versus most major currencies, adding to the negative tone of the markets.

Moreover, the US economic calendar was void of any major releases and the Treasury markets were closed on Thursday on observance of Veterans Day, which may have exaggerated the week’s move and prompted the increased scrutiny overseas. However, the US markets did contribute something to the week’s action as Dow member Cisco Systems Inc’s (CSCO $20) disappointing revenue outlook pressured the technology sector, helping lead to the market’s red figures for the week.

Economic data heats up next week

The economic calendar starts with Monday’s release of advance retail sales, forecasted to rise 0.7% month-over-month (m/m) in October, adding to September’s 0.6% increase, while sales ex-autos are estimated to grow 0.4% in October, after also advancing by 0.4% in September. Same-store sales results - sales at stores open at least a year - reported by retailers last week were generally better-than-expected. The retail sales report includes spending at supermarkets and gas stations.

Tuesday brings the October reading on industrial production, expected to rise 0.3% m/m after unexpectedly declining in September by 0.2%, and capacity utilization is forecasted to increase to 74.9% from 74.7% in September. With the exception of last month’s reading, industrial production has been a source of strength this year.

Additionally, the Producer Price Index (PPI) will be released on Tuesday, expected to show prices at the wholesale level accelerated in October to a 0.8% m/m advance, on the heels of a 0.4% increase in September, while the core rate, which excludes food and energy, is expected to remain contained to a 0.1% rise after also increasing 0.1% the prior month. On a year-over-year (y/y) basis, the PPI is expected to grow 4.6% in October versus a rise of 4.0% in the prior month on a headline basis, and increase 2.1% at the core level, up from a 1.6% gain in September. The release precedes Wednesday’s report on the Consumer Price Index (CPI), forecasted to show a 0.3% m/m increase in October, after rising by 0.1% in September, while ex-food and energy, it is expected to gain 0.1% after being flat the prior month. On a y/y basis, the CPI is expected to increase 1.3% at the headline level and 0.7% at the core level.

Wednesday also brings the release of the report on housing starts for October, expected to fall 1.6% m/m to an annual rate of 600,000 units, after rising 0.3% in September. Meanwhile, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, are forecasted to gain 4.2% m/m to 570,000 units after declining 5.6% in September.

Other releases on the US economic calendar include business inventories, the Empire Manufacturing Index, the NAHB Housing Market Index, MBA Mortgage Applications, initial jobless claims, the Philadelphia Fed’s Business Activity Index, and the Conference Board’s Index of Leading Indicators. Other reports in the Americas include Canadian manufacturing and wholesale sales, as well its leading indicator.

In Asia/Pacific, Japan will announce its preliminary reading on 3Q GDP, industrial production, machine tool orders, and its leading indicator, and China and Australia will release their leading indexes. Economic releases in Europe will include the euro-zone trade balance and CPI, the German PPI and Zew survey of economic conditions, UK house prices, CPI, retail price index, employment and retail sales.

In central bank action, the minutes from the last meetings of the Bank of England and Reserve Bank of Australia will be released and the Bank of Korea will meet but is not expected to change interest rates.