Morning Market Update

Agreement on Tax Soothes Consumer Spending Concerns

The global equity markets remain higher across the board as the bulls are finding sustenance from yesterday’s late-day preliminary agreement in the US to extend tax cuts to all Americans and extend unemployment benefits for thirteen months. Treasuries are lower as stocks are gaining ground on the announcement and as the US economic calendar remains light, with the lone report coming in the final hour of trading with the release of consumer credit. However, the dollar has pared a large portion of its losses and the equity markets are off of the best levels of the day. In equity news, Dow member 3M Co issued full-year 2011 guidance and AutoZone Inc easily topped the Street’s earnings expectations, while Talbots Inc issued disappointing guidance. Meanwhile, the aforementioned optimism helped Asian markets move mostly higher, and is supporting an advance in Europe, though the euro-area debt crisis remains in focus as Ireland is set to release its 2011 budget.

At 10:55 a.m. ET, the Dow Jones Industrial Average and the S&P 500 Index are up 0.6%, while the Nasdaq Composite is gaining 0.7%. Crude oil is down $0.46 at $88.92 per barrel, wholesale gasoline is $0.01 lower at $2.33 per gallon, and the Bloomberg gold spot price is down by $11.35 at $1,412.40 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% at 79.56.

Dow member 3M Co. (MMM $85) announced that it expected full-year 2011 revenues to be in the range of $29.0-30.5 billion, compared to the $29.0 billion that analysts surveyed by Reuters had expected. Also, the diversified manufacturer said 2011 EPS, excluding a pension expense of $0.27 per share, is forecasted to come in between $6.17-6.37, versus the Street’s forecast of $6.20. MMM said, “Our continuing strong performance clearly demonstrates that our growth strategy is working.” Shares are lower.

AutoZone Inc. (AZO $262) reported fiscal 1Q EPS of $3.77, well above the $3.43 that analysts anticipated, with revenues growing 12.7% year-over-year (y/y) to $1.8 billion, exceeding the $1.7 billion that the Street was forecasting. The auto parts retailer also said its same-store sales—sales at stores open at least a year—jumped 9.5% y/y. Shares are modestly higher.

Talbots Inc. (TLB $9) is down over 20% after the specialty retailer issued 4Q guidance that missed analysts’ forecasts and lowered its full-year outlook. Exacerbating the situation, the company reported 3Q revenues of $299 million, a decline of 3.2% y/y, below the $303 million that the Street was forecasting. TLB’s 3Q EPS ex-items of $0.27, which topped analysts’ forecasts by three cents, is having little success at limiting the pressure on its shares.

Developments in Washington help fill the void in the economic calendar

Treasuries are lower as the equity markets are higher in late-morning action as traders cheer the announcement that President Barack Obama has reached a preliminary agreement on extending the tax cuts for all Americans that were enacted under President George W. Bush. The extension will be for two years and will also include a thirteen-month extension of unemployment benefits but the agreement needs to be approved by Congressional Democrats. Per Reuters, other aspects of the agreement included: dividends and capital gains taxes remaining at 15%, the payroll tax for one year being reduced by two percentage points, and an estate tax coming in at 35%, with a $5 million exemption.

Traders are dissecting the agreement, which still has to pass through Congress, to try to gauge its impact while the US economic calendar will remain light, with today’s lone release coming in the final hour of trading, in the form of consumer credit, forecasted to decline by $1 billion in October, after unexpectedly rising for the first time in eight months, increasing by $2.1 billion in September.

In North American economic news, the Bank of Canada kept its benchmark interest rate unchanged at 1.00%, noting that “the global economic recovery is proceeding largely as expected, although risks have increased.”

Europe nicely higher on US tax agreement, while focus remains on debt situation 

Although off of the best levels of the day, the equity markets in Europe remain solidly higher in late-day action, led by materials and oil & gas issues as sentiment received a boost from the preliminary agreement in the US to extend its tax cuts for all Americans for two years. Meanwhile, the region continues to grapple with the ongoing debt crisis in the region and all eyes are on the release of Ireland’s 2011 budget, which is expected to show about 6 billion euros ($8 billion) in spending cuts, per Reuters. Also, attention will be paid to whether the Irish Parliament votes the budget proposal through, which would potentially help avoid a political shakeup in the nation that could exacerbate the debt crisis in the euro-area. Moreover, European finance ministers concluded a meeting yesterday, which resulted in no changes to how they will combat the potential contagion of the debt crisis and the euro-area’s near $1 trillion bailout package.

The upbeat sentiment across the pond is overshadowing a mixed bag of economic data in the region, as an unexpected drop in UK industrial production and smaller-than-anticipated growth in factory orders in Germany—Europe’s largest economy—is being met with a solid increase in UK retail sales.

The UK FTSE 100 Index is advancing 1.0%, France’s CAC-40 Index is gaining 1.9%, Germany’s DAX Index is rising 0.9%, and Ireland’s Irish Overall Index is increasing 1.9%.

Asia mostly higher, but yen weighs on Japan

Stocks in Asia finished mostly higher, aided by the news pertaining to extension of the tax cuts in the US and a monetary policy announcement from the Reserve Bank of Australia. The RBA expectedly kept its benchmark interest rate unchanged at 4.75%, but Governor Stevens noted that inflation is expected to be little changed over the next few quarters, suppressing expectations of further policy tightening by the central bank. Australia’s S&P/ASX 200 Index rose 0.8% to lead the advance in the region, along with stocks in China, as the Hong Kong Hang Seng Index gained 0.8% and the Shanghai Composite Index rose 0.7%. However, the Japanese yen hit the highest level versus the US dollar since November 12, pressuring export issues and bogging down the equity markets, leading to a 0.3% decline in the Nikkei 225 Index. A slightly larger-than-anticipated decline in Japan’s Leading Index for October did little to help support Japanese stocks. Elsewhere, South Korea’s Kospi Index rose 0.5%, Taiwan’s Taiex Index was flat, while India’s BSE Sensex 30 Index declined 0.2%.