Morning Market Update

Bulls Looking to Glide Into the New Year

The equity markets are higher to begin one of the final full weeks of trading for the year but action is light as there are no major US economic reports to spark any conviction on the Street. Treasuries are lower and yields are extending their recent run to the upside. Meanwhile, equity news is also light to add to the subdued start for stocks but Dow member General Electric Co announced its intentions to acquire UK-based Wellstream Holdings Plc for nearly $1.3 billion. Overseas, Asia moved higher, led by a solid advance in China after its government refrained from increasing interest rates in the face of hotter-than-anticipated inflation data, which is helping boost commodity issues to also support European stocks.

As of 8:51 a.m. ET, the March S&P 500 Index Globex future is 6 points above fair value, the Nasdaq 100 Index is 11 points above fair value, while the DJIA is 44 points above fair value. Crude oil is $1.53 higher at $89.32 per barrel, and the Bloomberg gold spot price is up $10.58 at $1,396.58 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.3% at 79.90.

Dow member General Electric Co. (GE $18 ¹) announced that it is proposing to acquire UK-based Wellstream Holdings Plc. (WSHOY $59), an oil & gas pipeline engineer and manufacturer, for 800 million pounds ($1.3 billion). GE said the acquisition will broaden its subsea production systems equipment and service capabilities, while enhancing its ability to capitalize on growth in Brazil, Africa and Asia. GE added that WSHOY’s Board intends to unanimously recommend the transaction to shareholders.

Economic data light today, but plenty of data is slated for the rest of the week

Treasuries are lower as there are no major economic releases scheduled for today but the week’s economic calendar starts with tomorrow’s release of advance retail sales, forecasted to rise 0.6% month-over-month (m/m) in November, adding to October’s 1.2% increase, while sales ex-autos are also estimated to grow 0.6% in November, after rising 0.4% in October.

Additionally, the Producer Price Index (PPI) will be released tomorrow, expected to show prices at the wholesale level rose 0.6% m/m in November, while the core rate, which excludes food and energy, is expected to increase 0.2%. On a year-over-year (y/y) basis, the PPI is expected to grow 3.3% in November, and increase 1.2% at the core level. The release precedes Wednesday’s report on the Consumer Price Index (CPI), forecasted to show a 0.2% m/m increase in November, while ex-food and energy, it is expected to gain 0.1%. On a y/y basis, the CPI is expected to increase 1.1% at the headline level and 0.6% at the core level.

However, the bulk of tomorrow’s focus will likely be on the afternoon statement concluding the one-day Federal Open Market Committee (FOMC) meeting. No changes are expected to the fed funds target rate, currently at a level between 0-0.25%, or the $600 billion asset purchase program, but markets will likely attempt to discern the Fed’s commitment to the program given better economic news recently, as well as the announcement to extend and expand tax cuts.

Treasury yields are extending their recent run up, with the rate of the 10-year note at a six-month high mostly in reaction to the tax deal, which could increase the deficit. Congress is set to conduct a procedural vote today, and traders have debated the impact of the tax deal on the potential for the Fed to complete its announced purchase program, dubbed quantitative easing, or QE2. One camp notes that the tax deal amounts to renewed fiscal stimulus for the economy, increasing the economic growth prospects for 2011, which could reduce the need for monetary stimulus. However, the resulting surge in yields has others wondering if the Fed will need to continue with its program in order to keep financial conditions stimulative, given the Fed’s forecast that it would take five-to-six years for the economy to return to its longer-term rate of output growth, inflation and employment levels.

Other releases on this week’s US economic calendar include: the NFIB Small Business Optimism Index, business inventories, industrial production and capacity utilization, the Empire Manufacturing Index, housing starts and building permits, 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.

Europe gaining ground as resource-related issues lead the way

The equity markets in Europe are broadly higher in afternoon action, with oil & gas and materials issues pacing the advance on heels of the Chinese government refraining from increasing its benchmark interest rate despite hotter-than-expected economic data. Financials are also one of the best performing sectors as euro-area debt concerns in the area are relatively suppressed. However, volume is lighter than usual as economic and equity news is on the softer side, which may be amplifying today’s moves. Meanwhile, there were some economic reports out of the UK that deserve a mention as separate reports showed home prices declined 3.0% m/m in December, while producer input prices rose more than economists had expected.

The UK FTSE 100 Index is 1.0% higher, France’s CAC-40 Index is up 0.9%, and Germany’s DAX Index is advancing 0.4%.

Asia higher on China rate-hike relief

Stocks in Asia were higher across the board, led by a solid 2.9% increase in China’s Shanghai Composite Index, following the lack of an interest-rate hike by the Chinese government as it faces the threat of an overheating economy. Most had anticipated the Chinese government to increase its benchmark interest rate in the wake of Friday’s stronger-than-anticipated data on inflation. China’s Producer Price Index rose 6.1% y/y in November, compared to the 5.1% increase that economists had anticipated, and the nation’s Consumer Price Index advanced 5.1% y/y in November, above the 4.7% that was expected. However, prior to the release of the inflation data, the Chinese government did increase the reserve requirement rate—the amount the nation’s banks must keep in reserve—by another 50 basis points to 18.5%, marking the third increase in five weeks. Other data out of China that fostered interest-rate hike uneasiness included, retail sales rising over 18% y/y, matching expectations, while industrial production and fixed asset investment both grew more than anticipated. Hong Kong’s Hang Seng Index rose 0.7%.

Meanwhile, Japan’s Nikkei 225 Index increased 0.8%, near a seven-month high, on the rate-hike relief in China and as the yen weakened to help export issues. Elsewhere, Australia’s S&P/ASX 200 Index rose 0.2%, on strength in banking stocks following the release of government reforms in the sector that were seen as less strict than had been anticipated. Rounding out the day, South Korea’s Kospi Index rose 0.5% and India’s BSE Sensex 30 Index gained 0.9%.