Morning Market Update

US Stocks Idle After Rally and Ahead of Data from Fed

Despite gains in Europe and Asia on improved global economic optimism, the US equity markets are nearly unchanged in morning action ahead of the midday release of the minutes from the Federal Reserve’s December monetary policy meeting. The global markets rallied yesterday to kick off the New Year in grand fashion amid a plethora of favorable manufacturing reports, and an unexpected acceleration in UK manufacturing activity today is adding to the list of upbeat data to help lift equities overseas. Treasuries are slightly higher in early trading ahead of the Fed’s release and a separate report on factory orders. Equity news is light, with Motorola officially splitting into two separate publicly-traded companies garnering some attention on the Street.

As of 8:44 a.m. ET, the March S&P 500 Index Globex future is at fair value, the Nasdaq 100 Index is 3 points above fair value, while the DJIA is 3 points above fair value. Crude oil is $0.27 lower at $91.28 per barrel, and the Bloomberg gold spot price is down $21.03 at $1,393.78 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.2% at 79.01.

Motorola completed its split into two separate publicly traded companies today, with Motorola Mobility Holdings Inc. (MMI $30), which encompasses its smartphone and set-top box businesses, and Motorola Solutions Inc. (MSI $37), consisting of its two-way radio and scanners businesses. Both are trading on the New York Stock Exchange.

Factory orders and Fed in focus

Treasuries are modestly higher in morning action ahead of a report on manufacturing and a release from the US Federal Reserve. The yield on the two-year note is 1 bp higher at 0.61% and the yield on the 10-year note is flat at 3.33%, while the 30-year bond yield is up 2 bps at 4.41%.

Just after the opening bell, factory orders will be released, expected to show a 0.1% drop month-over-month (m/m) in November, after falling 0.9% in October.

However, it's too early to say whether the upward move in yields in an undesirable one. It appears that the bulk of the move is attributable to increasing confidence in the recovery and the shifting of assets to stocks. And, as noted by the Fed multiple times, increasing asset values helps increase the confidence of American consumers by boosting household net worth and making them more likely to spend and get money moving through the economy.

QE2 only began in early November, but some investors are questioning whether the program will be completed as initially announced. In fact, during the most recent Federal Open Market Committee meeting, the Fed maintained the current QE2 path while acknowledging that it was discussed and that changes could be made as developments continue.

Europe continues to advance as the UK gets back into the act

The equity markets in Europe are gaining solid ground, extending gains made yesterday in the wake better-than-expected manufacturing data out the US, Italy, and the euro-zone, and the UK markets returned from a holiday to play catch up. Meanwhile, a report today showed growth in UK manufacturing activity unexpectedly accelerated in December at the fastest pace in sixteen years, per Bloomberg, led by exports, adding to the plethora of upbeat reports across the globe. Also, the UK markets are receiving a lift from a solid advance in shares of BP Plc. (BP $45) on optimism that the cost of the Gulf of Mexico oil spill will be less than initially expected and reports from the UK Daily Mail that Royal Dutch Shell Plc. (RDS/A $67) had mulled a takeover offer of the British energy firm. None of the entities involved commented on the report.

In other economic news across the pond, Germany’s unemployment change unexpectedly rose, French consumer confidence deteriorated, and UK mortgage approvals rose more than expected. Moreover, a report showed the euro-zone Consumer Price Index estimate reached 2.2% year-over-year (y/y) in December, compared to 1.9% in November and the 2.0% that economists had anticipated.

The UK FTSE 100 Index is 2.2% higher, France’s CAC-40 Index is advancing 0.8%, and Germany’s DAX Index is gaining 0.1%.

Asia mostly higher on global optimism

Stocks in Asia finished mostly higher as sentiment continued to be upbeat regarding the economic recovery on the heels of some favorable global manufacturing reports yesterday, highlighted by the seventeenth-straight month of expansion in the manufacturing sector in the US. Japanese markets led the way, with the Nikkei 225 Index rising 1.7% in its first trading session of the year, as weakness in the Japanese yen versus the US dollar boosted export issues to amplify the upward move. Also, the equity markets in China contributed to the advance as the Hong Kong Hang Seng Index rose 1.0% and the Shanghai Composite Index gained 1.6% as the markets returned to full strength after a holiday limited action in some markets yesterday. Materials led the way in China on the upbeat global sentiment, while the weekend report that growth in China’s manufacturing activity slowed eased some concerns about further monetary policy tightening by the Chinese government.

However, stocks in Australia finished modestly lower, with the S&P/ASX 200 Index declining 0.1% following a report that showed the nation’s manufacturing activity contracted for a fourth month in a row. Also, financials showed some weakness to pressure equities in Australia as massive flooding in the country weighed on insurance firms in the region. Elsewhere, South Korea’s Kospi Index gained 0.7% to close just shy of an all-time high, while India’s BSE Sensex 30 Index and Taiwan’s Taiex Index both finished 0.3% lower.