Morning Market Update

Stocks Higher on Japan Optimism

The US equity markets are higher in early action as Japanese stocks rallied on a weaker yen and optimism that production could be restored as the nation tries to recover from the massive earthquake and tsunami earlier this month. Stocks are gaining ground following the announcement that Canada’s Valeant Pharmaceuticals International Inc made an unsolicited proposal to acquire US-based drug maker Cephalon Inc for about $5.7 billion. Meanwhile, on the economic front, ADP reported that private sector job growth was roughly inline with forecasts, while MBA mortgage applications declined. Treasuries are nearly unchanged following the data. In other equity news, Family Dollar Stores Inc posted better-than-forecasted profits. Overseas, other equity markets were led higher by the rebound in Japan, which is also helping materials lift European equities.

As of 8:48 a.m. ET, the June S&P 500 Index Globex future is 8 points above fair value, the Nasdaq 100 Index is 15 points above fair value, and the DJIA is 57 points above fair value. WTI crude oil is $0.15 lower at $104.64 per barrel, and the Bloomberg gold spot price is up $10.35 at $1,428.85 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.1% at 76.27.

Canada’s Valeant Pharmaceuticals International Inc. (VRX $44) announced that it has made an unsolicited proposal to acquire US-based drug maker Cephalon Inc. (CEPH $59) for $73.00 per share in cash, valued at about $5.7 billion. VRX said it has made several private approaches to CEPH’s management, but has been disappointed by CEPH’s unwillingness to engage in discussions in a timely manner. CEPH confirmed that it received the proposal from VRX, which it is reviewing, and will respond in due course.

Family Dollar Stores Inc . (FDO $52) reported fiscal 2Q EPS of $0.98, one penny above the consensus estimate of analysts surveyed by Reuters, with revenues increasing 8.3% year-over—year (y/y) to $2.3 billion, inline with expectations. Same-store sales—sales at stores open at least a year—increased 5.1% y/y, on increased customer traffic and a modest increase in the value of the average customer transaction. The discount retailer raised the low end of its full-year 2011 EPS outlook, which came in above expectations.

Private sector payrolls rise modestly less than expected, mortgage applications decline

The ADP Employment Change Report showed private sector payrolls rose by 201,000 jobs in March, slightly below the forecast of economists surveyed by Bloomberg, which called for a 208,000 increase, and February’s 217,000 job gain was revised to 208,000 jobs. The release does not include government hiring and firing and comes ahead of Friday’s broader nonfarm payrolls report, where economists expect an increase of 190,000 jobs in March, after posting a 192,000 increase in February. Excluding government hiring, March private sector payrolls are expected to increase 210,000, after expanding by 222,000 in February.

In other economic news, the MBA Mortgage Application Index decreased by 7.5% last week, after the index that can be quite volatile on a week-to-week basis, rose by 2.7% in the previous week. The decrease came as the Refinance Index fell 10.1% and the Purchase Index posted a 1.7% decline, while the average 30-year mortgage rate increased by 12 basis points (bps) to 4.92%, above the record low of 4.21% on October 8, 2010.

Treasuries are nearly unchanged in morning action after overcoming some modest losses following the employment data, with the yield on the 2-year note at 0.81%, the yield on the 10-year note at 3.49%, and the 30-year bond at 4.54%.

Mining issues leading Europe higher

Stocks in Europe are higher in afternoon action, led by strength in basic materials on optimism that the global economy is healthy enough to continue to strengthen in the face of the tragedy in Japan, Middle East turmoil, and euro-area debt concerns. Financials are posting a modest advance to contribute to the upward move, even as Irish banks are under pressure ahead of the release of the troubled-nation’s stress tests of its banking sector that are due out tomorrow. However, shares of UK consumer electronics retailer Dixons Retail (DSITY $1) are sharply lower after the company warned that full-year earnings will miss analysts’ forecasts, due to a steep downturn in consumer spending as sentiment is waning amid austerity measures being implemented by the government and the impact of higher inflation, exacerbated by the recent increase in the region’s value-added-tax. In economic news across the pond, euro-zone economic confidence was roughly inline with economists’ forecasts, while a reading on UK service-sector activity declined by a smaller amount than anticipated.

The UK FTSE 100 Index is 0.4% higher, France’s CAC-40 Index is up 0.9%, Germany’s DAX Index is gaining 1.7%, and Ireland’s Irish Overall Index is rising 0.4%.

Asia mostly higher as Japan rebounds

The equity markets in Asia finished mostly higher, led by a 2.6% rebound in Japan’s Nikkei 225 Index, despite continued concerns regarding radiation leaks at the earthquake and tsunami-damaged nuclear facility north of Tokyo. Solid weakness in the Japanese yen, on growing expectations of a rate hike in Europe next week and following some hawkish comments from a US Federal Reserve official yesterday, helped boost export issues. Meanwhile, optimism regarding the resumption of production from Japanese companies that had halted output following the natural disaster also helped contribute to the advance. Shares of Hitachi Ltd. (HIT $49) posted a steep advance amid reports that its main manufacturing facility will return to full production next month, while Nissan Motor Co. (NSANY $17) rose solidly after it said it may return to normal production by June, if suppliers can resume their parts shipments. In economic news, a report showed Japan’s industrial production unexpectedly rose in the month preceding March’s tragedy.

Elsewhere, stocks in China were mixed, with the Hong Kong Hang Seng Index rising 1.7% on some better-than-forecasted earnings reports in the region, while the Shanghai Composite Index dipped 0.1%. Moreover, South Korea’s Kospi Index increased 0.9% and Australia’s S&P/ASX 200 Index gained 1.4%, as improved global economic sentiment buoyed stocks. In other economic news, South Korea’s 4Q GDP was unrevised quarter-over-quarter (q/q) and China’s Leading Index was nearly unchanged. In earnings news, after the closing bell in China, Industrial & Commercial Bank of China (IDCBY $16) posted better-than-forecasted profits as the world’s largest lender by market value, per Bloomberg, benefitted from higher loan margins.