Evening Market Update

Equities Mixed Despite Global M&A  

Stocks were mixed in light trading today, digesting two weeks of gains ahead of a week full of news from central banks globally, beginning with Fed Chief Bernanke’s speech tonight, and Treasuries were modestly higher. Technology shares led to the downside after the Semiconductor Industry Association said that worldwide chip sales dipped in February, ahead of March’s Japan disaster, while after the close, Texas Instruments announced a deal to acquire National Semiconductor. Meanwhile, the day’s news in equities was dominated by M&A, with Dow member Pfizer selling its Capsugel business to KKR for $2.38 billion, as well as several commodity-oriented M&A deals announced globally. Elsewhere, safety concerns arose after Southwest Airlines Co grounded several flights and General Dynamics confirmed a crash in a Gulfstream test flight.

The Dow Jones Industrial Average gained 23 points (0.2%) to 12,377, the S&P 500 Index was flat at 1,333, and the Nasdaq Composite was unchanged at 2,789. In light volume, 771 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.53 to $108.47 per barrel, wholesale gasoline gained $0.02 to $3.17 per gallon, while the Bloomberg gold spot price gained $5.10 to $1,433.90 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was flat at 75.91.

After the close, Texas Instruments Inc (TXN $34) announced a definitive agreement to acquire National Semiconductor (NSM $14) for $25 per share in an all-cash offer, funded by TI’s existing cash balances and debt, of about $6.5 billion, more than a 75% premium to NSM’s closing price.

In relatively light US equity news, Dow member Pfizer Inc. (PFE $21) announced that it has entered into an agreement to sell its Capsugel business for $2.38 billion in cash to private-equity firm KKR & Co. (KKR $17). Capsugel is a world leader in pharmaceutical and dietary supplement capsules and generated $750 million in revenue in 2010. Shares of both firms rose.

In commodity-oriented M&A news, China’s Minmetals Resources Ltd. announced that it has made an unsolicited bid to acquire Equinox Minerals Ltd. (EQXMF $6) for $6.5 billion in cash. EQXMF was over 30% higher in US trading. Equinox has its head offices in Australia, but is dual listed on Canada’s Toronto exchange. The offer complicates Equinox’s hostile bid for Lundin Mining (LUNMF $8), as it is conditional on Equinox abandoning its Lundin offer. Minmetals said that if completed, the purchase would create the 14th largest copper producer in the world. Elsewhere, shares of Molycorp Inc (MCP $66) rose over 10% after the company acquired a 90% stake in rare-earth company AS Silmet in a deal valued at about $89 milllion, doubling MCP’s production capacity.

European companies joined the M&A party, with Vodafone Group Plc. (VOD $29) agreeing to sell its stake in French mobile phone company SFR to Vivendi SA (VIVHY $29) for 7.95 billion euros ($11.3 billion). VOD gave up an early gain and finished modestly lower. Elsewhere, shares of Rhodia SA (RHAYY $44) were sharply higher after the specialty chemicals company reached an agreement to be acquired by Solvay SA (SVYZY $12) for 3.4 billion euros ($4.8 billion). Shares of acquirers Vivendi and Solvay were higher.

Elsewhere, shares of Southwest Airlines Co. (LUV $12) fell after the air carrier canceled several flights following Friday’s emergency landing in one of its Boeing 737 jets due to a hole in its fuselage. The National Transportation Safety Board said cracks have been found in three other 737 jets, per Dow Jones Newswires. Shares of Dow member  Boeing Co. (BA $74 ¹) were lower, and CNBC reported that the company would be issuing new service recommendations for several versions of its planes. Concerns about safety also pressured the shares of General Dynamics (GD $73) after the company confirmed that a test flight for its Gulfstream G650, where first deliveries were scheduled for early next year, ended in a crash killing all four people aboard. The accident is under investigation by the NTSB and FAA.

Economic week heats up with Fed in focus

Treasuries were modestly higher while there were no major US economic reports released today. The yields on the 2-year note fell 4 bps to 0.76%, the yield on the 10-year note was 2 bps lower to 3.42%, and the 30-year bond yield declined 1 bp to 4.48%.

However, tomorrow will likely be the pinnacle for the US economic calendar with the releases of the ISM Non-Manufacturing Index, forecasted to tick lower from 59.7 in February to 59.5 in March, and the minutes from the Federal Reserve’s March 15 policy meeting. The ISM report is expected to show the sixteenth-straight monthly expansion in service sector activity—as denoted by a reading above 50—but the underlying inflation and employment components of the report are likely to receive the highest level of scrutiny, given the week’s focus on central banks and that these are what make up the Fed’s dual mandate. Meanwhile, the Fed minutes will give a deeper look at varying degrees of conviction among policymakers on keeping their accommodative policy intact in light of improving economic data. Although there has not been an official dissension vote cast at the two meetings this year, recently there has been a plethora of more hawkish commentary coming out of the Fed.

Finally, the focus on the Fed kicks off with Fed Chief Ben Bernnake’s speech at the Federal Reserve Bank of Atlanta’s 2011 Financial Markets Conference tonight at 7:15 p.m. ET. There will be prepared text and an audience Q&A session to follow.

Lack of conviction ahead of central bank moves

Overseas markets found some support on the heels of some major M&A announcements globally today. However, gains in European markets were limited by growing expectations of a 25 bps rate-hike by the European Central Bank (ECB) at its Thursday meeting, exacerbated by a report that showed euro-zone producer prices rose 6.6% year-over-year (y/y) in February, from 5.9% in January, while a separate release showed investor confidence deteriorated by a larger amount than economists forecasted. In other economic news, UK PMI Construction came in above expectations, while Italy’s deficit-to-GDP was lower than forecasted. In addition to the ECB, the Bank of England and Bank of Japan are also meeting on Thursday, although only the ECB is expected to make any changes to monetary policy.

In Asia, the Japanese government released the breakdown of the 1Q Tankan Survey of Large Manufacturers, where Friday’s report showed an increase to 6 from 5 in 4Q. As 72% of the responses to the survey were received by March 11, the day natural disasters hit the nation, the government today reported that post-disaster responses called for business conditions in the coming months to worsen as the sector deals with power outages and production halts as a result of the tragedy. Elsewhere, markets in China and Taiwan were closed for holidays, but over the weekend China released the non-manufacturing PMI, which posted a seasonal rebound to 60.2 in March after the Lunar New Year depressed February’s reading to 44.1.

In the Americas, Mexico posted increases in both the manufacturing and services PMI indexes, with the manufacturing reading coming in ahead of expectations, while services came in modestly short of forecasts.

International releases tomorrow will include service PMI readings from the euro-zone, the UK, India and HSBC’s version of China’s service PMI, as well as euro-zone retail sales. Australia will report its trade balance and the central bank meets, where the benchmark rate is expected to remain at 4.75%. Elsewhere, Japan is scheduled to issue machine tool orders sometime this week.