Morning Market Update

Familiar Foes Stymieing Sentiment

Rates hikes out of China, debt concerns in Europe, continued uneasiness toward the Japanese tragedy, and near $108 per barrel WTI crude oil prices are all weighing on US stocks in early action, despite continued M&A activity. Texas Instruments announced a deal to acquire National Semiconductor for $6.5 billion, while Dow member Procter & Gamble Co reached a deal to merge its Pringles unit into Diamond Foods Inc in a transaction valued at $2.35 billion. Treasuries are mixed in morning trading ahead of a key report on service sector activity and the release of the minutes from the Federal Reserve’s March policy meeting, and after Fed Chairman Bernanke continued to downplay inflation concerns. In other equity news, AMR Corp announced that it reached an agreement with online travel booking site Expedia Inc to restore a business agreement, while KB Home posted a much larger-than-expected loss. Overseas, Asia finished mixed with Japanese stocks finding pressure, while European equities are lower on the heels of another credit downgrade of Portugal by Moody’s.

As of 8:50 a.m. ET, the June S&P 500 Index Globex future is 3 points below fair value, the Nasdaq 100 Index is 6 points below fair value, and the DJIA is 22 points below fair value. WTI crude oil is $0.41 lower at $108.06 per barrel, and the Bloomberg gold spot price is up $1.85 at $1,435.88 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.1% at 75.95.

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. The boards of directors of both companies have unanimously approved the transaction and TI said the deal will increase its profitability and earnings per share.

In other deal news, Dow member Procter & Gamble Co. (PG $62) announced that it has reached an agreement to merge its Pringles unit into Diamond Foods Inc. (DMND $57) in a transaction valued at $2.35 billion.

Moreover, American Airlines (AA) parent AMR Corp. (AMR $6) announced that it reached an agreement with online travel booking site Expedia Inc. (EXPE $22) to restore a business agreement in which EXPE and its Hotwire site will be able access to AA’s fares and schedule information.

In earnings news, KB Home (KBH $12) reported a fiscal 1Q loss of $1.49 per share, a much larger shortfall than the $0.27 per share loss that analysts surveyed by Reuters had forecasted, with revenues falling 25% year-over-year (y/y) to $197 million, below the $227 million that the Street had expected.

Service sector read and Fed minutes headline economic calendar

Treasuries are mixed in early action as there are no US economic reports due out before the opening bell, with the with the yield on the 2-year note up 1 bp to 0.77%, while the yields on the 10-year note and the 30-year bond are down 1bp to 3.41% and 4.46%, respectively.

However, last night Federal Reserve Chairman Ben Bernanke spoke at the Federal Reserve Bank of Atlanta’s 2011 Financial Markets Conference, in which he reiterated that the recent spike in commodity prices is likely to be “transitory” and “we have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability.”

Later this morning, the US economic calendar will yield the release of the ISM Non-Manufacturing Index, forecasted to tick lower from 59.7 in February to 59.5 in March, with the inflation and employment components of the reports likely to garner the most scrutiny. However, with the spotlight focused on the diverging central bank policies, the afternoon release of the minutes from the Federal Reserve’s March 15 policy meeting, will probably prove to be the highlight of the US economic day.

Debt concerns and expected rate hike pressuring European equities

Stocks in Europe are lower in afternoon action with some uneasiness regarding the impact of Thursday’s highly-anticipated interest rate hike from the European Central Bank (ECB) on debt-laden peripheral euro-zone nations stymieing sentiment. Meanwhile, Moody’s Investors Service’s sovereign debt downgrade of Portugal—the second time in less than a month—is exacerbating the uneasiness. Also, China’s surprise interest rate hikes are bogging down materials issues. However, technology stocks are nicely higher to limit the downside move, aided by Texas Instruments’ announcement to acquire National Semiconductor in the US. Elsewhere, the economic calendar is painting mixed picture to offer little help to stocks as a plethora of Services PMI reports for March showed favorable revisions to gauges in Italy and the euro-zone, and an unrevised read out of Germany, while France’s activity report was revised lower. Also, the initial March UK PMI Services report showed activity was much higher than economists had expected. Finally, a separate report showed euro-zone retail sales unexpectedly fell month-over-month (m/m) in February.

The UK FTSE 100 Index is down 0.4%, France’s CAC-40 Index is declining 0.7%, Germany’s DAX Index is 0.6% lower, and Portugal’s PSI 20 Index is decreasing 0.9%, while Spain’s IBEX 35 Index is falling 1.1%.

Asia mixed as Japanese stocks find pressure

The equity markets in Asia finished mixed, with Japanese stocks finding pressure amid continued concerns about radiation leaks at the nuclear facility north of Tokyo that was damaged by March’s massive earthquake and tsunami. Shares of Tokyo Electric Power Co. (TKECY $7), the operator of the facility, fell again amid the festering nuclear threat in the region. Meanwhile, shares of Toyota Motor Co. (TM $79) posted a solid decline amid reports that it may temporarily shut down manufacturing at its North America plants due to a shortage of parts in the aftermath of the disaster in the nation, which has halted manufacturing activity in the region. The company said that it has communicated to team members, associates, and dealers in North America that some production interruptions are likely, but it’s too early to predict location or duration. Finally, chipmakers in Japan also contributed to the decline following a gauge of chip prices fell solidly.

However, all was not lost in Asia, with South Korea’s Kospi Index rising 0.7% to an all-time high on strength in technology and refining stocks, and Australia’s S&P/ASX 200 Index increasing 0.3% on continued optimism from increased M&A activity in the resources sector, and after the Reserve Bank of Australia keeping its benchmark interest rate unchanged at 4.75%. Action was light again as markets in China, Hong Kong, and Taiwan were closed for holidays. But, even though markets were closed, China increased its benchmark 1-year lending rate and its 1-year deposit rate by 25 basis points to 6.31% and 3.25%, respectively. This was the fourth interest rate increase in less than a year as it tries to combat rising inflation and the formation of asset bubbles.