Morning Market Update

Modest Gains as Earnings Season Looms

The US equity markets are modestly higher in early action on the heels of Friday’s final-hour budget compromise by lawmakers, avoiding a Government shutdown, and as M&A activity continues to ramp up. Also, oil prices are lower to help sentiment, on reports that Libya’s leader Qaddafi agreed to a cease fire, but some of the pressure on oil prices is being attributed to lower growth outlooks for the US and Japan from the IMF. However, traders may be treading with some caution on the reports of another earthquake in Japan overnight, and ahead of the unofficial start to 1Q earnings season after today’s closing bell in the form of the profit report from Dow member Alcoa. Moreover, there will be some key US economic reports later this week, headlined by data on inflation, retail sales, and a broad look at business conditions across the nation. Treasuries are lower amid the gains in stocks and as there are no major economic reports scheduled for release today. In equity news, NYSE Euronext announced that it has unanimously rejected the unsolicited joint proposal by NASDAQ OMX Group Inc and IntercontinentalExchange, while Endo Pharmaceuticals Holdings Inc announced that it has entered into a definitive agreement to acquire American Medical Systems Holdings Inc for $2.9 billion in cash. Overseas, Asia finished mostly lower, while Europe is being bogged down by some disappointing reports out of the industrial sector.

As of 8:46 a.m. ET, the June S&P 500 Index Globex future is 2 points above fair value, the Nasdaq 100 Index is 8 points above fair value, and the DJIA is 22 points above fair value. WTI crude oil is $1.08 lower at $111.71 per barrel, and the Bloomberg gold spot price is down $6.89 at $1,468.02 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.3% at 75.07.

In M&A news, NYSE Euronext (NYX $39) announced that its Board of Directors has unanimously rejected the unsolicited joint proposal by NASDAQ OMX Group Inc. (NDAQ $28) and IntercontinentalExchange (ICE $121) to acquire NYX. The company said the proposal by NDAQ and ICE is “strategically unattractive,” and comes with “unacceptable execution risk.” NYX also reaffirmed its commitment to the previously agreed merger with Deutsche Boerse (DBOEY $8). NDAQ and ICE responded by saying that NYX, without engaging in any dialogue or discussion, has summarily elected to deny stockholders the opportunity to benefit from a “clearly superior proposal” to DBOEY’s announced transaction, “a proposed transaction that is indisputably financially inferior.”
In other dealmaking news, Endo Pharmaceuticals Holdings Inc. (ENDP $41) announced that it has entered into a definitive agreement to acquire American Medical Systems Holdings Inc. (AMMD $22) for $30 per share, or $2.9 billion in cash, including debt. ENDP said the combined company will be positioned to deliver more comprehensive healthcare solutions in branded pharmaceuticals, generics and devices and services, in key therapeutic areas of urology and pain.

Full slate of economic news in the second half of the week

Treasuries are modestly lower in morning action as there are no major economic reports due out today, with the yields on the 2-year and 10-year notes 1 bps higher to 0.81% and 3.59%, respectively, while the 30-year bond yield is gaining 2 bps to 4.66%.

Major US economic releases begin Wednesday, with advance retail sales, forecasted to rise 0.5% month-over-month (m/m) in March, after gaining 1.0% in February, while sales ex-autos are estimated to grow 0.7%, the same pace as the prior month. Same-store sales results—sales at stores open at least a year—reported by retailers were generally better-than-expected, despite the negative effects of the Easter shift and higher gasoline prices. The retail sales report includes spending at supermarkets and gas stations.

Later Wednesday, the Federal Reserve Beige Book will be released, wherein Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for April 26-27. In the minutes from the March meeting, the Fed upgraded its view on the economy, saying it was on a “firmer footing” and labor conditions showed “gradual improvement,” and inflation due to commodity price increases were expected to be “transitory.”

Inflation readings will be reported later in the week, starting with Thursday’s Producer Price Index (PPI), expected to show prices at the wholesale level rose 1.0% m/m in March, while the core rate, which excludes food and energy, is expected to increase 0.2%, the same pace as February. The release precedes Friday’s Consumer Price Index (CPI) report, forecasted to show a 0.5% m/m increase, while ex-food and energy, it is expected to again rise 0.2%.

The potential for inflation is a key point of disagreement and uncertainty for many investors. While this week’s core inflation readings are likely to continue to show levels below the Fed’s longer-term inflation “target” for a balanced economy, the question is whether very accommodative monetary policy continues to be necessary with the economy showing continued recovery. As inflation tends to lag economic growth and monetary policy needs time to work, monetary policy may need to be adjusted before inflation pressures rear their head.

Other releases on this week’s US economic calendar include: NFIB Small Business Optimism Index, import prices, the trade balance, MBA Mortgage Applications, business inventories, initial jobless claims, industrial production and capacity utilization, the Empire Manufacturing Index, and the preliminary University of Michigan Consumer Sentiment Index reading for April.

Europe lower as industrials are under some pressure

The equity markets in Europe are mostly lower in afternoon action, led by a decline in industrials issues on the heels of some disappointing corporate reports. Shares of Hochtief AG (HOCFF $99) are solidly lower after the German construction firm warned that full-year profits may fall about 50% on a reduction in the earnings outlook of its Australian subsidiary Leighton Holdings (LGTHY $27). Also, Husqvarna AB (HSQVY $17) is sharply lower after the world’s largest maker of lawnmowers, per Bloomberg, reported smaller-than-forecasted profits in the Americas, as a consequence of production disruptions at its largest manufacturing facility in North America. However, banking issues in the UK are moving nicely higher to limit losses across the pond, following the release of a report on the banking structure in the UK by a government-appointed commission, which was met with some relief as the report did not recommend the separation of retail and investment banking business, per Bloomberg.

Elsewhere, the economic calendar in Europe offered some slightly smaller-than-forecasted increases in industrial production in the euro-area, with Italy and France both posting m/m gains in output that missed economists’ forecasts.

The UK FTSE 100 Index is 0.1% higher, France’s CAC-40 Index is declining 0.7%, and Germany’s DAX Index is trading 0.3% to the downside.

Asia mostly lower, but Australian stocks gain ground

Stocks in Asia finished mostly lower, with Japan’s Nikkei 225 Index declining 0.5% on weakness in automakers following a downgrade of the sector by Citigroup Inc. to “sell” due to the impact on production and supply disruptions of the March 11 massive earthquake and tsunami that hit the country. Moreover, Chinese stocks finished lower, with the Hong Kong Hang Seng Index declining 0.4% and the Shanghai Composite Index decreasing 0.2% after the country’s Premier Wen Jiabao offered comments on controlling rising real estate prices, while noting that stabilizing consumer prices was a top priority, per Bloomberg. The decline in China came even as the nation reported an unexpected trade surplus in March, as exports jumped 35.8%, but the surplus was modest as imports also rose solidly, increasing 27.3%. Elsewhere, South Korea’s Kospi Index declined 0.3% and Taiwan’s Taiex Index dipped 0.2%, while India’s BSE Sensex 30 Index fell 1.0% after a report showed that nation’s industrial production unexpectedly slowed in February. However, Australia’s S&P/ASX 200 Index managed to gain ground, rising 0.6% following the trade data out of China and amid continued M&A speculation in the mining sector.