Morning Market Update

 

Markets Making a Morning Move to the Upside

The US equity markets are pointing higher in early trading, aided by some favorable manufacturing data in China and Europe, which are helping ease concerns about a return to a recession for the US economy. Treasuries are lower in morning action amid the advances in stocks, ahead of reports on US new home sales and regional manufacturing activity. In equity news, H.J. Heinz Co posted earnings that exceeded analysts’ forecasts, while Medtronic Inc reported fiscal 1Q results that were inline with expectations. Overseas, Asian equities moved broadly higher on an improvement in Chinese manufacturing, while European stocks are moving higher as upbeat eurozone manufacturing data is offsetting a sharp drop in German investor confidence.

As of 8:50 a.m. ET, the September S&P 500 Index Globex future is 10 points above fair value, the Nasdaq 100 Index is 17 points above fair value, and the DJIA is 91 points above fair value. WTI crude oil is $1.20 higher at $85.62 per barrel, and the Bloomberg gold spot price is down $20.31 at $1,877.15 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.6% at 73.73.

H.J. Heinz Co. (HNZ $52) reported fiscal 1Q EPS ex-items of $0.78, two cents above the consensus estimate of analysts surveyed by Reuters, with revenues growing 14.9% year-over-year (y/y) to $2.8 billion, roughly inline with what the Street had forecasted. The condiment company said its 1Q organic sales—sales excluding divestitures, acquisitions, and currency fluctuations—grew by 3.1% y/y, “despite the difficult economic environment in developed markets,” on higher pricing, primarily in the US, UK, and Latin America, in response to “sharply rising commodity costs.” HNZ reaffirmed its full-year EPS outlook.

Medtronic Inc. (MDT $31) announced fiscal 1Q earnings ex-items of $0.79 per share, inline with the Street’s projection, as revenues rose 7% y/y to $4.0 billion, mostly matching what analysts had anticipated. The medical device maker said it saw growth across many of its businesses, led by revenue growth of 30% in emerging markets, but its ICDs and spinal products “continued to face challenges.”

New home sales and regional manufacturing read expected after the opening bell

Treasuries are lower in early trading as there are no major US economic reports scheduled for before the opening bell, with the yield on the 2-year note up 1 bp to 0.21%, while the yields on the 10-year note and the 30-year bond are rising 3 bps to 2.14% and 3.46%, respectively.

Later this morning, we will get a look at new home sales for July, forecasted to decline 0.6% month-over-month (m/m) to an annual rate of 310,000 units, after falling 1.0% in June, while the Richmond Fed Manufacturing Index will also be released, projected to deteriorate from -1 in July to -5 in August, with a reading below zero denoting contraction in activity.

Europe gaining ground as manufacturing data is offsetting a tumble in German sentiment

The equity markets in Europe are higher in afternoon action, as some favorable manufacturing data is helping stocks across the pond make a bid for a second-straight winning session. Worries about the potential for the European economy to fall back into recession were calmed somewhat as an improvement in Chinese manufacturing activity was followed by a better-than-expected read on a similar report out of the eurozone. The preliminary eurozone PMI Manufacturing Index slowed from 50.4 in July to 49.7 in August, below the 50 mark that is the demarcation point between expansion and contraction, but came in higher than the 49.5 level that economists had expected. 

The eurozone manufacturing report was led by a better-than-expected read on activity in Germany—Europe’s largest economy—as the nation’s Manufacturing PMI report posted a preliminary reading of 52.0 for August, matching the level seen in July, and compared to the 50.6 mark that was estimated. The upbeat manufacturing data is overshadowing a separate report on German investor confidence, which fell to a level not seen since December 2008. The German ZEW Survey of Economic Sentiment tumbled from -15.1 in July to -37.6 for August, versus the -26.0 reading that was projected. The read on sentiment may not have been much of a surprise as the equity markets have sold off sharply recently as eurozone contagion fears have ravaged confidence and last week, the eurozone 2Q GDP report showed lackluster expansion, with German output nearly flat.

What we're witnessing in Europe is the inability of policymakers to stem uncertainty, fueling a contagious illness that feeds through to vulnerable banks and countries in a "whack-a-mole" fashion. To stem this crisis of confidence, we reiterate what we've been saying for some time: We believe large amounts of capital must be made available to give markets confidence that any potential problem can be addressed, regardless if it's a problem with a bank or a country.

Meanwhile, in equity news, UBS AG (UBS $13) announced that it plans to eliminate about 3,500 jobs, slightly more than 5% of its workforce. However, shares of Switzerland’s largest bank, per Bloomberg, are moving higher. In other economic news, France’s PMI Manufacturing Index slowed more than expected and UK loans for home purchases unexpectedly increased.

The UK FTSE 100 Index is gaining 0.8%, France’s CAC-40 Index is rising 1.2%, Germany’s DAX Index is advancing 0.7%, and Switzerland’s Swiss Market Index is 1.4% higher.

Asia finishes broadly higher on better-than-expected China data

Stocks in Asia closed with broad-based gains as a report that showed manufacturing activity in China likely improved in August, helping soothe concerns about a hard landing of the nation’s economy amid the backdrop of growing concerns about a return to recession in the US and Europe. China’s HSBC Flash Manufacturing PMI—a preliminary read on August activity—rose from 49.3 in July to 49.8, just below the 50 level that separates contraction from expansion. The final PMI report in for August is expected to be released on August 31. Stocks in China gained ground on the report, with the Shanghai Composite Index rising 1.5% and the Hong Kong Hang Seng Index advancing 2.0%.