Evening Market Update

Eurozone Anxiety Continues to Reign

Heightened worries over the eurozone sovereign debt crisis overshadowed an unexpected gain in US service sector activity, pushing stocks below the flatline in the first day of trading after the holiday weekend. Treasuries moved higher in a flight to safety, and crude oil prices were lower. Meanwhile, the US dollar gained ground as the Swiss franc moved sharply lower after the Swiss National Bank capped the franc’s rise compared to the euro. On the equity front, International Paper inked a deal to acquire Temple-Inland for $4.3 billion, including debt, Walgreen Co saw an increase in August same-store sales, but AutoNation posted a decline in August vehicle sales, and Sunoco announced its departure from the refining business.

The Dow Jones Industrial Average fell 101 points (0.9%) to 11,139, the S&P 500 Index lost 9 points (0.7%) to 1,165, and the Nasdaq Composite declined by 7 points (0.3%) to 2,474. In moderate volume, 1.1 billion shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil fell by $0.43 to $86.02 per barrel, wholesale gasoline lost $0.02 to $2.82 per gallon, and the Bloomberg gold spot price was $21.00 lower to $1,879.20 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 1.0% higher at 75.93.

In M&A news, International Paper Co. (IP $28) announced that it has entered into a definitive agreement to acquire Temple-Inland Inc. (TIN $31) for $32 per share in cash, or about $4.3 billion, including the assumption of $600 million in debt. On the heels of the announcement, IP said it will terminate its existing tender offer to acquire all of the outstanding common shares of TIN for $30.60 per share. TIN was sharply higher, while IP also gained solid ground.

Walgreen Co. (WAG $35) reported that its August same-store sales—sales at stores open at least a year—rose 5.6% year-over-year (y/y). The retailer reported that customer traffic increased 2.5% and “basket size” rose 2.3%. Separately, WAG noted that it has begun informing patients that it will not be part of the Express Scripts Inc. (ESRX $45) pharmacy benefits network as of January 1, 2012, as negotiations “remain at an impasse.” Shares were higher after overcoming early weakness.

AutoNation Inc. (AN $39) announced that its retail new vehicle unit sales in August declined 3% y/y to 18,121, as a 10% drop in import vehicle sales offset gains in domestic and premium luxury sales. AN traded lower.

US oil refiner Sunoco Inc. (SUN $38) announced that it will put its two Pennsylvania refiners up for sale and exit the refining business in order to focus on its retail and logistics enterprises. In a conference call, SUN’s CEO said the company’s performance in the refining segment was “unacceptable” and that the move was in the best interest of its shareholders. SUN said it will book a $1.9-2.2 billion impairment charge during the 3Q related to the refineries. SUN traded higher on the news.

Service sector activity surprisingly accelerates

The  ISM Non-Manufacturing Index unexpectedly improved in August to 53.3 from 52.7 in July—the lowest level for the year—while the forecast of economists surveyed by Bloomberg was for a decrease to 51.0. A reading of 50 separates expansion from contraction. The report is generally considered a measure of economic strength in the service sector and is the companion to the ISM Manufacturing Index, which last week surprisingly remained in expansion for August. The favorable read on service sector activity came as new orders increased 1.1 points to 51.7, while new export orders rose 7.5 points to 56.5. Elsewhere, although the non-manufacturing employment component declined 0.9 points, the gauge remained in expansion at a level of 51.6. Meanwhile, prices paid gained 7.6 points to 64.2. On inventories, the change component fell from 56.5 to 53.5 and the sentiment component declined 3.5 points to 56.0. Finally, accompanying a 0.5 point decrease in business activity/production to 55.6, the ISM indicated that survey respondent comments were mixed and that “There is a degree of uncertainty concerning business conditions for the balance of the year.”

Treasuries were mostly higher despite paring gains on the favorable service-sector data, as eurozone concerns continued to hamper sentiment and foster some flight-to-safety buying. The yields on the 2-year and 10-year notes were down 1 bp to 0.20% and 1.98%, respectively, and the 30-year bond rate fell 5 bps to 3.25%.

Swiss National Bank caps franc

Sentiment was mixed overseas as a move by the Swiss National Bank was tempered by the continued anxiety over the euro-area debt crisis. The Swiss National Bank (SNB) announced it will institute a ceiling on the Swiss franc against the euro, saying it is “aiming for a substantial and sustained weakening of the franc,” per Bloomberg, and “With immediate effect, it will no longer tolerate a euro-franc exchanged rate below the minimum rate of 1.20 francs.” The SNB added that it is “prepared to buy foreign currency in unlimited quantities.” The Swiss franc traded solidly lower in the currency markets following the announcement. However, worries over the sovereign debt contagion grew as Italy held talks about its austerity plans and balancing its budget, while political uncertainty in Germany exacerbated the concerns about the debt crisis across the pond. German Chancellor Angela Merkel’s party was handed a loss in a regional election over the weekend, and Germany is set to hold a constitutional vote tomorrow regarding the participation of Europe’s largest economy in the recent eurozone bailouts.

Meanwhile, today’s European economic calendar did little to help sentiment, as UK retail sales unexpectedly dropped in August, and German factory orders fell more than expected in July, while eurozone 2Q GDP was left unrevised at a 0.2% quarter-over-quarter (q/q) rate of growth.

The reemergence of the euro-area sovereign debt concerns dampened the mood in Asia as well with Japan’s Nikkei 225 Index closing at a 2-1/2 year low. Meanwhile, the Reserve Bank of Australia (RBA) kept its benchmark interest rate unchanged at 4.75%. The RBA has kept rates unchanged since November, noting today that conditions in global financial markets “have been very unsettled over recent weeks, as participants have confronted uncertainty about both the resolution of sovereign debt problems and the prospects for economic growth in Europe and the United States.” The central bank added that “the outlook for the global economy is less clear than it was earlier in the year.” Economic releases out of the region were minimal with a report showing South Korea’s 2Q GDP was revised slightly higher, while Australia’s net exports unexpectedly declined in 2Q.

Fed measures state of the States

The main event on tomorrow’s US economic calendar will be the midday release of the  Federal Reserve Beige Book, 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 September 20-21. The Beige Book measures what businesses and consumers are saying about actual current conditions, particularly the state of order books, demand for loans, and sales.

The only other item on the economic docket is MBA Mortgage Applications.

Tomorrow’s international economic calendar will have more to offer, including: UK industrial and manufacturing production, as well as home prices, and German industrial production, while Australia will report 2Q GDP, Japan will release its Leading Index, and Canada will report its Ivey Purchasing Managers Index. Elsewhere, Sweden’s Central Bank, the Bank of Canada and the Bank of Japan are expected to keep rates steady following the conclusions of their respective monetary policy meetings.