Evening Market Update

Stocks Rally on Brighter Outlook Across the Pond

The US equity markets posted solid gains today, breaking a three-day losing streak, as optimistic news out of Germany and Italy helped soothe some of the growing anxiety about the European debt crisis. Treasuries moved mostly lower, after showing little reaction to the release of the Fed’s Beige Book, which noted weakening activity in some Districts, while the only other item on the domestic docket was a decline in mortgage applications. Corporate leadership reorganization dominated the equity headlines, as Yahoo Inc announced the removal of Carol Bartz as Chief Executive Officer, while Dow member Bank of America Corp reported that President of Global Wealth and Investment Management Sallie Krawcheck, as well as President of Global Consumer and Small Business Banking Joe Price, will be leaving the company. On the earnings front, NVIDIA issued better-than-expected full-year guidance, while Darden Restaurants gave a weak outlook for Q1. Finally, BP Plc and Dow member Chevron announced a deep-water discovery in the Gulf of Mexico.

The Dow Jones Industrial Average surged 276 points (2.5%) to 11,415, the S&P 500 Index rose 33 points (2.9%) to 1,199, and the Nasdaq Composite increased 75 points (3.0%) to 2,549. In moderate volume, 944 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil gained $3.26 to $89.28 per barrel, wholesale gasoline rose $0.08 to $2.90 per gallon, and the Bloomberg gold spot price was $58.25 lower at $1,817.00 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.5% lower at 75.47.

Yahoo Inc. (YHOO $14) announced that the company’s Board of Directors removed Carol Bartz as Chief Executive Officer (CEO), replacing her with Timothy Morse, who will be interim CEO, effective immediately. YHOO said it is commencing a search for a permanent CEO. YHOO traded higher.

In other leadership reorganization news, Dow member  Bank of America Corp. (BAC $7) announced that President of Global Wealth and Investment Management Sallie Krawcheck, as well as President of Global Consumer and Small Business Banking Joe Price, will be leaving the company. BAC said it appointed David Darnell and Tom Montag to the newly-created positions of Co-Chief Operating Officers, effective immediately. BAC moved nicely to the upside.

In earnings news, NVIDIA Corp. (NVDA $14) issued revenue guidance for fiscal 2013, which begins for the company on January 30, 2012, forecasting revenues to be between $4.7-5.0 billion, compared to the $4.5 billion that analysts surveyed by Reuters had projected. The graphics chip maker said it sees growth across its entire graphics processing unit and mobile-processor business. Shares were nicely higher.

Darden Restaurants Inc. (DRI $45) said it expects 1Q EPS to be about $0.78, compared to the $0.87 estimate of analysts, as the parent of Red Lobster and Olive Garden forecasts that Hurricane Irene adversely impacted earnings. The company also noted that it expects “historically high” commodity costs and a sales shortfall at Olive Garden to put pressure on its 1Q profits. Moreover, DRI raised its full-year revenue outlook, but noted that EPS for the year are now expected to be toward the “lower end” of its previous guidance. Shares finished solidly lower.

Finally, shares of BP Plc. (BP $37) were solidly higher after the oil company and its partner, Dow member Chevron Corp. (CVX $99), made a deep water discovery in the Gulf of Mexico. The well is one of the first drilled in the area since last year’s Deepwater Horizon disaster that prompted a moratorium on deepwater drilling. CVX also moved to the upside.

Fed view: US economy as a whole continues to expand, despite mixed regions

The Federal Reserve Beige Book was released mid-day, 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. Information was collected through August 26. The report noted that the economy continues to expand at a modest pace, but noted that some Districts noted mixed or weakening activity, notably in the Philadelphia District. There were many contacts across Districts that were either downgrading their near-term outlooks for growth or becoming more cautious, due in part to declining consumer confidence and economic uncertainty highlighted by market volatility.

While consumer spending increased slightly, excluding autos, which surprisingly reported increases despite lingering supply disruptions, retail sales were flat or down in several Districts. Residential and commercial real estate and construction activity was weak overall. Manufacturing conditions were mixed, and while the pace of activity slowed, future capital spending plans were solid in a few Districts. Loan demand was described as stable or slightly weaker, while lending standards were largely unchanged with an improvement in loan quality. Price pressures edged lower, although input costs continued to increase in some areas. Labor markets were “generally stable” and some Districts reported modest employment growth. On a positive note, there were reports of shortages of skilled workers in areas such as engineers, mechanics and software developers.

In other economic news, the MBA Mortgage Application Index declined 4.9% last week, after the index that can be quite volatile on a week-to-week basis, fell by 9.6% in the previous week. The decrease came as a 6.3% fall in the Refinance Index more than offset a 0.2% increase in the Purchase Index. Meanwhile, the decline in refinancing activity came despite a drop in the average 30-year mortgage rate by 9 basis points (bps) to 4.23%, just above the record low of 4.21% set in early October.

Treasuries were mostly lower, as the yield on the 2-year note was unchanged at 0.20%, while the yield on the 10-year note increased 6 bps to 2.04%, and the 30-year bond rate was 9 bps higher at 3.37%.

German court says bailouts not unconstitutional, Italian Senate approves austerity plan

Eurozone sovereign debt concerns calmed somewhat from yesterday after Germany’s Constitutional Court ruled against a series of lawsuits aimed at deeming the participation of Europe’s largest economy in bailouts of troubled euro-area nations unconstitutional. The court said the German government must seek the approval of its Parliament Budget Committee before offering bailout funds, which may prolong the approval process if aid is needed. Meanwhile, the Italian Senate approved the government’s 54 billion euro austerity program designed to balance the budget in 2013. The plan will now be passed to the lower house, where it will be reviewed by the budget commission ahead of a vote, which is expected in a matter of days.

Meanwhile, the economic front also helped the markets across the pond rebound from their recent sell-off, as German industrial production came in much stronger than forecasted. Production rose 4.0% month-over-month (m/m) in July, after falling a favorably revised 1.0% in June, and compared to the 0.5% increase that economists expected. However, UK data was mixed, with industrial production unexpectedly declining in July and home prices falling more than forecasted for August, while manufacturing production unexpectedly increased in July. In other economic news, Sweden’s central bank left its benchmark interest rate unchanged at 2.00%, as expected.

Japan is still trying to address its "three D's" –the structural issues of debt, demographics and deflation. However, we're starting to see signs that Japanese corporations are viewing the crisis as a wake-up call and are slowly adopting practices that may make them more globally competitive. These changes may have the potential to bring about the long-awaited revival of Japanese stocks. Elsewhere, Australia’s 2Q GDP rose 1.2% quarter-over-quarter (q/q), after contracting a favorably revised 0.9% in 1Q, and compared to the 1.0% growth that economists expected. The stronger-than-forecasted increase in output came amid rising consumer spending and growth in exports. Finally, a report from the China Securities Journal suggested that the Chinese government may ease monetary policy by buying securities from banks or cutting the required reserve ratios for its banks, the media outlet said, according to Bloomberg.

Back in the Americas, the Bank of Canada (BoC) expectedly kept its benchmark interest rate unchanged at 1.00%, but sounded a more cautious tone than its previous monetary policy meeting. The BoC said, “In light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished.” This compares to its July statement, in which it noted that “To the extent that the expansion continues and the current material excess supply in the economy is absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn.”

Releases on the US economic calendar tomorrow will include the trade balance, expected to narrow to a deficit of $51.0 billion in July, while weekly initial jobless claims are forecasted to decline to 405,000 from 409,000 last week. Later in the trading day, consumer credit will be reported for July, with economists looking for a $6.0 billion increase, following a hefty $15.53 billion increase in June.

On the international front, reports will include Germany’s trade balance, Canada’s building permits, Mexico’s consumer prices, Japan’s trade balance and machine orders, and Australia’s unemployment rate. Additionally, the Bank of England and European Central Bank are scheduled to meet, with expectations that both will hold key benchmark interest rates unchanged.