Evening Market Update

Fed Twist Leaves Stocks Seeing Red

The US equity markets moved solidly lower today, after the Federal Reserve announced plans to buy $400 billion in Treasuries in an effort to extend the average maturity of its holdings of securities, while making no changes to the fed funds rate. Stocks were mostly flat leading up to the announcement despite ongoing concerns about a potential Greek default, but sold off in the final hours of trading. Treasuries were mixed on the Fed action, and after news of a larger-than-expected increase in existing home sales and a modest rise in mortgage applications. Meanwhile, the equity front was heavy today, as Oracle Corp, General Mills, and Adobe Systems all posted better-than-expected earnings. Other Dow components also made headlines, as Exxon Mobil Corp announced plans to sell its UK North Sea assets to Apache Corp for $1.75 billion, Microsoft Corp raised its dividend by 25%, rumors emerged that Hewlett-Packard may consider replacing CEO Leo Apotheker, and Moody’s downgraded Bank of America’s credit ratings, along with Wells Fargo & Co and Citigroup Inc.

The Dow Jones Industrial Average fell 285 points (2.5%) to 11,124, the S&P 500 Index declined 35 points (3.0%) to 1,167, and the Nasdaq Composite lost 52 points (2.0%) to 2,538. In heavy volume, 1.2 billion shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.66 to $85.26 per barrel, wholesale gasoline was $0.05 lower at $2.70 per gallon, and the Bloomberg gold spot price declined $17.91 to $1,785.78 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.9% higher at 77.66.

Oracle Corp. (ORCL $30) reported fiscal 1Q EPS ex-items of $0.48, two cents above the consensus estimate of analysts surveyed by Reuters, with revenues increasing 11% year-over-year (y/y) to $8.4 billion, roughly inline with the Street’s forecast. The technology company said new software license sales rose 17%, while its high-end server business “delivered solid double-digit revenue growth” during the quarter, offsetting a decline in revenue for its low-end server business. Shares were nicely higher

General Mills Inc. (GIS $38) announced fiscal 1Q adjusted earnings of $0.64 per share, two pennies above the Street’s expectation, with revenues increasing 9% y/y to $3.9 billion, above the $3.8 billion that analysts had forecasted. The cereal maker said it saw gains across all three of its business segments, reflecting good net price realization, resilient consumer demand, and good early response to new items launched during the quarter. GIS traded to the upside.

Adobe Systems Inc. (ADBE $25) posted fiscal 3Q profits ex-items of $0.55, one cent above the projection by analysts, as revenues increased 2.3% y/y to $1.0 billion, matching the Street’s expectations. The software maker said its 4Q financial results will be at the high end of its previous guidance and will result in it meeting its full-year revenue and earnings targets. Shares were solidly higher.

In M&A news, Dow member  Exxon Mobil Corp. (XOM $72) announced that it has reached an agreement to sell its UK North Sea assets, which include the Beryl Field and related properties, to Apache Corp. (APA $91) for $1.75 billion. The acquisition is expected to increase APA’s North Sea production by 54% and proved reserves by 44%. Shares of XOM and APA finished lower.

In other corporate financing news, fellow Dow member Microsoft Corp. (MSFT $26) announced a 25% increase in its quarterly dividend to $0.20 per share. MSFT said, “Our strong financial results enable us to increase our dividend as part of our ongoing commitment to return capital to our shareholders.” MSFT traded lower.

Moreover, shares of Dow component Hewlett-Packard Co. (HPQ $24) spiked amid media reports that the technology company’s Board of Directors is considering replacing CEO Leo Apotheker, according to people familiar with the matter. HPQ has not commented on the matter.

Finally, Dow member Bank of America Corp. (BAC $6) was under heavy pressure after Moody’s Investors Service downgraded the bank’s short and long-term credit ratings. BAC said it disagrees with the action by Moody’s. Also, the credit rating agency cut its credit ratings on Wells Fargo & Co. (WFC $24) and Citigroup Inc. (C $26). Shares of WFC and Citigroup moved lower.

Fed moves to “twist” the maturity of its balance sheet

The Federal Open Market Committee (FOMC) concluded with the Fed saying that economic growth remains slow, with continuing weakness in labor markets. Despite only making a change to the characterization of household spending within the components of the economy, to “increasing at only a modest pace” from flattening out, the Fed noted that they expect now “some pickup” versus a “somewhat slower recovery” outlook for the economy. As such, the Committee now characterizes the downside risks to their outlook as “significant,” adding in the factor of “strains in global financial markets.”

On inflation, the Fed continues to believe that it anticipates it will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate, and longer-term inflation expectations have remained stable. The Fed maintained their stance that conditions are likely to warrant an exceptionally low level for the fed funds rate through at least mid-2013.

To support a stronger economic recovery and ensure that inflation over time is at levels consistent with the Fed’s dual mandate, the Fed decided to extend the average maturity of its holdings of securities. The Committee announced that it intends to purchase, by the end of June 2012, $400 billion of Treasury securities with the remaining maturities of 6 years to 30 years and sell an equal amount of Treasury securities with remaining maturities of 3 years or less. The Fed believes this will put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. Additionally, to help support conditions in mortgage markets, the Committee will now reinvest payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities instead of Treasuries. The Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.

In a separate release, the Federal Reserve Bank of New York gave a breakdown of the $400 billion in intended purchases by maturity, with the schedule of operations to be released on September 30 and a Frequently Asked Questions review to be released September 26.

As a result of today’s actions, the same three members that dissented at the August meeting dissented again, with Presidents Fisher, Kocherlakota, and Plosser saying they did not support additional policy accommodation at this time.

Existing home sales exceed estimates, mortgage apps tick up

Existing home sales rose 7.7% month-over-month (m/m) in August to an annual rate of 5.03 million units, better than the increase to 4.75 million units forecasted by economists surveyed by Bloomberg, while July’s figure was left unrevised at 4.67 million units. The median existing-home price fell 5.1% from a year ago to $138,300 and declined 1.7% m/m, the second straight m/m decrease. The supply of homes available for sale fell by 2.0% m/m to 3.58 million units, equating to 8.5 months of supply at the current sales pace. Single-family home sales rose 8.5% m/m, while multi-family gained 1.8%. Sales of existing homes reflect closings from contracts entered one to two months earlier.

According to the National Association of Realtors (NAR), “Investors were more active in absorbing foreclosed properties,” accounting for 22% of purchases, also reflected in the 29% of transactions made in cash and 31% of all sales that were classified as distressed. Additionally, cancellations remained at a high level at 18%, and the NAR said this reflected mortgage applications that were either not accepted or because appraised values were coming in below the negotiated sales price.

In other economic news, the MBA Mortgage Application Index rose 0.6% last week, after the index that can be quite volatile on a week-to-week basis, gained a downwardly revised 4.9% in the previous week. The advance came as a 2.2% gain in the Refinance Index offset a 4.7% decrease in the Purchase Index. The increase in mortgage activity came as the average 30-year mortgage rate remained at 4.29%.

Treasuries were mixed, after yields on the longer-end of the curve jumped following the Fed announcement. The yield on the 2-year note gained 4 bps to 0.20%, the yield on the 10-year note was 6 bps lower at 1.88%, and the 30-year bond rate plunged 14 bps to 3.06%.

Greek default concerns continue, China’s Leading Index rises

The European markets were under pressure again today, as uncertainty regarding a Greek debt default continued to hamper sentiment across the pond. Although Greece concluded that its two-day meeting with eurozone lenders made “good progress,” the nation announced that a “full mission” of EU leaders will return to Greece next week to complete their review of its progress made on its deficit reduction plans in order to qualify for the next wave of bailout funds, as the nation only has a couple more weeks of cash to deploy to pay its maturing debt obligations. Meanwhile, Greece’s government implemented further austerity measures today, including the suspension of more civil servants than originally planned and new pension cuts. Meanwhile, the European Central Bank (ECB) loosened its eligibility requirements for debt securities issued by financial institutions that can be used as collateral for borrowing from the central bank. At the same time, the ECB lowered the limit for using unsecured debt instruments as collateral.

Elsewhere, on the European economic front, UK consumer confidence fell by a smaller amount than expected in August, while the UK public sector’s net borrowing rose more than forecasted for August. Finally, the minutes from the September Bank of England’s monetary policy meeting showed policymakers were unanimous on holding the central bank’s benchmark interest rate unchanged at 0.50%. However, the release showed that most policymakers noted that it was “increasingly probable that further asset purchases to loosen monetary conditions would become warranted at some point.”

In Asia/Pacific economic news, China released its Leading Index, which showed a 0.6% m/m rise in July, helping alleviate concerns that the government’s aggressive monetary policy tightening since early 2010 may cause a hard landing of the Chinese economy. Elsewhere in the region, Japan’s trade deficit came in larger than economists forecasted, while the country’s All Industry Activity Index rose at a rate that missed expectations. Finally, South Korea’s unemployment rate unexpectedly declined.

Back in the Americas, Canada’s consumer prices came in hotter than expected in August, while the increase in Mexico’s retail sales failed to match the expectations of analysts.

Tomorrow’s US economic calendar will yield weekly initial jobless claims, expected to decline to 420,000 from a previous reading of 428,000. Additionally, the Conference Board’s Index of Leading Indicators will be released, with economists looking for a 0.1% increase in August, after a better-than-expected 0.5% rise in July.

Reports due out on the international front include consumer confidence, PMI manufacturing and services reads from the eurozone, Canadian retail sales, Brazil’s unemployment rate, Australia’s leading index, and the preliminary manufacturing PMI for China released by HSBC.