Evening Market Update

Hope in Europe Springs Eternal

US equities added to yesterday’s rally, courtesy of growing optimism that European leaders will step up their efforts to tackle the region’s festering debt crisis. Also aiding sentiment, Greece’s parliament garnered enough votes to pass a property tax measure in its efforts to solidify its efforts to secure additional aid, and the nation is set to meet with German officials later today. However, a late-day report from the Financial Times noted that some euro members are split as to the role of private creditors within the Greek debt debacle, cutting the gains by more than half. Equity news was light as the focus remained on the events occurring overseas, with Walgreen Co reporting 4Q results that bested the Street’s forecasts, but also said no substantive progress has been made in its contract renewal negotiations with Express Scripts. Crude oil and gold prices gained solid ground, while the US dollar came under some pressure amid the optimism in Europe. Treasuries finished lower amid the advance in the equity markets and following improvements in US consumer confidence, home prices, and regional manufacturing activity.

At 12:50 p.m. ET, the Dow Jones Industrial Average is 2.4% higher, while the S&P 500 Index and the Nasdaq Composite are rising 2.2%. WTI crude oil is advancing $3.52 at $83.76 per barrel, and wholesale gasoline is jumping $0.09 to $2.62 per gallon, while the Bloomberg gold spot price is rising $30.12 to $1,657.00 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.4% at 77.63.

Walgreen Co. (WAG $35) reported fiscal 4Q earnings ex-items of $0.57 per share, above the $0.56 consensus estimate of analysts surveyed by Reuters, with revenues rising 6.5% year-over-year (y/y) to $18.0 billion, exceeding the $17.9 billion that the Street had forecasted. The pharmacy and retailer said its 4Q same-store sales—sales at stores open at least a year—rose 4.4% y/y, as customer traffic increased 1.6% and “basket size” rose 3.0%. However, shares were lower despite the results as the company noted that “there has been no substantive progress in the contract renewal negotiations” with Express Scripts Inc. (ESRX $40). Per Dow Jones Newswires, ESRX has generated $5.3 billion annually for WAG. ESRX traded higher.

Consumer confidence, home prices, and regional manufacturing all improve

The Consumer Confidence Index came in slightly below expectations, improving from an upwardly revised 45.2 in August—the lowest since April 2009—to 45.4 for September, compared to the 46.0 reading that economists surveyed by Bloomberg anticipated. The modest improvement in sentiment came as a decline in consumers’ assessment of the current situation was met by an increase in expectations of business conditions. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get” —fell further into negative territory. Also, the report showed consumers expect inflation to reach 5.7% twelve months from now, down from the 5.9% projection in August.

On the housing front, the 20-city composite S&P/Case-Shiller Home Price Index showed a decline in home prices of 4.11% y/y in July, compared to the 4.40% drop that economists had expected. Month-over-month (m/m), home prices were 0.05% higher, compared to forecasts, which called for a 0.10% increase. On a non-seasonally adjusted basis, home prices for the 20-city index were up 0.9%, the fourth-straight monthly gain, due to a “seasonal period of stronger demand for houses,” per David Blitzer, Chairman of the Index Committee at S&P. Blitzer added that with today’s report, “we are seeing not only anticipated monthly increases, but some fairly broad improvement in the annual rates of change in home prices.” However, he noted that “we do know that we are still far from a sustained recovery.”

Finally, the Richmond Fed Manufacturing Index showed manufacturing activity in the Mid-Atlantic region unexpectedly improved, rising from -10 in August—the lowest level since June 2009— to -6 in September compared to the decrease to -11 that was expected by economists. A reading below zero depicts contraction. The increase in the index came as employment rose from 1 to 7, wages gained 4 points to 6, and shipments advanced from -17 to -2, while the new orders volume fell to -17 from -11.

Treasuries finished lower following the data and amid the advance in the equity markets, with the yield on the 2-year note up 1 bp to 0.24%, the yield on the 10-year note increasing 8 bps to 1.98%, and the 30-year bond rate 9 bps higher at 3.08%.

Europe extends “hope” rally

Optimism that eurozone leaders will announce further action to help tackle the festering debt crisis when the European Central Bank (ECB) conducts its monetary policy meeting next week and continued talk that the ECB could ease its monetary policy stance helped boost sentiment overseas, along with reports that the region’s bailout mechanism, known as the European Financial Stability Facility (EFSF), may be leveraged. CNBC reported late yesterday that EU officials are in discussions to use funds from the EFSF, which its expanded capabilities have yet to be ratified, as seed money to create a special purpose vehicle (SPV) through the European Investment Bank (EIB), which will issue bonds that could be used to purchase sovereign debt and as collateral to obtain ECB loans and potentially provide capital to the region’s banks. The report, which has not been confirmed, helped soothe concerns about the threat of a debt contagion spreading throughout the eurozone. Also, concerns about a Greek default waned somewhat to help lift sentiment, as Greece is set to meet with Germany later today, and the nation’s finance minister said he expects euro-area leaders to approve the next installment of financial aid to the troubled nation, per Bloomberg, as the country’s parliament received enough votes to pass a proposed property tax. Moreover, Greece’s Prime Minister Papandreou said he can “guarantee” that the nation will meet its austerity goals. Elsewhere, Italy and Spain conducted debt auctions, which although required higher borrowing costs, key spreads between the two country’s debt and the benchmark German bond, known as the bund, moved lower amid the improved sentiment across the pond.

However, well after the closing bell in Europe, a report from the Financial Times cited European officials as saying up to seven euro members are demanding that private investors take a bigger “haircut” on their Greek holdings.

The economic calendar was light, with the lone report worth noting being a higher-than-expected reading on German consumer confidence for October.

The increased optimism spread to the Asian/Pacific region as well, leading to a rebound in the major Asian markets that hit lows yesterday that had not been seen in more than a year. Meanwhile, in economic news in the region, Japan’s small business confidence improved in September and South Korea’s consumer confidence remained unchanged this month, while after the closing bell in Asia, Hong Kong’s trade deficit narrowed by a smaller amount than forecasted in August, as exports came in below expectations and imports rose more than anticipated.

Eyes turn to durable goods orders tomorrow

Tomorrow, the US economic calendar will yield a key indicator of future demand for manufacturing, with the release of durable goods orders, expected to decline 0.2% m/m in August, after rising 4.0% in July. However, the headline figure can be volatile given its inclusion of defense and transportation orders that can have large swings on a m/m basis, so for clearer reads on business spending, other components of the report usually garner more attention. Excluding transportation, orders are forecasted to decline 0.2% in August after rising 0.7% in July, while nondefense capital goods excluding aircraft are projected to rise 0.4%, following the 1.5% decline posted in the previous month. Slowing global manufacturing activity has helped foster the recent concerns regarding a possible return to a recession and several reports during the recently passed 2Q earnings season showed waning confidence among businesses given the lingering eurozone debt crisis and signs of slowing global economic growth, as well as the political uncertainty in Washington.

The only other item on the docket will be MBA Mortgage Applications.

Tomorrow’s international economic calendar will offer a few more pertinent reports, with items slated for release to include: 2Q GDP from France, import prices and CPI from Germany, and Italian business confidence.