Evening Market Update

Optimism in Europe Aids US Equities

US equities were markedly higher in today’s session as optimism that eurozone policymakers may be considering actions aimed at stabilizing the region’s debt crisis aided sentiment. However, the Nasdaq Composite enjoyed a more modest gain as shares of Apple applied pressure to the index after a JPMorgan Chase analyst noted that the company lowered its 4Q iPad parts orders from suppliers. Treasuries were lower amid the gains in the equity markets, despite a decline in new home sales and an unexpected drop in the Dallas Fed Manufacturing Index. Meanwhile, crude oil moved to the upside, while the US dollar lost ground and gold suffered another sharp selloff. In other news on the equity front, billionaire activist investor Carl Icahn withdrew his slate of nominations to change the Board of Directors at Clorox, Berkshire Hathaway announced share buybacks, Dow member Boeing finally delivered the first of its 787 Dreamliner aircrafts, and shares of Eastman Kodak suffered following an unexplained draw on its credit line.

The Dow Jones Industrial Average jumped 272 points (2.5%) to 11,044, the S&P 500 Index gained 27 points (2.3%) to 1,163, and the Nasdaq Composite rose 33 points (1.4%) to 2,517. In lighter volume, 1.2 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.39 to $80.24 per barrel, wholesale gasoline gained $0.01 to $2.53 per gallon, and the Bloomberg gold spot price shed $35.99 to $1,620.75 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.4% to 78.18.

Billionaire activist investor Carl Icahn announced that his High River Limited Partnership withdrew its slate of nominations to change the Board of Directors at  Clorox Co. (CLX $66), ending his pursuit to have the company sold. Icahn said in a regulatory filing that a “considerable base of shareholders would not support” his stated campaign at this time. Icahn said he continues to believe that the best way to ultimately maximize shareholder value is through a sale of CLX to a strategic buyer. CLX confirmed the withdrawal of Icahn’s board member nominations, noting that the company will not be engaged in a proxy contest this year. CLX traded lower.

Elsewhere, fellow billionaire investor Warren Buffett’s Berkshire Hathaway Inc. (BRK/A $108,449) announced that its Board of Directors has authorized the repurchase of the company’s Class A and Class B shares (BRK/B $72) “at prices no higher than a 10% premium.” The company said it plans to use cash on hand to fund repurchases and repurchases will not be made if they would reduce its cash equivalent holdings below $20 billion. Shares were solidly higher.

Meanwhile,  Apple Inc. (AAPL $403), although finishing off the lows of the day, came under some pressure to weigh on the Nasdaq after an analyst at JPMorgan Chase noted that several suppliers indicated in the past two weeks that AAPL lowered 4Q iPad orders by 25%. AAPL did not comment.

Finally, Dow component Boeing Co. (BA $62) gained solid ground after the aerospace company finally delivered its first 787 Dreamliner aircraft to Japan’s All Nippon Airways Co. (ALNPY $7) over the weekend. The delivery came more than three years behind BA’s original schedule.

Finally, Eastman Kodak Co. (EK $2) fell over 25% after the film and imaging company said it drew $160 million from its credit line without disclosing a specific use for the proceeds. In an email on Friday, a spokesperson for EK noted that the credit line “has been a part of Kodak’s cash-management tool kit for some time”, but declined to further elaborate.

New home sales decline and Dallas manufacturing surprisingly drops

New home sales fell 2.3% month-over-month (m/m) in August to an annual rate of 295,000 units, above the 293,000 rate forecasted and July’s figure was upwardly revised to a 302,000 annual unit rate. The median home price fell 7.7% y/y, the largest y/y decline since July 2009, but rose 0.6% m/m to $209,100. The inventory of new homes for sale fell to 164,000 units, the second lowest level on record, representing 6.4 months of supply at the current sales rate. New home sales are considered a timely indicator of conditions in the housing market as they are based on signings instead of closings. However, trends in new home sales may have become less of a leading indicator because the market has shifted to the lower price points offered in the existing home market, which is over 90% of the housing market and where the median sale price in August was $138,300 due to the impact of distressed sales.

Meanwhile, the Dallas Fed Manufacturing Index unexpectedly fell, dropping from -11.4 in August to -14.4 for September, compared to the improvement to -8.0 that was expected. A reading below zero denotes contraction. The deterioration in the index came even as production, shipments, and employment all increased, while new orders remained in expansion territory. However, capacity utilization and general business activity remained in negative territory, while the company outlook component stayed positive but registered its lowest reading in more than a year. The report is the latest read on activity in September, with earlier data showing New York activity unexpectedly deteriorated and Philadelphia’s gauge improving by a smaller amount than forecasted, with both remaining at a level denoting contraction.

Treasuries finished mostly lower despite the data, amid the gains in the equity markets, with the yield on the 2-year note unchanged at 0.23%, while the yield on the 10-year note was 6 bps higher at 1.90%, and the 30-year bond rate gained 9 bps to 2.99%.

Tomorrow’s US economic calendar will offer additional news on the housing front in the form of the S&P/CaseShiller Home Price Index, forecasted to show prices rose 0.1% m/m in July, despite falling by a projected 4.4% y/y. Also on tap, the Consumer Confidence Index is expected to tick slightly higher to 46.0 in September from 44.5 the month prior, while the Richmond Fed Manufacturing Index will provide some insight into manufacturing activity in the mid-Atlantic region, with economists forecasting a slight decline to -11 during September from -10 in August, with a reading below zero denoting contraction.

Speculation of aid to debt crisis lifts mood overseas

Speculation that the European Central Bank (ECB) could cut interest rates at its monetary policy meeting next week boosted optimism across the pond, heightening hopes that eurozone policymakers will step up efforts to try to arrest the eurozone debt crisis and the threat of contagion in the region. As well, chatter about the possible leveraging of the European Financial Stability Facility (EFSF) and a potential action by the French government to help inject capital into its banking sector also aided sentiment. Meanwhile, German Chancellor Angela Merkel said a barrier must be put in place surrounding Greece to help combat the threat of contagion in the region. Merkel noted that, “We have to be in a position to react.” Also, the leader of Germany noted that she is “confident” that she will get her majority party’s vote on Thursday, resulting in the euro-area’s largest economy approving the expansion of scope of the EFSF that was agreed to by eurozone members in July.

Economic news on the European front was light, with the only item of note being the German Ifo Business Climate Index, which declined from 108.7 in August to 107.5 in September, but above the 106.5 level that economists had expected. Also, the German Ifo Expectations Index fell by a smaller amount than forecasted.

In Asia, however, the mood was decidedly different, as growing concerns about a possible return to a recession in the US and Europe, combined with the festering uncertainty regarding a Greek debt default, dampened sentiment and drained risk taking among traders, and many markets closed at fresh lows. There were no pertinent economic reports released in the region.

Major economic reports due out on the international front tomorrow will be very sparse, with only Germany’s Gfk Consumer Confidence Survey, hourly wages from Italy, and Hong Kong’s trade balance on the docket.