Morning Market Update

Bulls Continue to be Hamstrung by European Debt Concerns

Following the long Labor Day holiday weekend, US stocks are under solid pressure in early trading, on the heels of a sharp sell-off in Europe yesterday amid the festering eurozone sovereign debt crisis uneasiness. Also, concerns about the health of the US economy are weighing on sentiment, following Friday’s disappointing labor report, which showed no jobs were added to nonfarm payrolls. Treasuries are mostly higher, with the yields on the mid-to-long end of the curve under pressure amid the exacerbated sentiment, while traders are awaiting a read on US service sector activity after the opening bell. Meanwhile, President Obama’s Congressional speech later this week and tomorrow’s release of the Federal Reserve’s Beige Book will likely garner attention on the Street. In light equity news, Walgreen Co reported an increase in August same-store sales, while AutoNation Inc posted a decline in August vehicle sales. Overseas, Asian markets finished mostly lower, while European markets are mixed following yesterday’s drop, with Swiss stocks rallying after the nation’s central bank announced that it will cap the franc against the euro.

As of 8:52 a.m. ET, the September S&P 500 Index Globex future is 33 points below fair value, the Nasdaq 100 Index is 43 points below fair value, and the DJIA is 263 points below fair value. WTI crude oil is $2.83 lower at $83.62 per barrel, and the Bloomberg gold spot price is down $9.03 at $1,891.18 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.5% to 75.58.

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%.

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.

Service sector report due out after the opening bell

Treasuries are mostly higher in morning action as there are no major economic reports scheduled for before the opening bell, with the yield on the 2-year note flat at 0.20%, while the yield on the 10-year note is 5 bps lower at 1.94%, and the 30-year bond rate is declining 8 bps to 3.22%.

However, later this morning, the economic calendar will yield the release of the ISM Non-Manufacturing Index, anticipated to decrease to 51.0 in August from 52.7 in July, with 50.0 marking the level that 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 was released last week and unexpectedly remained above 50 for August.

The economic front will be relatively light, with a report from the Federal Reserve the only other major release in the holiday-shortened week. While the Central Bank is not scheduled to meet for another couple weeks, anecdotal economic information collected by Fed staffers in advance of the Federal Open Market Committee (FOMC) meeting scheduled for September 20-21 will be released in tomorrow’s midday Federal Reserve Beige Book. At the August FOMC meeting, the Fed downgraded its view on the economy, and made the historic announcement that it expected conditions to warrant keeping the Fed funds rate at an exceptionally low level through at least mid-2013.

Other US economic releases scheduled for this week include: MBA Mortgage Applications, the trade balance, initial jobless claims, consumer credit, and wholesale inventories.

Europe mixed following yesterday’s sharp declines

The equity markets in Europe are mixed in afternoon action, with Swiss stocks rallying on the news that the Swiss National Bank (SNB) will institute a ceiling on the Swiss franc against the euro. The SNB said 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 is trading solidly lower in the currency markets following the announcement. However, stocks in Spain and Italy remain under pressure amid growing concerns about the sovereign debt contagion as Italy is holding talks about its austerity plans and balancing its budget, while political uncertainty in Germany is exacerbating the concerns about the debt crisis across the pond.

Meanwhile, today’s European economic calendar is not helping 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 UK FTSE 100 Index is gaining 0.3% and Switzerland’s Swiss Market Index is rallying 4.0%, while France’s CAC-40 Index is declining 0.8%, Germany’s DAX Index is dropping 0.7%, Spain’s IBEX 35 Index is falling 1.3% and Italy’s FTSE MIB Index is tumbling 2.5%.

Asia finds pressure as European debt concerns continue

Stocks in Asia finished mostly lower following yesterday’s steep sell-off in Europe amid a reemergence in euro-area sovereign debt concerns. Japan’s Nikkei 225 Index fell 2.2%, closing at a 2-1/2 year low amid the uneasiness toward Europe, while South Korea’s Kospi Index came under pressure for a third-consecutive session, dropping 1.1%. Elsewhere, Australia’s S&P/ASX 200 Index decreased 1.6%, led by weakness in resource-related stocks, while 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.” Meanwhile, China’s Shanghai Composite Index declined 0.3%, while markets in Hong Kong and India overcame early losses in late-day action to finish higher, with the Hang Seng Index gaining 0.5% and the BSE Sensex 30 Index rising 0.9%, as European markets opened positively following yesterday’s steep declines. In other economic news in the region, South Korea’s 2Q GDP was revised slightly higher, while Australia’s net exports unexpectedly declined in 2Q.