Morning Market Update

US Stocks Higher as Europe Shrugs off Italian Downgrade

With European equity markets rising despite a credit rating downgrade of Italy by Standard & Poor’s, US stocks are finding some support, advancing in early action as the Federal Reserve is set to begin its two-day monetary policy meeting today. Meanwhile, traders are digesting a mixed read on August housing construction, as housing starts fell more than expected, while building permits unexpectedly increased. Treasuries are lower in morning action amid the gains in the equity markets and following the data. In equity news, ConAgra Foods Inc posted mixed 1Q results and announced that it has withdrawn its bid to acquire Ralcorp Holdings Inc, while AutoZone Inc reported better-than-forecasted 4Q profits. Elsewhere overseas, Asian markets finished mixed as Japan fell after returning to action following a holiday.

As of 8:47 a.m. ET, the December S&P 500 Index Globex future is 8 points above fair value, the Nasdaq 100 Index is 16 points above fair value, and the DJIA is 71 points above fair value. WTI crude oil is $0.66 higher at $86.47 per barrel, and the Bloomberg gold spot price is up $10.47 at $1,789.32 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% to 77.07.

ConAgra Foods Inc. (CAG $23) reported fiscal 1Q earnings ex-items of $0.29 per share, below the $0.31 consensus estimate of analysts surveyed by Reuters, while revenues rose 9.5% year-over-year (y/y) to $3.1 billion, topping the $2.9 billion that the Street had forecasted. Separately, the food company announced that it has withdrawn its $94 per share, all-cash offer to acquire Ralcorp Holdings Inc. (RAH $75), following RAH’s “failure to enter into constructive dialogue” with CAG by the designated deadline of September 19, 2011.

AutoZone Inc. (AZO $332) posted fiscal 4Q profits of $7.18 per share, exceeding the $6.97 forecast by analysts, with revenues rising 8.1% y/y to $2.6 billion, roughly inline with the Street’s expectations. The auto parts retailer said its 4Q same-store sales—sales at stores open at least a year—rose 4.5% y/y.

Housing starts and building permits come in mixed, Fed meeting begins

Housing starts for August fell by a larger rate than expected, dropping 5.0% month-over-month (m/m) to an annual rate of 571,000 units, from a downwardly revised 601,000 rate in July, and compared to expectations of economists surveyed by Bloomberg, which called for starts to come in at 590,000. However, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, unexpectedly rose, gaining 3.2% m/m in August to an annual rate of 620,000, after July’s upward revision to a 601,000 rate. The expectation was for permits to come in at 590,000 units.

Treasuries are lower following the data, with the yield on the 2-year note up 1 bp to 0.17%, the yield on the 10-year note gaining 3 bps to 1.98%, and the 30-year bond rate rising 2 bps to 3.24%.

Elsewhere, the Federal Open Market Committee’s (FOMC) two-day monetary policy meeting is set to begin today, concluding with its statement tomorrow at 2:15 p.m. ET. The meeting was originally scheduled as a one day discussion, but it was extended to “provide more time” to discuss the possible costs and benefits of various potential tools at the Fed’s disposal. There will be no customary press conference that typically follows a two-day meeting. Traders will be looking for any indications that the Fed will provide additional economic stimulus amid the backdrop of discouragingly high unemployment and slowing growth. Some in the market believe the next step for the Fed may be a “twist” of their balance sheet maturity, in reference to reducing its share of short-term securities and increasing its longer-term holdings. The effect of this action would be somewhat similar to QE, as it would reduce the supply of longer-term securities in the market and potentially lower longer-term rates, with the hope of pushing investors toward higher-risk securities elsewhere.

Europe gaining ground despite Italian credit rating downgrade

The equity markets in Europe are gaining ground in afternoon action, despite Standard & Poor’s (S&P) downgrading the sovereign credit rating of Italy by one notch and keeping its outlook negative, due to slowing economic growth and a “fragile” government. Also, stocks are moving higher as Greece is set to conduct its second day of talks with eurozone leaders to discuss its progress on cutting its deficit in order to qualify for the next installment of euro-area bailout funds that will be needed to cover its debt obligations through the rest of the year. Bloomberg reported that Greece’s finance minister said yesterday’s talks were “productive,” which is helping somewhat ease Greek default concerns. German utilities are moving higher to help the advance across the pond after a government court ruling suspended a tax on nuclear fuel.

Meanwhile, the economic calendar in Europe is helping boost some optimism, with Germany’s ZEW Survey of Economic Sentiment falling by a smaller amount than economists had expected for September, German producer prices unexpectedly falling m/m in August, and Italian industrial orders surprisingly growing m/m in July. However, separate reports showed Sweden’s 2Q GDP was revised to a slightly lower rate of growth, while Switzerland’s exports fell solidly in August, causing a the nation’s trade surplus to shrink.

The UK FTSE 100 Index is advancing 1.3%, France’s CAC-40 Index is gaining 1.0%, Germany’s DAX Index is rising 2.0%, Italy’s FTSE MIB Index is trading 1.2% to the upside, Switzerland’s Swiss Market Index is increasing 0.9%, and Greece’s Athex Composite Index is moving 0.1% higher.

Asia mixed as Japan returns from a holiday

Stocks in Asia finished mixed as the US Federal Reserve is set to begin its two-day monetary policy meeting today and the attention remained on the eurozone debt crisis. Japan’s Nikkei 225 Index fell 1.6%, returning from yesterday’s holiday to find pressure on Italy’s credit rating downgrade and exacerbated uncertainty regarding a default by Greece. Moreover, economic reports showed Japanese department store sales fell in August and the nation’s Leading Index was revised lower. Elsewhere, Australia’s S&P/ASX 200 Index fell 1.0% on weakness in mining issues amid the uneasiness toward that eurozone debt crisis. Also, the minutes from the Reserve Bank of Australia’s monetary policy meeting showed policymakers were content on keeping its benchmark interest unchanged at 4.75%, as they grappled with determining the “extent to which recent global and domestic developments would reduce capacity pressures in the economy and, in due course, help contain inflation.”

However, South Korea’s Kospi Index gained 0.9% on some strength in technology issues, despite a report that showed the country’s department store sales grew at a smaller rate in August compared to July. Finally, stocks in China advanced, with the Shanghai Composite Index rising 0.4% and the Hong Kong Hang Seng Index increasing 0.5%, amid a solid upward move in shares of China Unicom (CHU $22) after the mobile phone carrier posted m/m growth in subscribers in August.