Morning Market Update

Stocks’ Opening Act is Flat Before Fed Takes Center Stage

The US equity markets are nearly unchanged in early action amid cautious trading ahead of this afternoon’s monetary policy statement from the Federal Reserve, and as eurozone debt concerns remain in focus. Treasuries are flat before the Fed’s statement, following a modest increase in mortgage applications, and ahead of a report in existing home sales. Meanwhile, equity news is plentiful, with Oracle Corp, General Mills, and Adobe Systems all posting better-than-expected earnings, while Dow member Exxon Mobile Corp sold its UK North Sea assets to Apache Corp for $1.75 billion, and fellow Dow component Microsoft Corp raised it dividend by 25%. Overseas, Asian equity markets were mixed, while European stocks are trading to the downside.

As of 8:50 a.m. ET, the December S&P 500 Index Globex future is 1 point below fair value, the Nasdaq 100 Index is 3 points above fair value, and the DJIA is 7 points below fair value. WTI crude oil is $0.83 lower at $86.09 per barrel, and the Bloomberg gold spot price is down $4.34 at $1,799.35 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.5% to 77.34.

Oracle Corp. (ORCL $28) 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.

General Mills Inc. (GIS $37) 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.

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.

In M&A news, Dow member Exxon Mobil Corp. (XOM $74) 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 $95) for $1.75 billion. The acquisition is expected to increase APA’s North Sea production by 54% and proved reserves by 44%.

Finally, fellow Dow member Microsoft Corp. (MSFT $27) 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.”

Mortgage apps inch higher, more housing data due out later, along with Fed statement

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 are flat in morning action, with the yields on the 2-year and 10-year notes, along with the 30-year bond unchanged at 0.16%, 1.94%, and 3.21%, respectively.

Meanwhile, more housing data will be released later this morning, in the form of existing home sales, forecasted to rise 1.7% month-over-month (m/m) to an annual rate of 4.75 million units in August after falling 3.5% in July to a 4.67 million unit annual rate.

However, the main event will come with the 2:15 p.m. ET statement at the conclusion of the Federal Open Market Committee’s (FOMC) two-day monetary policy meeting. With economic data continuing to come in on the weak side, investors may be expecting the Fed to deploy further tools to try to arrest the deceleration in the economy. 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. This could be achieved by reinvesting the proceeds of prepaid or maturing mortgage securities into Treasuries in the middle maturities of the curve. Other tools the Fed may be weighing are cutting the interest rate on excess reserves (IOER) or making further refinements to its communication policy on the conditions for an eventual rate hike.

Europe under pressure as Greek default concerns continue

The equity markets in Europe are lower in afternoon action, ahead of the US Federal Reserve’s monetary policy meeting, while uncertainty regarding a Greek debt default continues 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 is expected to discuss further austerity measures today, which could include government layoffs and pension cuts. However, technology issues are the best performers on the day in Europe, but remain lower, on the heels of the better-than-expected earnings report from US-based Oracle Corp. In M&A news, SABMiller Plc. (SBMRF $35) announced that its sweetened $10.2 billion bid to acquire Australia’s Foster’s Group Ltd. (FBRWY $5) was accepted.

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.”

The UK FTSE 100 Index is declining 0.9%, France’s CAC-40 Index is falling 1.0%, Germany’s DAX Index is dropping 1.5%, and Switzerland’s Swiss Market Index is flat, while Greece’s Athex Composite Index is advancing 0.7%.

Asia mixed as traders await Fed statement and European debt focus remained

Stocks in Asia finished mixed in cautious trading ahead of this afternoon’s monetary policy statement by the US Federal Reserve, while uncertainty remained about a potential default by Greece on its debt obligations. Japan’s Nikkei 225 Index increased 0.2%, following a report that showed the nation’s trade deficit came in larger than economists forecasted, while the country’s All Industry Activity Index rose at a rate that missed expectations. Meanwhile, South Korea’s Kospi Index gained 0.9%, aided by a report that showed that nation’s unemployment rate unexpectedly declined. Also, Australia’s S&P/ASX 200 Index rose 0.8% amid some strength in the mining sector.

However, stocks in China finished mixed, with the Shanghai Composite Index jumping 2.7%, following the release of the nation’s 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. Finally, the Hong Kong Hang Seng Index declined 1.0% after the European markets opened to the downside as a two-day discussion between Greece and its eurozone lenders failed to clear up the uncertainty about a Greek default.