Morning Market Update

Fed Hangover and Manufacturing Data Give Markets a Headache

Following yesterday’s steep declines on the Fed’s announcement that it will take action to lower longer-term interest rates, while noting “significant downside risks” to the economic outlook, US stocks are extending losses in early action on a plethora of disappointing global manufacturing data. Treasuries are higher amid the declines in stocks, with mid-to-long-term yields adding to yesterday’s losses, and after weekly initial jobless claims remained above the key 400,000 level. Meanwhile, a read on US leading indicators is due out later this morning. In equity news, FedEx Corp posted earnings and revenues that exceeded analysts’ expectations, while lowering its full-year EPS outlook, and Dow member United Technologies Corp announced that it will acquire aerospace company Goodrich Corp for about $18.4 billion. Overseas, Asian equity markets moved broadly lower after a read on Chinese manufacturing activity depicted contraction for a third-straight month, while European stocks are solidly lower after a report on eurozone manufacturing output came in below forecasts.

As of 8:52 a.m. ET, the December S&P 500 Index Globex future is 40 points below fair value, the Nasdaq 100 Index is 67 points below fair value, and the DJIA is 328 points below fair value. WTI crude oil is $4.54 lower at $81.38 per barrel, and the Bloomberg gold spot price is down $47.55 at $1,734.75 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 1.1% to 78.62.

FedEx Corp. (FDX $73) reported fiscal 1Q earnings of $1.46 per share, one penny above the consensus estimate of analysts surveyed by Reuters, with revenues growing 11% year-over-year (y/y) to $10.5 billion, exceeding the $10.3 billion that the Street had forecasted. The company said revenue and earnings “increased significantly,” due to strong FedEx ground performance, improved freight results and the continued success of the company’s yield management actions. FDX added that while the economic environment is “challenging,” it remains confident it will improve earnings, margins and cash flows this fiscal year. However, the company lowered its full-year EPS guidance, noting that the “US and global economy grew at a slower rate than we anticipated during the quarter.”

In M&A news, Dow member United Technologies Corp. (UTX $75) confirmed recent reports as it announced an agreement to acquire aerospace company Goodrich Corp. (GR $109) for $127.50 per share in cash, or about $18.4 billion, including the assumption of $1.9 billion in debt. UTX reaffirmed its expectations for full-year revenues and EPS.

Jobless claims remain above 400k, a read on leading indicators due out later this morning

Although weekly initial jobless claims declined by 9,000 to 423,000, the drop came from a 4,000 upward revision to last week's figure to 432,000, and compared to the 420,000 level that economists surveyed by Bloomberg had expected. Also, the four-week moving average, considered a smoother look at the trend in claims, increased by 500 to 421,000, while continuing claims fell by 28,000 to 3,727,000, but came in above the forecast of economists, which called for a 3,722,000 reading.

Treasuries remain higher in early action following the data and the declines in stocks, with the yield on the 2-year note down 1 bp to 0.19%, the yield on the 10-year note 8 bps lower to 1.77%, and the 30-year bond rate declining 13 bps to 2.87%.

Yields on the mid-to-long end of the curve are extending losses, after finding pressure from yesterday’s monetary policy statement from the Federal Reserve, which revealed that the Central Bank will purchase $400 billion in longer-term Treasuries, while selling that same amount in shorter-term debt. The action is aimed at putting downward pressure on longer-term interest rates and “help make broader financial conditions more accommodative.” Also, the Fed noted that “there are significant downside risks to the economic outlook.”  Meanwhile, a plethora of disappointing manufacturing data out of China and Europe are exacerbating sentiment today, putting further pressure on the equity markets and bond yields.

Later this morning, the US economic calendar will yield the release of the Index of Leading Economic Indicators, forecasted to increase 0.1% month-over-month (m/m) in August.

Global economic concerns join lingering debt uneasiness to pound Europe

The equity markets in Europe are under solid pressure in afternoon action, led by weakness in basic materials and energy issues amid several reports showing decelerating manufacturing activity, and as the US Federal Reserve launched its plan to lower long-term interest rates and said there are “significant downside risks” to the economy. On the heels of a third-consecutive monthly indication of contraction in Chinese manufacturing output, similar readings in Europe showed activity in the sector slowed more than expected. The eurozone Manufacturing PMI Index declined from 49.0 in August to 48.4 in September, just below the 48.5 reading that economists had forecasted. A reading below 50 suggests a contraction in manufacturing activity. Also, the eurozone Services PMI Index fell below the key 50 mark in September. The disappointing data was led by larger-than-expected decelerations in services and manufacturing output in Germany—Europe’s largest economy—and France.

Meanwhile, continued eurozone debt concerns, particularly the possibility of a Greek debt default and a subsequent contagion in the region, are adding to the uneasiness across the pond, even though Greece announced accelerated austerity measures, including pension cuts and government layoffs. Greece will meet with EU officials next week to review is deficit reduction plans and progress in order to determine if it will receive its next installment of bailout funds. A report by CNBC that the European Central Bank stepped up its purchases of Italian and Spanish bonds is having little impact on helping alleviate the exacerbated contagion fears.

The UK FTSE 100 Index is tumbling 4.7%, France’s CAC-40 Index is plunging 5.2%, Germany’s DAX Index is falling 4.5%, Spain’s IBEX 35 Index is decreasing 4.9%, Italy’s FTSE MIB Index is trading 4.2% lower, Switzerland’s Swiss Market Index is down 3.1%, and Greece’s Athex Composite Index is declining 2.5%.

Asia falls on Fed and Chinese manufacturing data

Stocks in Asia finished broadly lower on the heels of yesterday’s solid declines in the US equity markets as traders grappled with whether the Fed’s initiative to buy longer-term Treasuries will have a positive impact on the economy. Moreover, a read on Chinese manufacturing activity for September that showed the third-straight month of contraction exacerbated sentiment regarding the global economy. China’s Shanghai Composite Index fell 2.8% and the Hong Kong Hang Seng Index tumbled 4.9% after HSBC’s Flash China Manufacturing Index decelerated from 49.9 in August to 49.4, with a reading below 50 depicting contraction in output.

Elsewhere, Japan’s Nikkei 225 Index dropped 2.1% and South Korea’s Kospi Index fell 2.9%, while Australia’s S&P/ASX 200 Index traded 2.6% to the downside, amid the amplified concerns about the global economy. However, losses in Australia were limited somewhat by a solid gain in shares of Foster’s Group Ltd. (FBRWY $5) after it accepted a sweetened $10.2 billion takeover offer by Europe’s SABMiller Plc. (SBMRF $33) yesterday.