Morning Market Update

Rally Continues as Eurozone Concerns Ease

After a late-day rally yesterday, US stocks are extending gains in early action amid increased optimism that eurozone leaders are discussing further efforts to try to stem the region’s debt crisis. Treasuries are lower amid the strong morning advance in the equity markets and after a report showed US home prices rose in July compared to June. Later this morning, we will get reads on consumer confidence and regional manufacturing activity. In equity news, Walgreen Co reported earnings and revenues that topped the Street’s forecasts. Overseas, Asian stocks posted a broad-based advance, while financials are rallying in Europe to help extend yesterday’s gains.

As of 8:55 a.m. ET, the December S&P 500 Index Globex future is 21 points above fair value, the Nasdaq 100 Index is 31 points above fair value, and the DJIA is 176 points above fair value. WTI crude oil is rising $2.26 to $82.50 per barrel, and the Bloomberg gold spot price is up $28.87 at $1,655.75 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.2% at 77.85.

Walgreen Co. (WAG $36) reported fiscal 4Q earnings ex-items of $0.57 per share, above the $0.56 consensus estimate of analysts surveyed by Reuters, with revenues rising 6.5% year-over-year (y/y) to $18.0 billion, exceeding the $17.9 billion that the Street had forecasted. The pharmacy and retailer said its 4Q same-store sales—sales at stores open at least a year—rose 4.4% y/y, as customer traffic increased 1.6% and “basket size” rose 3.0%.

Home prices improve, consumer confidence and regional manufacturing reads to follow

Just before the opening bell, the 20-city composite S&P/Case-Shiller Home Price Index showed a decline in home prices of 4.11% y/y in July, compared to the 4.40% drop that economists surveyed by Bloomberg had expected. Month-over-month (m/m), home prices were 0.05% higher, compared to forecasts, which called for a 0.10% increase.

Treasuries are lower in morning action following the data and amid the advance in the equity markets, with the yield on the 2-year note up 1 bp to 0.24%, the yield on the 10-year note increasing 6 bps to 1.97%, and the 30-year bond rate 8 bps higher at 3.07%.

Later this morning, the US economic calendar will yield the releases of the Consumer Confidence Index, forecasted to improve from 44.5 in August to 46.0 for September, as well as the Richmond Fed Manufacturing Index, expected to deteriorate from -10 in August to -11 for September.

Europe extending yesterday’s gains on hopes of new measures to stem debt crisis

The equity markets in Europe are nicely higher in afternoon action, extending yesterday’s gains, with financials rallying again amid optimism eurozone leaders will announce further action to help tackle the festering debt crisis. The European Central Bank (ECB) is set to conduct its monetary policy meeting next week and continued talk that the ECB could ease its monetary policy stance is helping boost sentiment, along with reports that the region’s bailout mechanism, known as the European Financial Stability Facility (EFSF), may be leveraged. CNBC reported late yesterday that EU officials are in discussions to use funds from the EFSF, which its expanded capabilities have yet to be ratified, as seed money to create a special purpose vehicle (SPV) through the European Investment Bank (EIB), which will issue bonds that could be used to purchase sovereign debt and as collateral to obtain ECB loans and potentially provide capital to the region’s banks. The report, which has not been confirmed, is helping soothe concerns about the threat of a debt contagion spreading throughout the eurozone. Also, concerns about a Greek default are waning somewhat to help lift sentiment, as Greece’s finance minister said he expects euro-area leaders to approve the next installment of financial aid to the troubled nation, per Bloomberg, as the country is set to vote on a property tax and meet with Germany today. Elsewhere, Italy and Spain conducted debt auctions, which although required higher borrowing costs, key spreads between the two country’s debt and the benchmark German bond, known as the bund, are moving lower amid the improved sentiment across the pond.

Meanwhile on the equity front, shares of Man SE (MAGOY $8) are solidly higher after European regulators approved the truckmaker’s takeover by Volkswagen AG (VLKAY $25), while Novartis AG (NVS $55) is nicely higher after positive study results were revealed regarding the drugmaker’s treatment for smoker’s cough. Finally, the economic calendar is light, with the lone report worth noting being a higher-than-expected reading on German consumer confidence for October.

The UK FTSE 100 Index is 2.9% higher, France’s CAC-40 Index and Germany’s DAX Index are rising 4.0%, Italy’s FTSE MIB Index is increasing 3.5%, Spain’s IBEX 35 Index is trading 2.6% to the upside, Switzerland’s Swiss Market Index is advancing 2.4%, and Greece’s Athex Composite Index is gaining 0.4%.

Asia rallies on optimism toward Europe

Stocks in Asia finished with solid, broad-based gains, on increased optimism eurozone leaders are moving closer to announcing further measures to help combat the region’s debt crisis and stabilize the euro-area’s financial sector. Stocks that rely heavily on business in Europe were among the best performers, leading a rebound in the major Asian markets that hit lows yesterday that had not been seen in more than a year. Japan’s Nikkei 225 Index rose 2.8%, Australia’s S&P/ASX 200 Index gained 3.6%, and South Korea’s Kospi Index jumped 5.0%. Meanwhile, stocks in China finished higher, with the Hong Kong Hang Seng Index rallying 4.2% and the Shanghai Composite Index rising 0.9%. In economic news in the region, Japan’s small business confidence improved in September and South Korea’s consumer confidence remained unchanged this month, while after the closing bell in Asia, Hong Kong’s trade deficit narrowed by a smaller amount than forecasted in August, as exports came in below expectations and imports rose more than anticipated.