Morning Market Update

Modest Gains Amid Data and a Flare-up in Eurozone Uncertainty

Following three days of gains, the US equity markets are slightly higher in morning action, aided by some favorable US economic data, while eurozone debt uncertainty is keeping the bulls’ stride in check. Treasuries are nearly unchanged in early trading, with mid-range maturities dipping slightly after a report showed US durable goods orders came in better than expected and the previous months’ figures were favorably revised, and mortgage applications rose. In equity news, Darden Restaurants Inc posted inline 1Q results, and Family Dollar Stores Inc achieved better-than-anticipated profits. Overseas, Asian stocks finished mixed amid a flare-up in uncertainty regarding a debt default by Greece, while European markets are mixed in cautious trading ahead of some key eurozone debt events.

As of 8:51 a.m. ET, the December S&P 500 Index Globex future is 3 points above fair value, the Nasdaq 100 Index is 10 points above fair value, and the DJIA is 37 points above fair value. WTI crude oil is declining $1.17 to $83.28 per barrel, and the Bloomberg gold spot price is down $3.92 at $1,646.80 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.2% at 77.65.

As previously indicated early this month, Darden Restaurants Inc. (DRI $47) reported fiscal 1Q profits of $0.78 per share, with revenues rising 7.2% year-over-year (y/y) to $1.9 billion, matching the consensus estimate of analysts surveyed by Reuters. The restaurant company said it saw 2.8% growth in 1Q same-store sales—sales at stores open at least a year—reiterating that strong sales growth at its Red Lobster and LongHorn Steakhouse establishments was offset by lower-than-expected sales at its Olive Garden chain, unfavorable y/y commodity costs and the adverse impact of Hurricane Irene.

Family Dollar Stores Inc. (FDO $54) announced fiscal 4Q EPS of $0.66, three cents above the Street’s expectations, with revenues growing 9.1% y/y to $2.1 billion, inline with analysts’ forecasts. The discount retailer said its 4Q same-store sales increased 5.6% y/y, as a result of increased customer traffic and higher average customer transaction values. FDO issued full-year 2012 EPS guidance the roughly matched the Street’s estimate.

Durable goods orders come in better than expected and mortgage applications rise

Durable goods orders exceeded expectations, dipping 0.1% month-over-month (m/m) in August, compared to the 0.2% decrease that was expected by economists surveyed by Bloomberg, and July’s figure was revised from a 4.0% gain to a 4.1% rise. Meanwhile, ex-transportation, orders also came in better than forecasts, slipping 0.1% in August, compared to the expectation of a 0.2% decline, and July’s figure was left unadjusted at a 0.7% gain. Elsewhere, orders for non-defense capital goods excluding aircraft, considered a good proxy for business spending, came in well above forecasts, rising by 1.1% in August, compared to the 0.4% increase that was projected, after falling by a favorably revised 0.2% in July, from the initial report of a 1.5% decline.

Elsewhere, the MBA Mortgage Application Index rose 9.3% last week, after the index that can be quite volatile on a week-to-week basis, gained 0.6% in the previous week. The increase came as an 11.2% jump in the Refinance Index was complimented by a 2.6% increase in the Purchase Index. The rise in mortgage activity came as the average 30-year mortgage rate moved lower by 5 basis points (bp) to 4.24%.

Treasuries are nearly unchanged in morning trading following the data, with the yield on the 2-year note flat at 0.24%, the yield on the 10-year note 2 bps higher at 1.99%, and the 30-year bond rate unchanged at 3.07%.

European markets mixed following recent rally

The equity markets in Europe are mixed in afternoon action following the recent rally seen across the pond on optimism eurozone leaders are discussing more aggressive and effective measures to tackle the region’s debt crisis. Meanwhile, traders are taking a breather on the heels of a late-day report yesterday by the Financial Times that euro-area members are torn between the rate of participation of private creditors in the second bailout of Greece, which is fostering a reemergence of uncertainty regarding a potential default of the troubled nation. However, a Greek newspaper is reporting that indications of Greek bondholders participation in a debt swap, a component of the terms of the second bailout for Greece, has reached its 90% target and could exceed the target amount, citing unnamed Greek Finance Ministry officials. The Greek government has declined to comment on the report.

Meanwhile, traders may be treading with some caution ahead of Germany’s vote tomorrow to ratify the recent expansion of scope of the eurozone bailout fund, known as the European Financial Stability Facility (EFSF), and as euro-area officials are set to meet in Greece to review the nation’s austerity progress in order to determine if it will qualify to receive the next installment of financial aid as part of the first bailout for the country. Germany’s Chancellor Angela Merkel noted that she will wait for the results of the review before determining if any revisions are needed to the terms of Greece’s bailout.

Elsewhere, the European economic front provided some key reports worth mentioning, as French 2Q GDP was left unrevised at flat quarter-over-quarter growth, while its y/y rate of output was adjusted modestly higher. On inflation, Germany’s m/m import prices fell more than expected in August, while consumer prices in Europe’s largest economy came in hotter than anticipated. Finally, Italian business confidence deteriorated more than forecasted for September.

The UK FTSE 100 Index is down 0.4%, France’s CAC-40 Index is 0.2% lower, and Italy’s FTSE MIB Index is declining 0.1%, while Germany’s DAX Index is gaining 0.1%, Switzerland’s Swiss Market Index is rising 0.3%, and Greece’ Athex Composite Index is 1.6% higher.

Asia mixed as Greek concerns curb eurozone debt optimism

Stocks in Asia finished mixed as the recent increase in optimism that eurozone leaders are moving toward an effective plan to combat the region’s debt crisis was held in check by a flare-up in Greek default concerns following a report from the Financial Times yesterday that noted euro-area members were split on the participation of private creditors in the second bailout of Greece. Japan’s Nikkei 225 Index inched 0.1% higher amid the mixed sentiment toward the eurozone, while a solid decline in shares of Japan Tobacco Inc. (JAPAY $7) hamstrung the index, as the government announced that it will sell its majority stake in the world’s third largest cigarette maker to help cover the cost of rebuilding after the March earthquake and tsunami. Meanwhile, mining stocks continued to gain ground, helping Australia’s S&P/ASX 200 Index advance 0.9%, along with a report that showed the nation’s new home sales rebounded in August.

However, South Korea’s Kospi Index fell 0.7%, as the cautiousness toward the Greek debt situation overshadowed reports that showed business sentiment in the non-manufacturing sector improved and manufacturing confidence remained unchanged for October. Elsewhere, China’s Shanghai Composite Index fell 1.0% and the Hong Kong Hang Seng Index declined 0.7%, as the eurozone uneasiness was exacerbated by reports showing Hong Kong exports rose by a smaller rate than expected and China’s Leading Index decelerated slightly for August.