Evening Market Update

4Q Starts with a Thud

Despite surprising growth in US manufacturing and better-than-expected construction spending, US stocks began 4Q with solid losses courtesy of familiar foes—eurozone debt concerns and growing global growth worries. On the equity front, Arch Coal cut full-year EPS guidance citing lost coal production, while on the M&A front, the CEO of Chinese internet company Alibaba Group Holding Ltd may be eyeing Yahoo! and Pharmaceutical Product Development agreed to go private in a deal worth $3.9 billion. Meanwhile, the major automakers reported September US auto sales with mixed results. Treasuries finished higher despite the favorable US economic data, along with gold prices and the US dollar, while crude oil traded lower.

The Dow Jones Industrial Average dropped 258 points (2.4%) to 10,655, the S&P 500 Index fell 32 points (2.9%) to 1,099, and the Nasdaq Composite declined 80 points (3.3%) to 2,336. In moderately heavy volume, 1.4 billion shares were traded on the NYSE and 2.5 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.59 to $77.61 per barrel, wholesale gasoline lost $0.03 to $2.51 per gallon, and the Bloomberg gold spot price added $29.50 to $1,651.80 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.9% to 79.50.

Arch Coal Inc. (ACI $13) lowered its full-year adjusted earnings guidance from a previous range of $1.75-2.15 per share, to between $1.00-1.40 per share, with analysts surveyed by Reuters expecting the coal producer to post 2011 EPS of $1.97. ACI said the reduction in earnings guidance resulted largely from lost metallurgical coal production at the Mountain Laurel complex, which during 3Q encountered unfavorable geologic conditions, and its longwall facility was idled for nearly 45 days following a roof fall in August. ACI finished lower.

In M&A news, Jack Ma, the CEO of Chinese internet company Alibaba Group Holding Ltd, which is the parent of Alibaba.com (ALBIY $5), said he is “interested” in buying Yahoo! Inc. (YHOO $14) and was approached by private-equity firms and others about a potential takeover deal. However, Ma noted that talks have been hampered by political concerns as opposed to financial ones. Both companies have declined to comment on the news. YHOO traded higher, while ALBIY declined modestly in Asia overnight

Also, Pharmaceutical Product Development Inc. (PPDI $32) was sharply higher after the company announced that it has reached an agreement with The Carlyle Group and Hellman & Friedman to go private in an all-cash transaction valued at $3.9 billion. PPDI shareholders will receive $33.25 per share in cash.

The major automakers are reporting September US sales, with General Motors Co. (GM $20) posting a 20% year-over-year (y/y) gain, Ford Motor Co. (F $10) registering a 9% increase, and Chrysler reporting a 27% jump. Elsewhere, Germany’s Volkswagen (VLKAY $23) announced that its September sales increased 36% compared to last year, while Nissan Motor Co. Ltd’s (NSANY $18) sales rose 25%. Meanwhile, Honda Motor Co. (HMC $29) saw sales during the same period fall 8%, and Toyota Motor Co. (TM $67) posted a 17% decline. GM, F, VLKAY, HMC and TM were all lower, while NSANY finished with a modest gain.

Manufacturing activity and construction spending unexpectedly grow

The ISM Manufacturing Index surprisingly accelerated in September, rising to 51.6 from 50.6 in August—the lowest level since July 2009—while the expectation of economists surveyed by Bloomberg was for the index to decrease modestly to 50.5. A reading above 50 denotes expansion in manufacturing activity. The key underlying components of the better-than-expected reading were production, which rose 2.6 points to 51.2, a gain in employment from 51.8 to 53.8, and a 3 point increase in new export orders to 53.5. Elsewhere, new orders remained unchanged at 49.6, supplier deliveries—a component within the Leading Economic Indictors Index—rose slightly to 51.4, and inventories dipped from 52.3 to 52.0.

Elsewhere, construction spending unexpectedly rose, posting a solid 1.4% month-over-month (m/m) increase in August versus the 0.2% decline forecasted by economists, but July’s previously-announced 1.3% drop was revised to a fall of 1.4%. Within the report, residential construction gained 0.9% while non-residential spending increased 1.6%.

Treasuries finished higher despite the upbeat data, with the yield on the 2-year note unchanged at 0.24%, the yield on the 10-year note down 16 bps to 1.76%, and the 30-year bond rate 18 bps lower at 2.74%.

Tomorrow’s US economic calendar will be light with only factory orders slated for release, forecasted to come in unchanged for August following a 2.4% rise in July.

Greek concerns continue to weigh on sentiment

Lingering worries about a potential default by Greece continued to hamstring sentiment across the pond in today’s session. The concerns came courtesy of Greece’s government draft budget figures showing that the troubled nation will miss its deficit targets, despite its efforts to reduce spending to qualify for bailout funds from the eurozone. The data comes as eurozone lenders just concluded their review of the austerity progress made by Greece as they try to determine if the nation will get its next installment of bailout aid by mid-October, when Greek cash is expected to run out. Greece said the missed deficit target was due to a deeper-than-expected recession in the nation’s economic growth.

Meanwhile, on the European economic front, the eurozone PMI Manufacturing Index, a gauge of activity for September, was unexpectedly revised slightly higher, from 48.4 in the previous estimate to 48.5, compared to the unrevised forecast of economists. A reading below 50 depicts contraction and the slight improvement came as figures out of Germany and France were better than originally reported. The September reading was the second-straight month of contraction, after falling to 49.0 in August from 50.4 in July. Elsewhere, the UK PMI Manufacturing Index surprisingly improved to 51.1 in September, from an upwardly revised 49.4 in August, and compared to the deceleration to 48.5 that economists forecasted.

Sentiment in Asia continued to be hampered by growing global economic growth concerns and the festering eurozone debt crisis, despite some key economic reports in the region that were released over the weekend. Japan’s 3Q Tankan Survey of Large Manufacturers, a read on business sentiment for the country’s largest manufacturers, improved to 2 from -9 in 2Q, matching economists’ expectations, with a reading above zero denoting that optimists outweighed pessimists. Despite the rebound in sentiment, the level remained below the 6 mark that was posted in 1Q, before the earthquake and tsunami hit the nation, per Bloomberg. Also, South Korea reported September trade figures late-Friday, with the nation’s exports growing 19.6% year-over-year (y/y), above the 16.6% that economists expected, but a deceleration from the downwardly revised 25.9% growth seen in August. Moreover, South Korea’s imports rose more than expected, and the country’s trade surplus grew by a smaller amount than anticipated. Finally, China’s PMI Manufacturing Index accelerated to 51.2 in September from 50.9 in August, slightly above the 51.1 reading that economists expected, while a separate report showed Chinese non-manufacturing activity accelerated.

International economic releases tomorrow will include construction PMI from the UK, Australia’s retail trade, and CPI from South Korea.