Evening Market Update

Stocks Swing on European Reports

Stocks posted a late-day bounce to end higher, after struggling for most of the day on continued concerns about Europe. Equities started the day sharply to the downside after Franco-Belgium bank Dexia was seen as needing government aid, while solutions to solve Greece’s woes appeared to be no closer. However, a late day report from the Financial Times that EU finance ministers were examining ways of recapitalizing banks and a Wall Street Journal report that Dexia would set toxic assets into a bad bank, lifted sentiment. In the US, a mid-day Congressional testimony by Fed Chair Bernanke provided little new information, Apple Inc failed to unveil an iPhone 5, instead releasing an updated version called iPhone 4S, and shares of American Airlines parent AMR Corp rose after the pilots’ union said it had no inside information about the company’s finances. In economic news, factory orders unexpectedly fell, while Treasuries were lower, following the moves in equity markets. 

The Dow Jones Industrial Average rose 153 points (1.4%) to 10,809, the S&P 500 Index gained 25 points (2.3%) to 1,124, and the Nasdaq Composite advanced 67 points (3.0%) to 2,405. In heavy volume, 1.7 billion shares were traded on the NYSE and 3.0 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.94 to $75.67 per barrel, wholesale gasoline lost $0.02 to $2.49 per gallon, and the Bloomberg gold spot price declined $38.63 to $1,619.67 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.5% to 79.27.

In light equity news on Tuesday, Apple Inc. (AAPL $380) announced the iPhone 4S, which while including improved software and capabilities, use as a world phone by both CDMA and GSM customers, and iCloud features, it did not release a new device in the form of an iPhone 5, which was widely expected and reported to be forthcoming in this morning’s Wall Street Journal. Key additions include a new operating system, a voice-recognition assistant named Siri, improved gaming, download, photo and video capabilities, and the ability to update content on all Apple devices simultaneously and wirelessly through iCloud. Shares reversed an early gain to close lower.

Shares of AMR Corp (AMR $2) rose roughly 20% after the head of the pilots’ union said its members were not retiring based on inside information about a potential bankruptcy, which was cited as the reason for yesterday’s over 30% decline in the stock. The Allied Pilots Association added that “Our advisers have in fact indicated that the airline does not face any immediate liquidity crisis and possesses respectable cash reserves.” Yesterday a spokesman for American said that a Chapter 11 bankruptcy filling “is certainly not our goal or our preference.”

Fed Chairman testifies and factory orders surprisingly decline

Federal Reserve Chairman Ben Bernanke testified on the economic outlook before the Joint Economic Committee of Congress noting that fostering healthy growth is the shared responsibility of all economic policymakers, in close cooperation with the private sector. He added that while monetary policy can be a powerful tool, it is not a panacea for the current problems facing the US economy and that there were areas that the government could help, including labor markets, housing, trade, taxation and regulations. Bernanke noted that the Fed’s latest step, “Operation Twist,” wherein it buys longer-term Treasuries at the same time selling shorter-term securities, should bring down long-term interest rates by about 20 basis points, roughly equivalent to cutting the Fed’s benchmark rate by 0.5%. Bernanke acknowledged the eurozone sovereign debt crisis, noting that it is difficult to judge how much these strains have affected US economic activity, but “there seems little doubt that that they have hurt household and business confidence, and that they pose ongoing risks to growth.” 

Elsewhere, factory orders unexpectedly declined, decreasing 0.2% month-over-month (m/m) in August, compared to the flat reading that economists surveyed by Bloomberg had expected, and July’s initial 2.4% gain was unfavorably revised to a 2.1% Increase. August durable goods orders—reported last week—were unrevised at a 0.1% decline.

Treasuries were lower following the gains in stocks, with the yield on the 2-year note up 2 bps to 0.26%, the yield on the 10-year note increasing 8 bps to 1.83%, and the 30-year bond rate 9 bps higher at 2.81%.

Greece and European banking concerns weigh on overseas markets 

The equity markets in Europe finished solidly lower for a third-straight session, on continued worries about the festering eurozone debt crisis and in particular, a potential default by Greece. Exacerbating the concerns, Bloomberg reported that Luxembourg Prime Minister Jean-Claude Juncker noted that European finance ministers considered “technical revisions” to Greece’s second bailout at a meeting yesterday, fueling uneasiness that bondholders may have to shoulder larger losses as part of the rescue efforts for the debt-laden nation. Also, Juncker said that the decision on the next installment of bailout aid for Greece, which was supposed to come on October 13, has been postponed.

Meanwhile, European banking stocks were broadly lower, with shares of Dexia SA (DXBGF $2) falling sharply on its exposure to Greek debt and after its Board urged the company to solve its “structural problems.” However, shares came well off of the worst levels of the day as France and Belgium pledged to take “all necessary measures” to protect clients and will guarantee all of its loans. Also, Deutsche Bank (DB $33), Germany’s largest lender, per Bloomberg, scrapped its 2011 profit forecast, while announcing 500 job cuts, but shares pared early losses in late-day action.

However, after European markets closed, late in the US trading day, the Financial Times reported that EU finance ministers were examining ways of recapitalizing banks and the Wall Street Journal reported that Dexia would set toxic assets into a bad bank backed by guarantees from the French and Belgian governments.

On the economic front, the lone reports from Europe worth noting were a smaller-than-expected m/m decline in eurozone producer prices for August, and a larger deceleration in the UK PMI Construction Index than expected in September. In Asia, Australia dominated the economic docket, with reports showing the nation’s trade surplus grew more than expected in August, while building approvals for the month jumped 11.4% m/m after rising by 1.8% in July, and compared to the 1.0% increase that economists expected. Moreover, the Reserve Bank of Australia (RBA) kept its benchmark interest rate unchanged at 4.75% as expected, but noted that the path for inflation may now be more consistent with the 2-3% target in 2012 and 2013. The RBA concluded that, “An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary.” Elsewhere, South Korea’s HSBC Manufacturing PMI Index decelerated from 49.7 in August to 47.5 in September, with a reading below 50 depicting contraction, and a separate report showed the nation’s consumer prices came in cooler than expected in September.

Readings on services and employment due up tomorrow

Ahead of Friday’s labor report, tomorrow’s US economic calendar will yield the releases of the ADP Employment Change, and the gauge of private sector jobs is forecasted to rise by 73,000 jobs in September after increasing by 91,000 in August, as well as the ISM Non-Manufacturing Index, expected to decelerate from 53.3 in August to 52.8 for September, with a reading above 50 depicting expansion. The ISM non-manufacturing report has shown expansion in service-sector activity for the past 22 months and although its key components of overall business activity, new orders, and inventories will garner attention, the data on employment is likely to take the lion’s share of the focus.

The other report on tomorrow’s economic docket is the release of MBA Mortgage Applications, which have risen solidly the past three weeks as interest rates are near record lows.

International economic releases will include the services PMI from the eurozone, India and Australia, eurozone and Australian retail sales and 2Q GDP for the UK.