Morning Market Update

Pressure Continues With European Debt Concerns Remaining

After beginning 4Q on a sour note yesterday, US stocks are under solid pressure again in early action, with European equity markets trading solidly lower for a third-consecutive session amid exacerbated concerns regarding a potential default of Greece. Meanwhile, traders are waiting for the morning testimony from Federal Reserve Chairman Ben Bernanke in front of Congress and a report on factory orders. Treasuries have pared most of their early losses and are mixed amid the weakness in stocks. The US equity front is light today, with traders anticipating the introduction of the iPhone 5 in the afternoon by Apple Inc. Elsewhere overseas, Asian equity markets finished broadly lower amid the aforementioned eurozone debt concerns and growing worries about a hard landing for the Chinese economy.

As of 8:46 a.m. ET, the December S&P 500 Index Globex future is 17 points below fair value, the Nasdaq 100 Index is 27 below fair value, and the DJIA is 136 points below fair value. WTI crude oil is declining $1.71 to $75.90 per barrel, and the Bloomberg gold spot price is down $5.59 at $1,652.71 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is flat at 79.67.

In light equity news on Tuesday, Apple Inc. (AAPL $375) is expected to hold a media event later this afternoon and it is anticipated to introduce its iPhone 5, and according to the Wall Street Journal, the company has been working on an iPhone that is thinner and lighter with an improved eight-megapixel camera but details otherwise are unclear.

Factory orders and the Fed Chairman to highlight today’s economic docket

Treasuries are mixed in morning action as there are no economic reports due out before the opening bell, with the yield on the 2-year note up 1 bp to 0.24%, while the yield on the 10-year note is declining 2 bps to 1.74%, and the 30-year bond rate is 1 bp lower at 2.71%.

However, after the beginning of trading this morning, we will get the release of factory orders, forecasted to come in flat month-over-month (m/m) in August, after posting a solid 2.4% gain in July.

Also, Federal Reserve Chairman Ben Bernanke will testify on the economic outlook before the Joint Economic Committee of Congress at 10:00 a.m. ET. The Fed characterized the downside risks to its economic outlook as “significant” in their latest monetary policy statement on September 21, and it began its “Operation Twist,” buying longer-term Treasuries and at the same time selling shorter-term securities, aimed at further reducing borrowing costs and pushing money via lending out into the real economy. Traders will be looking for any signals that the Fed is planning on deploying further measures to follow through on its dual mandate of keeping inflation under control and fostering maximum employment. Last week, Bernanke noted that “If inflation itself falls too low or inflation expectations fall too low, that would be something we’d have to respond to because we don’t want deflation.” However, the Fed Chairman will likely continue to stress that the high unemployment rate, which he characterized as a “national crisis,” needs attention from the White House and Congress.

The level of rhetoric continues to be elevated in Washington and the ongoing standoff is damaging the confidence of American businesses and consumers. It's not that gridlock continues, which is often viewed positively by the market. It's that many of the issues being discussed affect the ability of businesses to make long-term plans, while many of the decisions that have been made have been largely viewed as anti-business, particularly on the regulatory front.

We believe the error by both parties is in leaving long-term fixes aside for now in favor of short-term remedies. Numerous temporary steps have been tried, from "cash-for-clunkers" to home mortgage modifications and buyer tax credit; with few, if any, tangible results. We believe the latest round of proposals will have a similar impact. Although we find it highly unlikely, an agreement between the two sides that results in a reformed, sustainable tax code, serious and practical entitlement reform, reasonable spending restraint, and a more friendly and globally competitive business environment would go a long way toward setting the economy on a sustainable growth path. The most effective and fastest way to solve debt problems is to grow your way out of them. Read more at www.schwab.com/marketinsight.

Europe under pressure as Greek default uneasiness continues to stymie sentiment

The equity markets in Europe are solidly lower for a third-straight session, on continued worries about the festering eurozone debt crisis and in particular, a potential default of Greece. Exacerbating the concerns, Bloomberg reported that Luxembourg Prime Minister Jean-Claude Juncker noted that European finance ministers, which met yesterday considered “technical revisions” to Greece’s second bailout, fueling uneasiness that bondholders may have to shoulder larger losses as part of the rescue efforts for the debt-laden nation. Meanwhile, banking stocks are 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 are well off of the worst levels of the day as France and Belgium pledged to take “all necessary measures” protect clients and will guarantee all of its loans. Also, shares of Deutsche Bank (DB $33) are under pressure after Germany’s largest lender, per Bloomberg, scrapped its 2011 profit forecast, while announcing 500 job cuts. Also, airlines are some of the biggest decliners on the day as the International Air Transport Association said profit forecasts through 2012 may by unsustainable as over-capacity and looming regulatory costs weigh on margins, per Bloomberg.

The economic front across the pond is relatively light, with the lone reports worth noting being a smaller-than-expected m/m decline in eurozone producer prices for August, and the UK PMI Construction Index decelerating more than expected in September.

The UK FTSE 100 Index is down 3.0%, France’s CAC-40 Index is dropping 2.9%, Germany’s DAX Index is falling 3.6%, Switzerland’s Swiss Market Index is declining 1.7%, and Greece’s Athex Composite Index is tumbling 5.4%.

Asia finds pressure again amid eurozone debt and China growth concerns

Stocks in Asia finished lower following the steep declines in the US and Europe yesterday, amid ongoing uneasiness toward the eurozone debt crisis and the uncertainty regarding a debt default by Greece. Also, growing concerns about a hard landing for the Chinese economy amid the backdrop of a potential recession in Europe and lackluster growth in the US weighed on sentiment. Japan’s Nikkei 225 Index fell 1.1% amid the aforementioned concerns, and as shares of Toyota Motor Co. (TM $67) and Honda Motor Co. (HMC $29) came under pressure after reporting declines in US sales for September yesterday. Elsewhere, the Hong Kong Hang Seng Index dropped 3.4% and South Korea’s Kospi Index fell 3.6% to lead the way, while Australia’s S&P/ASX 200 Index faired relatively well, declining 0.6% following several key economic reports. Meanwhile, China’s Shanghai Composite Index remained closed for a week long holiday and will return to action on Monday.

Australian economic data dominated the docket for the day, 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.” Finally, 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.