Data Helps Bulls Not Look Down While Hanging Off Fiscal Cliff
With President Obama and Congressional leaders set to meet at 3:00 p.m. ET and the House set to reconvene on Sunday, US equity markets are under pressure in late-morning action as hopes of final-hour fiscal cliff deal are waning. Treasuries are moving higher on the budgetary uncertainty. However, stocks are well off of the worst levels of the day following stronger-than expected domestic reports on regional manufacturing activity and pending home sales.
In equity news, Dow member Hewlett-Packard Co announced that the US Department of Justice has opened an investigation regarding its allegations that software company Autonomy Corp misrepresented itself before HPQ acquired that company last year. Gold is lower and crude oil prices are mixed, while the US dollar is gaining modest ground.
Overseas, Asian stocks moved higher on optimism that the final-hour US fiscal cliff negotiations may result in an 11th hour deal, while some disappointing data and US fiscal cliff uneasiness are weighing on European equities.
Company and Earnings News
Dow member Hewlett-Packard Co. (HPQ $14) announced in a regulatory filing that the US Department of Justice has opened an investigation regarding its allegations that software company Autonomy Corp misrepresented itself before HPQ acquired that company last year. HPQ reported an $8.8 billion writedown for its fiscal 4Q last month, attributing about $5 billion of it to a decline in the value of Autonomy due to alleged improper revenue recognition. Autonomy’s former CEO Mike Lynch responded by saying, “It is extremely disappointing that H-P has again failed to provide a detailed calculation of its $5 billion writedown of Autonomy, or publish any explanation of the serious allegations it has made against the former management team, in its annual report filing today.” HPQ is trading solidly lower.
Regional Manufacturing Activity Expands & Pending Home Sales Exceed Expectations
The Chicago Purchasing Managers Index moved further into expansion territory, rising to 51.6 in December—the highest since August—from 50.4 in November, compared to the improvement to 51.0 that economists surveyed by Bloomberg had expected. A reading above 50 depicts expansion in manufacturing activity. The positive report revealed a jump in new orders from 45.3 to 54.0, production remained above the key 50 mark, and prices paid stayed above 60, while employment fell from 55.2 to 45.9.
Meanwhile, pending home sales rose more than expected in November, increasing 1.7% month-over-month, compared to the 1.0% gain that economists had projected, and the 5.2% jump registered in October was revised to a 5.0% m/m rate of growth. Moreover, compared to last year, sales were up 8.9% in November, below the 12.2% increase that was forecasted, and compared to the downwardly revised 17.8% gain—from the initially reported 18.0% increase—posted in October. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose more than expected, jumping 5.9% m/m in November.
Treasuries are higher in late-morning action despite the data, as the fiscal cliff uncertainty festers, with the yield on the 2-year note nearly unchanged at 0.26%, while the yields on the 10-year note and the 30-year bond are falling 3 basis points to 1.71% and 2.88%, respectively.
Europe Seeing Red Following Some Lackluster Data
The European equity markets are under some pressure in late-day action, in the wake of some lackluster economic data in the region, while traders are treading cautiously ahead of a final push in the US fiscal cliff negotiations. France’s 3Q GDP was unexpectedly revised lower to a 0.1% quarter-over-quarter (q/q) pace of growth, from the originally-reported 0.2% expansion, where economists expected to nation’s output to remain.
The modest expansion for France’s economy follows the 0.1% q/q contraction seen in 2Q. Meanwhile, Spanish retail sales fell nearly 8% year-over-year in November. On the equity front, shares of Porsche Automobil Holding SE (POAHY $8) are moving nicely higher after a US Appeals Court dismissed a lawsuit against the sportscar maker. Moreover, Atari SA is falling sharply after the videogame maker warned of a “significant’ fiscal-year loss.
The UK FTSE 100 Index is down 0.5%, France’s CAC-40 Index is declining 1.2%, Germany’s DAX Index is trading 0.6% lower, Italy’s FTSE MIB Index is decreasing 0.5%, Spain’s IBEX 35 Index is falling 2.0%, Switzerland’s Swiss Market Index is dipping 0.2%, and Greece’s Athex Composite Index is dropping 1.2%.
Asia Moves Higher As Fiscal Cliff Resolution Hopes Remain
Stocks in Asia finished broadly higher as traders clung to hopes that lawmakers in the US may be able to pull off a final hour fiscal cliff agreement. Japan’s Nikkei 225 Index rose 0.7% to the highest level since March 2011, supported by the continued weakness in the yen versus the US dollar, which sits at the lowest level since August 2010, on growing expectations that the new Japanese leadership will deploy more aggressive monetary policy to try to stoke economic growth and inflation.
More, new leadership on the fiscal and monetary fronts could help growth in the near term, but we believe a more fundamental change to Japanese corporate culture is required before we see lasting and meaningful improvements to the economy. In the meantime, the stock market could rally if the government is able to sustain recent weakness in the yen—but pressure on corporate profits may continue and be a headwind for Japanese stocks. The gains for Japanese stocks came despite some lackluster economic data, as Japan’s Manufacturing PMI Index fell further into contraction for December, industrial production fell more than expected for November, retail sales came in flat last month, and consumer price inflation fell in November.
Elsewhere, South Korea’s Kospi Index rose 0.5% as a report showed the nation’s industrial production increased at a much larger rate than expected for November, while mining issues supported a 0.5% increase for Australia’s S&P/ASX 200 Index as iron ore prices continued to rebound. Meanwhile, India’s BSE Sensex 30 Index rose 0.6%, the Hong Kong Hang Seng Index increased 0.2% and China’s Shanghai Composite Index gained 1.2%.