EmailA lot was said and written over the weekend about the EU Summit. Despite all of the reporting, what we know today is not much different from what we knew (or didn't know) on Friday.
That could be construed as a good thing considering the S&P 500 jumped 1.9% on Friday, but it seems unlikely that the U.S. market would have similar success today considering European bourses are mixed, Italy's 10-year bond yield is rising, and the U.S. Treasury market is showing some early strength. The confluence of those developments suggests a realization, or perhaps a frustration, that the EU has yet to fire up its bailout bazooka.
Specifically, an accord has yet to be reached on the extent of the private sector's involvement in a Greek debt restructuring and it remains unclear how much the EFSF is going to be super-sized in an attempt to ringfence Spain and Italy from any restructuring fallout in Greece.
Most reports continue to point to a likely 90-100 bln euro bank recapitalization plan. Meanwhile, it has been said that France's request for the EFSF to be turned into a bank so that it has ECB backing has been essentially squashed by Germany and the ECB.
Everything should come to light, though -- or so it is said -- on Wednesday, October 26. That is when another summit will be held and when EU leaders have indicated a comprehensive framework for managing the debt crisis will be presented.
Germany has warned participants not to expect a silver bullet solution; nonetheless, there is still a good bit of hope that a framework put in place ahead of the November 3 summit of G20 leaders will at least be a silver-plated bullet. That hope has risen following a preliminary PMI manufacturing figure for the eurozone in October that came in at a disappointing 47.3 versus 48.5 in September.
Europe's issues notwithstanding, the U.S. equity market appears to be standing its ground this morning.
An October manufacturing survey for China, which showed a return to an expansion phase, combined with a report from Japan showing exports increased in September for the second straight month, a spate of M&A activity, and a better-than-expected earnings report from Dow component Caterpillar (CAT) have acted as underpinning factors.
Strikingly, Caterpillar beat the Capital IQ consensus estimate by seven cents, raised its FY11 guidance, and said it saw sales volume improve across the world in all geographic regions and in nearly all segments.
CAT's comments pretty much say it all in terms of the reporting period so far. The global economy reportedly came to a halt in the third quarter, yet corporate America and incoming economic data are proving that was more hyperbolic reporting than anything else. Presently, third quarter operating earnings are projected to increase 15%, according to Thomson Reuters, while the advance estimate for Q3 GDP on Thursday is expected to show a 2.2% increase in third quarter output.
There is no recession, or even stagnation, in those figures.
On the M&A front, Cigna (CI) has announced that it intends to buy Healthspring (HS) for $3.8 bln, or $55 per share, in cash. Oracle (ORCL) for its part is planning to buy RightNow Technologies (RNOW) for $1.5 bln, or $43 per share. Those deals represent premiums of 37% and 20%, respectively, to Friday's closing prices.
This is going to be another busy week, particularly on the earnings front with 189 S&P 500 companies due to report their quarterly results. All eyes, however, will continue to gravitate toward Europe and the makings, or lack thereof, of a convincing plan to keep the market's worst fears in check.
The S&P futures are trading 0.4% above fair value, which is setting the stage for a slightly higher open for the cash market.
--Patrick J. O'Hare, Briefing.com
Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial, please email researchsales@briefing.com.
