US merger talk checks Euro woes

Photo / Thinkstock

Wall Street prepared for the start of the fourth-quarter earnings season, expected to confirm the economic recovery was gaining traction.

Kicking off the US fourth-quarter earnings season is Alcoa, scheduled to report its quarterly results today after the market closes.

M&A deals were also kicking into higher gear, with the top ones announced today including Duke Energy Corp's agreement to buy Progress Energy for US$13.7 billion in stock and DuPont's plans to buy Danisco, a Danish food ingredient firm, for US$5.8 billion.

Corporate America is sitting on billions and billions of cash and 2011 is expected to be a year full of M&A activity.

Even so, recurring concern that the sovereign debt issue in Europe is far from solved is keeping investors cautious. Stocks on Wall Street and in Europe were lower.

"Europe is part of it," Don Wordell, a fund manager for Atlanta-based RidgeWorth Capital Management, told Bloomberg News.

"The biggest concern is that the austerity measures that have to happen in Europe really slow down that economy, and I don't think that is being contemplated yet by US investors," Wordell said.

- Reuters reported that the European Central Bank was buying Portugese bonds, as well as those of Greece and Ireland, in another attempt to assuage investors' concerns about its willingness to act.

Wordell said another reason for the dip in global equities to start this week reflects the recent rally. "You also have to consider where we are. The market has almost doubled from the lows. Investors may just take a breather here," he said.

The Dow Jones Industrial Average declined 0.36 per cent, the S&P 500 weakened 0.22 per cent and the Nasdaq slipped 0.16 per cent.

In Europe, the Stoxx 600 Index dropped 0.9 per cent in its largest fall since December 30.

US Treasuries rose, sending two-year yields down to a four-week low amid increased appetite for the relative safety of US debt.

Two-year note yields fell two basis point to 0.58 per cent at 10.41am in New York, BGCantor Market Data shows.

Meanwhile, a top Federal Reserve official said the central bank might need to start considering a reversal of its tight monetary policy by year end.

That reinforces expectations that the Fed would proceed with its plan to buy US$600 billion more US Treasuries and could start to look toward an initial increase in interest rates later this year or early in 2012.

"The bar is very high for me," Kocherlakota said in an interview with the Wall Street Journal published today. "There would have to be a disorderly reaction of some kind in inflation expectations or in the behaviour of the dollar."

"We're talking about relatively extreme events," he said.

In Europe, the cost of insuring Portuguese bonds against default rose to a record today after Der Spiegel reported on January 8 that Germany and France will pressure the nation to seek help from a bailout fund to prevent contagion to other countries, Bloomberg said.

Belgian debt dropped as the nation's king demanded the caretaker government prepare a budget amid a political impasse. Portugal, Spain and Italy will all sell bonds this week.

"There is no question, that there has been no long-term structural fix there," Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey, told Reuters.

"It's almost as if it's looked at as a catalyst to lock in profits, and once it recedes from the headlines, you start seeing a little more robust tone to the market."