Morning Call: U.S. and European stocks rally after Italy's government pledges to cut its budget deficit; Dec E-mini S&Ps up +0.23%; Euro Stoxx 50 up +0.43%.
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 ESZ18 - S&P 500 E-Mini

Overnight Markets and News

Dec E-mini S&Ps (ESZ18 +0.32%) this morning are up +0.23% and European stocks are up +0.43% on a rally in Italian assets. Italian stocks and government bonds rose on signs the government may reign in budget deficits after the Corriere della Sera newspaper reported that the Italian government will seek to contain the budget deficit at 2% of GDP in 2021, down from 2.4%. The target will be trimmed to 2.2% for 2020, while the target for 2019 will remain at 2.4%. The Five Star Movement-League coalition still needs to release its economic-growth projections before presenting a draft budget proposal to the EU Commission by Oct 15. Gains in European markets were limited after economic data showed an unexpected decline in Eurozone Aug retail sales and a downward revision to the Eurozone Sep Markit composite PMI. Asian stocks settled mostly lower: Japan -0.66%, Hong Kong -0.13%, China and South Korea closed for holidays, Taiwan -0.51%, Australia +0.32%, Singapore +0.76%, India -1.51%.

The dollar index (DXY00 +0.04%) is down -0.02%. EUR/USD (^EURUSD -0.01%) is up +0.03% on a report that Italy's government will pledge to cut the nation's budget deficit after next year. USD/JPY (^USDJPY +0.16%) is up +0.17%.

Dec 10-year T-note prices (ZNZ18 -0-040) are down -3.5 ticks.

Chicago Fed President Evans said the U.S. economic fundamentals are strong and he is "quite comfortable" with a December rate hike by the Fed.

Eurozone Aug retail sales unexpectedly fell -0.2% m/m, weaker than expectations of +0.2% m/m.

The Eurozone Sep Markit composite PMI was revised downward by -0.1 to 54.1 from the originally reported 54.2.

The UK Sep Markit/CIPS services PMI fell -0.4 to 53.9, weaker than expectations of -0.3 to 54.0.

U.S. Stock Preview

Key U.S. news today includes: (1) Chicago Fed President Charles Evans (non-voter) speaks on the U.S. economy and monetary policy at an event in London, (2) weekly MBA mortgage applications (previous +2.9% to 352.5 with purchase sub-index +2.6% to 240.4 and refi sub-index +3,2% to 946.8), (3) Richmond Fed President Thomas Barkin (voter) speaks at “The Outlook for Tomorrow: Five Numbers to Watch” at a West Virginia Economic Outlook Conference at Marshall University in Charleston, WV, (4) Sep ADP employment (expected +184,000, Aug +163,000), (5) final-Sep Markit U.S. services PMI (expected +0.1 to 53.0, prelim-Sep 52.9), (6) Sep ISM non-manufacturing index (expected -0.5 to 58.0, Aug +2.8 to 58.5), (7) EIA weekly Petroleum Status Report, (8) Fed Governor Lael Brainard speaks about the payment system at an event in Chicago, (9) Cleveland Fed President Loretta Mester (voter) is keynote speaker at a community banking conference hosted by the St. Louis Fed, (10) Fed Chair Jerome Powell speaks in a moderated discussion at an event in Washington D.C.

Notable Russell 2000 earnings reports today include: Lennar (consensus $1.19), Acuity Brands (2.56), RPM Intl (0.86).

U.S. IPO's scheduled to price today: Guardant Health (GH), Kodiak Sciences Inc (KOD).

Equity conferences during the remainder of this week: Wolfe Research Utilities & Energy Conference on Tue-Thu, European Association for the Study of Diabetes Meeting on Thu.

Market Comments

Dec S&P 500 E-minis (ESZ18 +0.32%) this morning are up +6.75 points (+0.23%). Tuesday's closes: S&P 500 -0.04%, Dow Jones +0.46%, Nasdaq 100 -0.22%. The S&P 500 on Tuesday closed lower on negative carry-over from a slide in European stocks to a 1-week low as Italy's budget woes fueled Italian and European political risks. Stocks were also undercut by concern that the U.S./China trade rift will drag on after National Economic Council Director Kudlow said China's efforts to appease the U.S. are "not serious enough." Stocks were supported by upbeat comments from Fed Chair Powell who said the U.S. economy faces a "remarkably positive outlook." There was also strength in mining stocks and metals producers after the price of gold rose +1.28% to a 1-week high and silver prices rose +1.28% to a 5-week high.

Dec 10-year T-notes this morning (ZNZ18 -0-040) are down -3.5 ticks. Tuesday's closes: TYZ8 +4.50, FVZ8 +2.50. Dec 10-year T-notes on Tuesday closed higher on reduced inflation expectations after the 10-year T-note breakeven inflation rate fell to a 2-week low and on carry-over support from a rally in 10-year German bunds to a 2-week high.

The dollar index (DXY00 +0.04%) this morning is down -0.015 (-0.02%), EUR/USD (^EURUSD -0.01%) is up +0.0003 (+0.03%), and USD/JPY (^USDJPY +0.16%) is up +0.19 (+0.17%). Tuesday's closes: Dollar Index +0.209 (+0.22%), EUR/USD -0.0030 (-0.26%), USD/JPY -0.28 (-0.25%). The dollar index on Tuesday climbed to a 6-week high and settled higher on weakness in EUR/USD which tumbled to a 6-week low on ramped up Italian political risks after the head of Italy's lower house budget committee said Italy could solve its fiscal problems with its own currency. EUR/USD was also undercut by the drop in the 10-year German bund yield to a 2-week low, which weakened the euro's interest rate differentials versus the dollar.

Metals prices this morning are mixed with Dec gold (GCZ18 -0.06%) -0.1 (-0.01%), Dec silver (SIZ18 +0.46%) +0.082 (+0.56%) and Dec copper (HGZ18 +0.23%) +0.013 (+0.46%). Tuesday's closes: Dec gold +15.3 (+1.28%), Dec silver +0.186 (+1.28%), Dec copper +1.90 (+0.68%). Metals on Tuesday closed higher with Dec gold and Dec copper at 1-week highs and Dec silver at a 5-week high. Metals prices were boosted by increased safe-haven demand for precious metals on the Italian budget crisis. Copper prices were supported by tighter supplies after LME copper inventories fell -2,525 MT to a 9-1/2 month low of 196,600 MT.

Nov WTI crude oil prices (CLX18 -0.11%) this morning are up +3 cents (+0.04%) and Nov gasoline (RBX18 -0.45%) is -0.29 (-0.14%). Tuesday's closes: Nov crude oil -0.07 (-0.09%), Nov gasoline -0.06 (-0.03%). Nov crude oil and gasoline on Tuesday closed lower as Nov crude retreated from a 3-3/4 year high. Crude oil prices were undercut by the rally in the dollar index to a 6-week high and by increased Russian crude output after Russian Sep crude production rose +150,000 bpd m/m to a record 11.356 million bpd. Crude oil prices continued to see underlying support from global supply fears with the collapse of Venezuela's oil industry and concern about the extent to which Iranian crude exports will fall due to U.S. sanctions in November.

Overnight U.S. Stock Movers

Axos Financial (AX unch) was upgraded to 'Strong Buy' from 'Outperform' at Ramond James with a price target of $46.

Valvoline (VVV +0.63%) was rated a new 'Buy' at Jeffroes with a price target of $27.

Diamondback Energy (FANG +0.18%) was rated a new 'Outperform' at Oppenheimer with a price target of $166.

Temper Sealy International (TPX -1.87%) rallied 9% in after-hours trading after Reuters reported that competitor Mattress Firm is preparing a bankruptcy filing as early as this week. Sleep Number (SNBR -1.64%) gained 0.5% on the news as well.

Healthcare Services Group (HCSG -0.47%) was rated a new 'Overweight' at Stephens with a price target of $54.

General Motors (GM -2.63%) was upgraded to 'Outperform' from 'Peer Perform' at Wolfe Research with a price target of $50.

Twilio (TWLO -4.99%) was rated a new 'Buy' at D.A. Davidson.

AutoNation (AN -2.22%) was downgraded to 'Underperform' from 'Peer Perform' at Wolfe Research with a price target of $37.

Ultralife (ULBI +2.94%) jumped 11% in after-hours trading after it won a contract valued at about $10.9 million to supply vehicle amplifier-adaptors and mounted power amplifiers to Thales Defense & Security.

Veritex Holdings (VBTX -0.68%) was rated a new 'Outperform' at Raymond James with a price target of $33.

Epizyme (EPZM -6.99%) lost almost 4% in after-hours trading after it announced that it intends to offer and sell shares of its common stock in an underwritten public offering, although no size or terms were given.

Government Properties Income Trust (GOV -1.56%) slid more than 3% in after-hours trading after it announced that it had begun a registered public offering of 24.9 million shares of Select Income REIT.

Kala Pharmaceuticals (KALA -3.63%) tumbled 8% in after-hours trading after it announced that it had commenced an underwritten public offering of 7.5 million shares of its common stock.

DavidsTea (DTEA +63.14%) plunged 20% in after-hours trading when the company released a statement that said it is not aware of any corporate development or other reason for recent market activity, such as Tuesday's 63% surge.

J.C. Penney (JCP -8.24%) rallied 9% in after-hours trading after it named Jill Soltau, recent president and CEO of Joann Stores, to be CEO of JCP effective from October 15.