Morning Update

Government Reportedly Points Finger and Flu Fears Linger

Stocks are again lower in early action as cases of the swine flu spread and the Wall Street Journal reported that government regulators have told Bank of America and Citigroup that they may need to raise capital, following results from its stress tests. Treasuries are higher amid the uneasy sentiment on the Street, ahead of housing data and as the Fed is set to kick off its monetary policy meeting. In other equity news, Pfizer and Bristol-Myers Squibb topped profit estimates, while US Steel reported a much larger-than-expected loss and slashed its dividend. Overseas, markets are lower.

As of 8:50 a.m. ET, the June S&P 500 Index Globex futures contract is 11 points below fair value, the Nasdaq 100 Index is 9 points below fair value, and the DJIA is 98 points below fair value. Crude oil is down $1.09 at $49.05 per barrel, and gold is down $19.70 at $888.50 per ounce.

The Wall Street Journal is reporting that US regulators have told Dow members Bank of America (BAC $9 ¹) and Citigroup (C $3) that they may need to raise more capital following the government's stress testing of the two banks. The report said the shortfall amounts to billions of dollars at BAC, according to a person familiar with the matter, and it is likely that these are not the only banks targeted by the Federal Reserve. None of the entities involved commented on the report.

Dow member Pfizer (PFE $13) reported adjusted 1Q EPS of $0.54, topping the Reuters estimate of $0.49, as revenues fell 8% to $10.9 billion, which was slightly short of the Street's expectations of about $11 billion. The company said US sales fell by 10% versus last year, international sales-which accounted for 54% of total sales-declined by 7%. PFE said foreign exchange unfavorably impacted sales, but the loss of US exclusivity for Zyrtec, and revenue declines for Lipitor-due to continued intense competition-also negatively impacted 1Q sales. The drugmaker reiterated its full-year outlook.

Fellow drugmaker Bristol-Myers Squibb (BMY $21) posted 1Q EPS ex-items of $0.48, one penny ahead of the Street's forecast, as revenues rose 3% to $5 billion, just shy of the $5.1 billion analysts forecast. BMY said financial results were supported by continued cost management improvements and its biopharmaceutical net sales increased 3% to $4.3 billion, led by a 13% gain in the US, partially offset by an 11% decline in international sales on an unfavorable foreign exchange. The company reaffirmed its 2009 EPS ex-items forecast of $1.85-2.00.

US Steel Corp. (X $28) posted a 1Q net loss ex-items of $3.84 per share, much wider than the $1.62 per share loss analysts called for, as revenues fell 47% to $2.8 billion, also short of the Street's forecast of $3.2 billion. The company said weak customer demand for flat-rolled products, coupled with customers' efforts to reduce inventories, has resulted in very low order rates and further downward pressure on prices for its flat-rolled and US Steel Europe segments. The company added that its tubular operations also experienced a severe downturn, primarily as a result of reduced drilling activity due to lower oil and gas prices, high inventory levels, and "unprecedented levels of unfairly traded and subsidized tubular imports from China." The steelmaker said it expects an operating loss in 2Q and slashed its quarterly dividend by $0.25 per share to $0.05 per share.

Housing data on deck and Fed commences its monetary policy meeting

Treasuries are higher as traders await the S&P/Case-Shiller Home Price Index for February, which will be released in early action and is expected to fall 18.7% year-over-year (y/y). The index is a three-month rolling average representing 20 major cities, and through January had fallen 29.1% from its peak in 2006. Steeply falling prices brought on by foreclosures have motivated buyers to begin to bargain shop and sales of new and existing homes have begun to stabilize.

The Federal Open Market Committee (FOMC) will begin its two day meeting today, with the conclusion on Wednesday. Not surprisingly, with the fed funds rate already targeted to a rate near zero, no action is expected on the interest rate front. However, the Fed will likely update the market with regard to the unconventional measures it is taking to stabilize the economy and credit markets. Of particular interest will be any details regarding the status of the Term Asset-backed Securities Loan Facility (TALF), which has gotten off to a slow start. Additionally, investors will be monitoring progress on the Fed's purchases of mortgage-backed securities and Treasuries. The Street will also be looking for any comments regarding any "green shoots" in the economy-which we have seen some signs of improvement since the Fed's last meeting in mid-March-and whether that will have any impact on the Fed's asset purchasing appetite and keeping the fed funds rate targeted near zero.

Europe under pressure amid flu concerns and financial fears

Stocks in Europe are lower across the board as the spreading of cases of the swine flu is conspiring with weakness in financials-exacerbated by the report that Bank of America and Citigroup will need more capital-to dampen sentiment across the pond. Not surprisingly, however, healthcare issues are the lone sector in the green as drug companies stand ready to deploy vaccinations to combat the flu. Earnings are also in the spotlight as Deutsche Bank (DTBKY $123) topped the 773 million euro profit consensus of analysts surveyed by Bloomberg, reporting 1Q earnings of 1.19 billion euros ($1.55 billion), versus a loss last year. However, shares of Germany's largest lender are under pressure despite the better-than-expected earnings results amid the aforementioned uneasiness toward the group. Elsewhere, Europe's second-largest oil firm, BP (BP $42) posted a more than 60% drop in 1Q profits to $2.56 billion amid the precipitous decline in crude oil prices as a result of the global recession. Nonetheless, aggressive cost cutting measures-which it cut its 2009 forecast for a second time today-helped the company top analysts' estimates after excluding certain items. BP also raised its quarterly dividend payment by 4% to $0.14 per share. Additionally, Daimler announced a 1Q loss for the second-consecutive quarter, led by a drop in sales of Mercedes-Benz and trucks.

Flu fears and yen draw Asian jeers

Stocks in Asia were broadly lower amid lingering fears about the swine flu, which weighed on travel stocks, and continued strength in the yen versus the dollar weighed on export issues that rely heavily on sales in the US and Europe. Financials also came under pressure to exacerbate the decline, led by news about the possible need of additional capital from the two major US banks. The Nikkei 225 Index fell 2.7% and the broader Topix Index dropped 2.5%, while South Korea's Kospi Index fell about 3% to lead the region lower. Other equity news was also focused on the financial sector after Allianz (AZ $8) and Dow member American Express (AXP $24 ¹) sold a combined $1.9 billion of shares of Industrial & Commercial Bank of China (IDCBY $26)-the world's largest lender by market value, according to Bloomberg news. Also, Bank of China (BACHY $9) reported a 14% drop in 1Q profits on higher loan loss provisions and mortgage-related writedowns. However, the company's 1Q net income of 18.6 billion yuan ($2.72 billion) beat analysts' estimates of 17.8 billion yuan.