Morning Update

Futures Pointing Lower on Concerns More Banks Need Capital

Stocks are lower in early action as rumors swirl that more banks than originally expected will need additional capital. Federal Reserve Chairman Ben Bernanke will testify before the Joint Economic Committee this morning and investors will be watching for any comments from him on the strength of the banking system as well the underlying economy. In equity news, Kraft beat analyst earnings expectations while Archer-Daniels Midland disappointed. Treasuries are mixed ahead of the ISM Non-Manufacturing Index data which is scheduled to be released today. In Europe, producer prices fell more than expected which is adding to investor expectations that another rate cut and possible non-traditional measures may be expected when the ECB meets on Thursday. Overseas markets were mixed.

As of 8:51 a.m. ET, the June S&P 500 Index Globex futures contract is 6 points below fair value, the Nasdaq 100 Index is 9 points below fair value, and the DJIA is 52 points below fair value. Crude oil is down $0.54 at $54.02 per barrel, and gold is up $8.80 at $910.90 per ounce.

Dow member Kraft (KFT $24) reported 1Q EPS of $0.45, a growth of 10%, beating the Reuters consensus of $0.40. Company revenues fell 6.5% to $9.4 billion, although organic revenue growth was 2.3% and management attributed much of the fall in sales to unfavorable currency moves. The food producer, famous for brands such as Velveeta, Oreo cookies, and Maxwell House coffee, was able to expand its operating margin by 2.9% by restructuring its operations and raising prices on some of its products.

Archer-Daniels Midland (ADM $26) announced 3Q EPS of $0.37, down from $0.80 a year ago, and below analyst expectations of $0.49. ADM sales dropped 21% to $14.8 billion. The agribusiness company cited weak demand in North America, falling global commodity prices, and continued challenges in the ethanol industry as reasons for the decline.

US regulators have determined that "about ten" of the largest US banks will need to raise more capital, according to people familiar with the matter,. The Financial Times had reported yesterday that 4 banks, including Bank of America (BAC $10 ¹), Citigroup (C $3) Wells Fargo (WFC $24) and PNC Financial (PNC $43) would be required by the government to improve their balance sheets. The report was described by Bank of America as "completely inaccurate" and other firms did not comment on the matter. The Fed has also declined comment. The identities of the other banks needing to raise capital is not yet clear.

The final results of the U.S. government stress test of the 19 U.S. banks with assets greater than $100 billion will be released on Thursday, postponed from an initial release date slated for Monday. Preliminary results were given to the banks privately on April 24, and the Fed released a white paper saying that most banks currently have capital levels well in excess of the amount required to be well capitalized. However, regulators said they believe "it is prudent for large bank holding companies to hold additional capital to provide a buffer against higher losses than generally expected, and still remain sufficiently capitalized" over the next two years and be able to lend if such losses materialize. President Obama's spokesman Robert Gibbs said today that the administration believes the banks will be able to raise capital in the private markets or sell assets to meet the capital needs. Regulators are expected to brief the banks on the final results and how they will be revealed tomorrow.

Economic data on tap

The lone release on the economic calendar today is the ISM Non-Manufacturing Index, which is expected to post a reading 42.2, up from March's 40.8. The report is expected to complement the 40.1 reading on the ISM Manufacturing Index released last Friday, which showed the economy continues to decline, but the pace of decline has slowed. As Schwab's Chief Investment Strategist Liz Ann Sonders, and Director of Sector Analysis, Brad Sorensen, CFA, note in their bi-weekly Schwab Market Perspective: A Refreshing Market Pause?, the pace of decline is slowing in some indicators, while others continue to deteriorate - the path to recovery is unlikely to be a straight line. However, we are becoming more optimistic that the recession could end soon, despite the risk of a double dip down given the historic nature of this downturn and the policy response globally.

Also scheduled for today is Federal Reserve Chairman Ben Bernanke's testimony before the Joint Economic Committee at 10 a.m. ET. Bernanke will discuss the economic outlook and investors will be hoping for some hints on what to expect from the bank stress tests, scheduled to be released on Thursday. Any comments during his testimony on "green shoots" he is seeing in the economy at present can also be expected to impact the markets.

Europe mixed on economics and earnings

Stocks in Europe are mixed in afternoon trading, led by economic and earnings reports. The UK's FTSE index is trading ahead while France's CAC 40 and Germany's DAX both lost ground. Financials are strong and UBS (UBS $15) is up over 5% after the bank reported a 1Q loss of 1.98 billion Swiss francs, confirming the pre-announcement given by the bank last month, although management noted that they remain cautious on the outlook for future operations. In economic data, European producer prices fell 3.1% in March, sharper than the 2.9% expected by economists polled by Bloomberg. Given such a low level of inflationary pressures, this will strengthen the case for a rate cut and further non-traditional measures when the ECB meets this week. The ECB's Governing Council is scheduled to meet on May 7 and economists are expecting a further cut in the benchmark rate of 25 basis points to 1%, which would be the lowest level since the ECB began directing monetary policy in 1999. Europe has so far lagged behind other areas in its response to the economic downturn and more action is likely needed.

Asia continues to climb

Stocks in Asia continued their climb as investors continue to bet on a stabilization in the global economy. Trading in the region was mostly quiet with several markets, including Japan, South Korea, and Thailand all closed for holidays. Among the gainers in Asia overnight were companies dependent on exports to the US and China as favorable economic reports in both of those markets yesterday added fuel to the rally. Fisher & Paykel (FPAHF $0.3), which sells household appliances and gets 25% of its sales from the US, was up almost 10%. The Straits Times Index, which tracks Singapore stocks, gained more than 2% overnight, led by industrials and consumer staples. Elsewhere, Australia's S&P/ASX 200 Index was higher following the announcement that Australia's central bank decided to keep its benchmark interest rate unchanged, keeping borrowing costs at their lowest level in nearly 50 years. The benchmark rate in Australia has been reduced by a record 4.25% since September and was lowered 0.25% last month, the sixth reduction in eight months.