Morning Update

Stress Test Fever Breaks for Financials

Stocks are higher in morning action as financials are leading the way amid the relative relief following the government stress test results and the fact that the banks that need to address capital gaps will likely do so without more government money. On the economic front, the April nonfarm payroll report showed job losses were less than expected but gains were pared as the previous two months' figures were revised lower. Overseas, the upbeat sentiment in financials is helping markets gain ground. Treasuries moved higher following the jobs data. In other equity news, McDonald's posted a jump in April same-store sales.

As of 8:48 a.m. ET, the June S&P 500 Index Globex futures contract is 11 points above fair value, the Nasdaq 100 Index is 12 points above fair value, and the DJIA is 73 points above fair value. Crude oil is up $1.25 at $57.96 per barrel, and gold is down $1.30 at $914.20 per ounce.

The government reported the results of the stress tests on the 19 largest US banks, conducted to estimate the range of possible losses banks could suffer over the next years amid further deterioration in the economy. The report revealed that 10 of the firms that were put through the tests needed to address a total of $74.6 billion in capital shortfalls. Those needing capital according to the government are:

Needing capital

Bank of America (BAC $14 ¹) $33.9 billion, Wells Fargo (WFC $25) $13.7 billion, GMAC LLC $11.5 billion, Citigroup (C $4) $5.5 billion, Regions Financial (RF $5) $2.5 billion, SunTrust Banks (STI $19) $2.2 billion, Morgan Stanley (MS $27) $1.8 billion, KeyCorp (KEY $7) $1.8 billion, Fifth Third Bancorp (FITB $5) $1.1 billion, and PNC Financial (PNC $44) $0.6 billion.

Following yesterday's results, BAC said it would fill its capital gap by selling common stock and/or converting existing privately held preferred stock into common shares and by selling assets, stressing that it would not need new government funds. Elsewhere, WFC, MS and C all announced plans to offer additional stock to the public to address their respective capital needs.

Those nine relatively fine

JPMorgan Chase (JPM $35), Goldman Sachs (GS $134), Metlife (MET $32), Bank of New York Mellon (BK $30), American Express (AXP $26 ¹), Capital One Financial (COF $26), US Bancorp (USB $20), State Street (STT $38), and BB&T (BBT $25) were the firms that the government said did not have to fill any capital gaps.

In other equity news, Dow member McDonald's (MCD $53) reported same-store sales in April jumped 6.9%, led by a 6.1% increase in the US and an 8.4% rise in sales in Europe. MCD cited strength in its core menu and beverages, including its McCafe coffees, and chicken snack wraps.

Nonfarm payrolls fall less than expected

Nonfarm payrolls fell 539,000 in April, versus the Bloomberg estimate of a 600,000 decline. March was downwardly revised to -699,000, while February was revised from -651,000 to -681,000. The unemployment rate rose from 8.5% to 8.9%, in line with the consensus forecast. Average hourly earnings rose 0.1%, below the Street's forecast of 0.2%. Treasuries moved higher following the labor data, suggesting that traders may have been a bit uneasy by the downward revisions to the previous months' figures.

Later today, the Commerce Department will release its report on wholesale inventories, which are expected to fall 1.0% in March.

Financials support Europe on banking results relief

Stocks in Europe are solidly higher in afternoon action, led by strength in the financial sector as the results of the stress tests of the largest banking institutions in the US calmed fears about the health of the financial sector. Adding support to sentiment toward the group, shares of the Royal Bank of Scotland (RBS $13) are up well over 10% after the bank owned by the British government said its investment banking revenues almost doubled, which helped offset a fourfold rise in loan losses. The upbeat sentiment across the pond is helping Commerzbank (CRZBY $8) move higher despite higher loan-loss provisions and writedowns, which led Germany's second-largest bank to announce a 1Q loss that came in at 861 million euros, larger than the 772 million euro loss that analysts surveyed by Bloomberg forecasted. The economic front is also providing some support after data showed that German exports in March unexpectedly grew for the first time in six months.

Asia first to respond to stress test results

Stocks in Asia finished broadly higher, supported by an advance in financials following the US banking sector stress tests. Japan's Nikkei 225 Index rose 0.5%, and the broader Topix Index gained 1.1% despite a 1.5% drop in shares of Toyota Motor Corp. (TM $80), after it forecasted a larger-than-expected loss and slashed its dividend. The world's largest automaker said it expects a loss for the year ending in March 2010 may reach 550 billion yen ($5.5 billion), which almost doubled the 284 billion yen loss that economists surveyed by Bloomberg had anticipated. TM also cut its semiannual dividend from 75 yen per share a year ago to 35 yen per share as part of cost cutting measures to limit the impact of the sharp drop in demand for vehicles amid the global recession. Adding insult to injury, Standard and Poor's Ratings Service cut its long-term credit rating to AA from AA+. In other equity news, Japan's largest chip maker, Toshiba (TOSBF $4) announced after trading closed that it plans to sell about $5 billion of stock and bonds after the company posted a full-year net loss on slumping semiconductor prices and customer spending. Elsewhere, Australia's central bank lowered its modest GDP growth forecast for this year from 0.25% to a decline in output of 1.25%.