Morning Update

Adversity After Retail Sales Sours Sentiment

Stocks are extending early losses in morning action on fears that the recent signs of recovery in the economy may have hit a snag, exacerbated by an unexpected drop in April retail sales and further revisions to the previous month's reading. Treasuries are higher after gaining ground following the disappointing sales data, while import prices rose and mortgage applications fell due to a drop in refinancing activity. In equity news, the European Union levied a $1.5 billion antitrust fine on Dow member Intel Corp, Macy's reported a 1Q net loss that was smaller than anticipated, and Applied Materials matched earnings expectations. Overseas, markets are mixed.

As of 8:45 a.m. ET, the June S&P 500 Index Globex futures contract is 16 points below fair value, the Nasdaq 100 Index is 12 points below fair value, and the DJIA is 143 points below fair value. Crude oil is down $0.12 at $58.73 per barrel, and gold is down $4.30 at $919.60 per ounce.

Dow member Intel Corp. (INTC $15) was fined $1.5 billion by the European Union (EU) for antitrust violations that the company abused its dominant market position and offered illegal rebates to computer manufacturers, shutting rival Advanced Micro Devices (AMD $4) out of the market. The EU said INTC's practices hurt "millions of European consumers," and has ordered the chipmaker to immediately halt illegal practices. The ruling exceed the $1.36 billion fine that was imposed on fellow Dow component Microsoft (MSFT $20). INTC said it takes "strong exception to this decision," and it believes the decision is wrong and ignores the reality of a highly competitive microprocessor marketplace. INTC added that there has been "absolutely zero harm to consumers," and will appeal the decision.

Macy's (M $12) posted a 1Q net loss ex-items of $0.16 per share, narrower than the $0.20 per share loss analysts surveyed by Reuters estimated. Revenues fell 9.5% to $5.2 billion and same-store sales for the quarter fell 9%. The department store said given the continued uncertainty in the macro-economic environment, it believes that it is prudent to maintain it previous annual guidance of sales to decline between 6-8% and EPS to be between $0.40-0.55.

Applied Materials (AMAT $11) reported a fiscal 2Q net loss ex-items of $0.10 per share, in line with the Street's estimate, as revenues were $1.0 billion, which topped analysts' expectations. New orders fell almost 40% to $649 million versus last quarter, and backlog of orders also declined, falling to $3.2 billion from $4.1 billion in 1Q, reflecting what the company called a period of "exceptionally weak demand."

Retail sales fall

Advance retail sales fell 0.4% in April, below a forecasted unchanged reading, while March's decline was again unfavorably revised from -1.2% to -1.3%. Ex-autos, sales declined 0.5%, versus a projected reading of a 0.2% increase. March's decline was also unfavorably revised further from -1.0% to -1.2%. If gasoline, autos, and building materials are removed, sales at retailers fell 0.3%, indicating that consumers-which stepped up spending for the first two months of the year-may have continued to save more to reduce debt. Additionally, debt levels remain elevated, as consumers have only just begun the long process of deleveraging.

The Import Price Index increased 1.6% in April, more than the expected increase of 0.6%. Import prices gained a downwardly revised 0.2% in March.

In other economic news, the US MBA Mortgage Application Index fell 8.6% to 895.6 for the week ended May 8. The Refinance Index dropped 11.2% to 4588.6, while the Purchase Index advanced slightly, rising 0.5% to 265.7. The Mortgage Bankers Association (MBA) said the average 30-year mortgage rate declined 3 basis points to 4.76%. The report may be welcome news for the housing front as the Purchase Index managed to gain modest ground, suggesting some homebuyers are warming up to the near record low mortgage rates and increasing housing affordability.

Later today on the economic calendar, business inventories for March are expected to be released and are forecast to decline by 1.1%.

Insurers and economic concerns cause European sentiment to turn

Stocks in Europe are under pressure in afternoon action amid a couple of disappointing profit reports from some major insurers in the region and on unfavorable data from the economic front. Allianz (AZ $10) is about 6% lower after Europe's largest insurer said 1Q profits fell 97%, due to declining investment values, while Dutch bank and insurer ING Groep (ING $11) is about 9% in the red after it posted a third-straight quarterly loss that was larger than what analysts surveyed by Bloomberg expected. Meanwhile, the economic front is offering no help after eurozone industrial production fell 2% in March, doubling economists' forecasts, while the previous month's reading was revised to a larger decline. Elsewhere, economic fears were also stoked by the Bank of England saying risks are weighted toward a relatively slow and protracted recovery for the UK economy.

China leads Asia higher

Stocks in Asia were mostly higher amid a couple of favorable forecasts from the equity arena and after an upbeat reading from the Chinese economic front. China's Shanghai Composite Index gained 1.7% to lead the region after April retail sales rose 14.8%, topping the 14.5% estimate of economists surveyed by Bloomberg. However, Chinese industrial production increased 7.3% in April, which came in below the 8.6% advance that was anticipated. Hong Kong's Hang Seng Index fell 0.6%, and Australia's S&P/ASX 200 Index declined 0.5% amid selling in the mining sector. Elsewhere, Japan's Nikkei 225 Index rose 0.5% and the broader Topix Index advanced 0.4%, as a couple of upbeat earnings forecasts helped limit the pressure from the yen's solid gains versus the dollar, which has dampened the outlook for sales of companies in the region that rely heavily on sales in the US. Shares of camera maker Olympus (OCPNY $19) jumped about 13% after it said it expects to return to profitability this fiscal year, and automaker Nissan (NSANY $11) moved solidly higher after it forecasted a narrower net loss for its fiscal year. But shares of chipmaker Hitachi (HIT $39) fell about 11% after saying it expects a larger-than-expected net loss for its fiscal year.