Morning Update

Retail Earnings and US Rating Relief Promoting a Rebound

Stocks are higher in the last session ahead of the Memorial Day weekend, supported by an unexpected profit from Sears Holdings Corp, and a better-than-expected earnings report from fellow retailer Gap Inc. Moody's said it is comfortable with the US government's triple-A credit rating, easing fears about the future of the nation's rating, which were exacerbated by yesterday's rating outlook downgrade of the UK by Standard & Poor's. Treasuries are higher in an abbreviated session even as equities gain ground and as there are no major economic releases scheduled for today. In other equity news, BankUnited became the largest bank failure this year, and the US Treasury confirmed that it will inject $7.5 billion of additional capital into GMAC. Overseas, markets are mixed as Europe is also in rebound mode.

As of 8:45 a.m. ET, the June S&P 500 Index Globex futures contract is 6 points above fair value, the Nasdaq 100 Index is 8 points above fair value, and the DJIA is 64 points above fair value. Crude oil is up $0.71 at $61.76 per barrel, and gold is up $5.90 at $957.10 per ounce.

Sears Holdings Corp. (SHLD $50) unexpectedly posted 1Q EPS ex-items of $0.38, versus the Reuters estimate, which called for the company to record a $0.88 per share loss. Revenues declined by $1 billion to $10.1 billion, due to lower same-store sales, driven by categories directly impacted by housing market conditions and lower apparel sales, the company said. SHLD said its gross margin rate increased by 130 basis points as it controlled inventories and reduced domestic selling and administrative expenses by 6.7%.

Federal regulators seized Florida-based BankUnited FSB, whose parent company was Bank United Financial Corp. (BKUNA $0.49), in the largest bank failure this year. The failure is estimated to cost the Federal Deposit Insurance Corp. (FDIC) about $4.9 billion and the FDIC has sold the bank to a group of private equity firms, who will put up about $900 million of capital to the help rescue the firm. BankUnited is expected to open for normal business today with the same name.

Retailer Gap Inc. (GPS $16) reported 1Q EPS of $0.31, one penny ahead of the Reuters estimate, as revenues fell about 7% to $3.1 billion and same-store sales for the quarter fell by 8%. The company said it is pleased with the results in the "challenging economic environment" and was particularly encouraged by Old Navy's recent performance.

The US Treasury confirmed that GMAC LLC will receive $7.5 billion in additional government funding. The struggling auto lender has already received $5 billion in loans from taxpayer funds, but a failed bank stress test earlier this month mandated the company raise $11.5 billion within the next six months. The US government already holds 5 million GMAC shares and has used that control to tell the firm that it must extend about $4 billion of the capital injection to help financing services to customers of now-bankrupt Chrysler. The remaining $3.5 billion will go toward strengthening GMAC's capital position, according to the Wall Street Journal.

Holiday shortened session for bonds

Treasuries are modestly higher in relatively light morning action as there are no major economic releases scheduled for today and the bond market will close early at 2 p.m. ET today. Please note the all US markets will be closed on Monday in observance of the Memorial Day holiday.

Europe rebounding from rating pressure

Stocks in Europe are higher in afternoon action, rebounding from yesterday's drop amid fears that the UK's triple-A credit rating could be downgraded after Standard & Poor's lowered it outlook for the British nation from "stable" to "negative." Basic materials stocks are leading the advance across the pond after Goldman Sachs said mining companies remain attractive. However, shares of British Airways (BAIRY $26) are in the red to limit the advance after Europe's third-largest airline posted a net loss of 375 million pounds, which was wider than the 312 million-pound loss that analysts had expected, its first full-year loss since 2002, according to Bloomberg. The company said it will ground as many as 16 planes and cut winter capacity by 4% as demand for travel has softened amid the global recession.

Asia declines amid stronger yen and credit rating fears

Stocks in Asia came under broad-based pressure as the yen continued to gain ground on the dollar, dampening expectations of earnings of export-related firms that rely heavily on sales in the US. Additional pressure came from the reaction of yesterday's credit rating outlook downgrade of the UK. On the equity front, shares of Lenovo (LNVGY $8) were lower again following yesterday's larger-than-expected 4Q net loss by the Chinese PC maker amid severe weakness in sales in the US and Europe, as the company cut expansion plans. Resource related stocks also came under pressure amid the exacerbated concerns about the recovery of the global economy.

However, losses in Japan were limited after the Bank of Japan decided to keep its key lending rate unchanged at 0.10% and raised its view about the economy. The BoJ said, "Economic conditions have been deteriorating, but exports and production are beginning to level out," differing from its previous view the Japanese economy had "deteriorated significantly."