Morning Update

Holiday Hangover Hits Street

As traders get back to business following the long Memorial Day weekend, stocks are lower in morning action, but have come well off of their lows, as geopolitical uneasiness in Asia is dampening enthusiasm on Wall Street. There is little in the way of equity news to help soothe sentiment as the Canadian Auto Workers union ratified a labor agreement with General Motors, and United Therapeutics received approval of a pulmonary arterial hypertension. Treasuries are higher and traders are likely looking forward to some major economic reports this week, which could be adding to some of the tepidness in early action. Overseas, South Korean markets led Asia lower following nuclear missile tests by North Korea, and Europe is succumbing to the pressure that is carrying over from the Asian adversity.

As of 8:49 a.m. ET, the June S&P 500 Index Globex futures contract is 3 points below fair value, the Nasdaq 100 Index is 7 points below fair value, and the DJIA is 27 points below fair value. Crude oil is down $1.27 at $60.40 per barrel, and gold is down $10.10 at $948.80 per ounce.

The Canadian Auto Workers union (CAW) announced that it has ratified a cost-saving labor agreement with US automaker and Dow member General Motors (GM $1). The CAW represents about 9,000 hourly GM workers and voted 86% in favor of the agreement that will freeze pension payments until 2015 and pay newly hired employees less. The announcement comes as the June 1st government deadline approaches, which would likely lead to bankruptcy for GM if it has not sufficiently restructured its operations.

Shares of United Therapeutics (UTHR $67) are nicely higher after the biotechnology firm announced that the US Food and Drug Administration (FDA) has approved its orally administered drug ADCIRCA for treatment of pulmonary arterial hypertension. The treatment is indicated to improve exercise ability in some patients and UTHR has licensed the rights to develop, market, promote and commercialize ADCIRCA from Eli Lilly (LLY $34).

Heavy week of data ahead

Treasuries are higher as traders await the S&P/Case-Shiller Home Price Index for March—released later in morning action—and is expected to have fallen 18.4% year-over-year (y/y), after falling 18.6% in February. The index is a three-month rolling average representing 20 major cities, and has been falling at a slower rate in recent months. Through February, the index had fallen 30.7% from its peak in 2006. On a month-over-month basis, prices have improved slightly, but the housing market seasonally starts to perk up in spring, and therefore month-to-month fluctuations are less meaningful than y/y comparisons. Also, consumer confidence, forecast to have improved from 39.2 in April to 42.6 in May, and the Richmond Fed Manufacturing Index, expected to improve from -9 in April to -6 in May, will both be reported later in morning action today.

Although the week will be one session short, data will be aplenty with key readings on housing and manufacturing likely dominating the attention. Existing home sales for April will be reported on Wednesday, and the forecast is for sales to rise 2.0% month-over-month (m/m) to an annual rate of 4.66 million units, after falling 3.0% in March and rising 4.9% in February. Pending home sales have risen two months in a row, and are a leading indicator for this data series.

New home sales, due out on Thursday, are expected to have risen 1.1% for April m/m to an annual rate of 360,000 units, after falling 0.6% in March and rising 8.2% in February. New home sales now account for 7% of the market, down from 16% at the peak, as they have struggled to compete with the steep discounts afforded by foreclosures. In response, homebuilders have significantly cut back on new housing starts, allowing inventory levels to fall.

Durable goods orders will also be released Thursday, and are expected to show a rise of 0.5% m/m in April, after falling 0.8% in March, and rising 2.1% in February. Ex-transportation, orders are forecasted to decline 0.3%, following a fall of 0.6% in March.

Lastly, the second reading on 1Q Gross Domestic Product will be released on Friday, and is expected to show a decline of 5.5%, revised up from the initial report of -6.1%. The initial read was worse than projected, but investors were encouraged by the surprising rebound in consumer spending. While the 1Q GDP estimate has been positively revised, the personal consumption component has been revised down, and enthusiasm for the strength and sustainability of spending by the U.S. consumer has been tempered in recent weeks.

Other releases on this week's economic calendar include MBA Mortgage Applications on Wednesday, Thursday's release of initial jobless claims, and the Chicago Purchasing Manager survey, and University of Michigan consumer sentiment will round out the week on Friday.

Europe under pressure as Asian geopolitical concerns dampens sentiment

Stocks in Europe are lower in afternoon action as the geopolitical concerns that weighed on Asian action are tempering sentiment across the pond. Resource related issues are under pressure after Rio Tinto (RTP $174) agreed to a 33% cut in contract prices with Japanese steelmakers, which is exacerbating concerns about the health of the global economy—which typically drives demand for the mining sector. In other equity news, shares of Danone (DANOY $11) are under solid pressure after the world's largest yogurt maker said it plans to raise 3 billion euros ($4.2 billion) in a rights offering. The company also maintained its full-year guidance for 10% growth in EPS. On the economic front, Germany announced the final read on 1Q GDP, which came in unrevised at -3.8% from 4Q confirming the steepest drop since quarterly data were first compiled in 1970, per Bloomberg. Exports in Europe's largest economy fell almost 10%, while capital investment by companies fell a much more-than-expected 7.9%.

North Korean missile exercise weighs on Asia

Stocks in Asia were mostly lower, led by a 2.1% drop in South Korea's Kospi Index on geopolitical concerns following nuclear missile tests by North Korea and reports that it fired two missiles a day after the tests. However, Australia's S&P/ASX 200 Index managed to gain 1.4% to limit some of the losses in the region as mining stocks led the way following the announcement that Nippon Steel (NISTY $36), the world's second largest steelmaker, agreed to pay Rio Tinto—the world's second largest iron ore exporter—$0.97 per dry metric ton. Although the reduced price for iron ore dampened enthusiasm in the sector in European trading, the deal sparked optimism the agreement will establish a global benchmark for contract prices, which supported the Australian advance. Elsewhere, Hong Kong announced that it will deploy about $2.2 billion in tax cuts, fee waivers, and spending to help soothe the sting of the global recession and the government said it could do something further if conditions worsen.