Morning Update

Markets Heading Lower in Quiet Trading

Stocks are slightly lower in early action, as traders consider the prospects for further gains in stocks after the recent strong rally. At the same time, commodity prices are recovering from yesterday’s weakness, with crude oil nudging back towards $65 per barrel. Equity news is light as investors prepare for the second quarter earnings season, which will kick off with tomorrow’s earnings release from Alcoa. Elsewhere, auto parts maker Lear Corp has filed for bankruptcy protection, bringing the total number of auto suppliers to go bankrupt this year to more than 20, while Discover Financial Services announced a capital raising as the credit card company attempts to repair its balance sheet. Meanwhile, Treasury yields are pointing higher as there are no economic reports on today’s calendar and traders are awaiting a $35 billion auction of three-year notes. Overseas, Asian markets were lower as yesterday’s weakness in commodity markets spilled over to the region, while Europe is making gains amid an upbeat outlook on the UK housing market.

As of 8:44 a.m. ET, the September S&P 500 Index Globex futures contract is 2 points below fair value, the Nasdaq 100 Index is 1 point below fair value, and the DJIA is 9 points below fair value. Crude oil is up $0.36 at $64.41 per barrel, while gold is gaining $5.28 at $930.23 per ounce.

Auto parts manufacturer Lear Corp (LEA $0.29) has officially filed for bankruptcy protection. The world’s second-biggest manufacturer of car seats filed Chapter 11 documents after winning approval from a majority of creditors for a reorganization plan. The filing shows the company holds $4.5 billion in debt, against assets of $1.3 billion. Today’s announcement brings the total number of auto suppliers that have sought bankruptcy protection so far this year to over 20, according to the Original Equipment Suppliers Association trade group. The Michigan-based supplier also released a forecast for sales of $9.1 billion in 2009, a 33% decline from last year’s level.

Discover Financial Services (DFS $11) announced that it will be raising additional capital. The credit card company that has received government loans totaling more than $1 billion said it plans to sell $500 million worth of common stock. The funds could be used to repay the government funding, although CEO David Nelms noted last month that the firm is in no rush to return the funds.

Treasury yields rising ahead of today’s auction

The recent rise in Treasury yields is somewhat concerning. Much of the rise can be attributed to a normalization of the yield curve as investors have moved away from the safety of Treasuries, but the corresponding rise in lending rates has the potential to stall the tentative economic stabilization we have been seeing.

Furthermore, despite a growing chorus of concern about the level of government involvement and spending, the Federal government has so far shown few signs of restraint. President Obama’s adviser noted yesterday that the first stimulus package was smaller than she would have liked, and a second package could be needed. With at least a portion of the recent rise in Treasury yields attributable to debt concerns, and countries around the world increasingly disparaging the dollar as a reserve currency, we’re in a tenuous time during which the government needs to tread carefully, as continued massive debt issuance could contribute to a “double dip” recession.

In related news, Fitch Ratings yesterday cut its rating of California’s long-term general obligation bonds to BBB, which is just two notches above speculative grade. California’s debt is still on watch for further downgrades as the state struggles with a cash crunch including a $26.3 billion budget deficit this year. Talks between lawmakers to balance the budget are progressing slowly and the state has begun issuing IOUs in place of cash payments to taxpayers owed refunds. "After September 2009, absent any proposed budget and payment adjustments, cash deficits will expand dramatically,” Fitch noted in its report.

There are no releases on today’s economic calendar, but later in the week markets will have a variety of reports to consider, including tomorrow’s reports on weekly MBA Mortgage Applications and consumer credit. That will be followed by Thursday’s release of weekly initial jobless claims and wholesale inventories, while Friday’s reports on the trade balance and the University of Michigan Consumer Sentiment Index will round out the week.

European markets rebound, led by positive UK housing outlook

European markets have recovered from yesterday’s weak trading, with most major indices approximately 1% higher in afternoon trading. Persimmon (PSMMF $6), the UK’s largest homebuilder, is higher after CEO Mike Farley said in an interview that housing prices may be beginning to stabilize. Farley also noted that further writedowns at the company are unlikely, after Persimmon has already made provisions for a possible 10% further fall in its land bank. “Currently we are seeing a 4% decline, so it would take a big fall” to trigger further writedowns, Farley said. Elsewhere in Europe, CRH Plc (CRHCF $21) the Dublin-based firm that is the world’s second-largest manufacturer and distributor of building materials, is gaining over 5% after detailing plans to cut 555 million euros more in costs through 2010, on top of the 895 million euro cuts announced earlier in the year. This announcement comes after CRH earlier reported an 83% fall in 1H earnings.

Asian markets under pressure, oil and metals still lagging

Shares in Asia were broadly lower, led once again by weakness in commodity-related stocks. Indexes in Japan, Hong Kong, and Australia all suffered losses of less than 1%. Also dampening sentiment in Japan was yesterday’s rally in the Japanese yen. Mixed global economic data led to a drop in investor risk appetite, causing traders to sell their high-yielding currencies and return to relatively safer currencies such as the yen. This strength in the Japanese currency weighed on shares of Japanese exporting companies overnight.

Bucking the negative trend for the second day in a row was South Korea, with the Kospi Index managing small gains on the back of a strong day from LG Electronics. The world’s third-biggest manufacturer of LCD televisions gained over 5% after announcing plans to grow revenues in its Mexican factories by more than 50% to $4 billion by 2012. LG is boosting production in the region, which serves as its production base for all American markets, in an attempt to cut costs. Also managing to swim against the tide was India, with the BSE Sensex 30 Index climbing almost 1% to reverse a portion of yesterday’s steep losses that stemmed from concerns over government deficit levels.