Evening Market Update

Roller-coaster Ride Continues

After dropping precipitously at the opening bell and spending much of the day mired in the red, the equity markets were able to mount a late-day surge to finish nearly where they began, with the S&P 500 actually moving modestly into positive territory. Anxiety came courtesy of continued euro-area debt fears, further exacerbated by the consolidation of some regional banks in Spain, and on worries toward geopolitical events in Korea. The yield curve flattened as Treasuries were mixed amid flight-to-safety buying, showing little reaction to a stronger-than-expected reading on consumer confidence, a mixed S&P/Case Shiller Home Price report and a decline in the Richmond Fed Manufacturing Index. On the equity front, Medtronic and AutoZone both topped analysts’ profit forecasts, Dell unveiled a new compact mobile device that will run Google’s Android operating system, while there was a management shake-up at Dow member Microsoft.

The Dow Jones Industrial Average fell 23 points (0.2%) to close at 10,044, the S&P 500 Index rose less than a point to finish at 1,074, and the Nasdaq Composite lost 3 points (0.1%) to 2,211. In heavy volume, 1.9 billion shares were traded on the NYSE and 2.9 billion shares were traded on the Nasdaq. Crude oil fell $1.46 to $68.75 per barrel, wholesale gasoline lost $0.04 to $1.93 per gallon, and the gold spot price jumped $5.10 to $1,199.10 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.5% to 86.62.

Medtronic Inc. (MDT $40) reported fiscal 4Q EPS ex-items of $0.89, one penny above the consensus estimate of Wall Street analysts, with revenues rising 10% year-over-year (y/y) to $4.2 billion, inline with analysts’ forecasts. The medical device maker said its international revenue grew 20% y/y to help the company post revenue of over $4 billion for the first time in the company’s 61-year history. MDT issued full-year 2011 guidance that matched the Street’s projections. Shares were lower.

AutoZone Inc. (AZO $195) announced fiscal 3Q earnings of $4.12 per share, easily topping the $3.61 that analysts had forecasted, with revenues increasing 9.9% y/y to $1.8 billion, above the $1.7 billion that had been expected by the Street. Domestic same-store sales—sales at stores open at least a year—at the auto parts retailer rose 7.1% and the gross margin improved due to a shift to higher margin products and lower product acquisition costs and leveraging distribution costs due to higher sales. AZO finished nicely higher.

Dell Inc. (DELL $13) unveiled a 5-inch portable tablet, named Streak, that will run Google Inc.’s (GOOG $477) Android operating system designed to provide people on-the-go entertainment, social connection, and navigation experience. The device will be launched in June exclusively in the UK, with US availability to arrive later this summer. The device will be able to connect to wireless internet and 3G cellular networks and will come with Bluetooth capability as well as a 5-megapixel camera. Shares of both DELL and GOOG were lower.

In related technology industry news, Dow member Microsoft Corp. (MSFT $26) announced that the company’s President of the Entertainment and Devices Division (E&D) Robbie Bach will retire from the company this fall. Bach, who has been with the company for the past 22 years, will remain with MSFT through the fall, working with CEO Steve Ballmer to ensure a transition. Also, MSFT said J Allard, the company’s Senior Vice President of Design and Development for E&D will leave the company after 19 years, taking an official role as an advisor in a strategic role for Ballmer and his leadership team. MSFT finished lower.

Home prices mixed, consumer confidence jumps

The S&P/Case-Shiller Home Price Index was released showing an increase in home prices of 2.35% year-over-year (y/y) in March, below the increase of 2.5% that economists surveyed by Bloomberg had expected. Month-over-month (m/m), home prices were 0.05% lower, compared to forecasts, which called for a decline of 0.3%. Although the y/y figure continued to show an improvement, the report revealed that in 1Q, home prices were down 3.2%. Moreover, prices in 13 of the 20 cities that make up the composite index declined compared to February. Additionally, the report noted that even though prices rebounded from crisis lows, led by markets in Los Angeles, Minneapolis, San Diego and San Francisco—with San Diego posting the eleventh-straight monthly increase—recently prices have seen renewed weakness as tax incentives are ending and foreclosures are climbing. Also, David Blitzer, Chairman of the Index Committee at Standard & Poor’s, said, “It is especially disappointing that the improvement we saw in sales and starts in March did not find its way to home prices. Now that the tax incentive ended on April 30th, we don’t expect to see a boost in relative demand.”

Elsewhere, the Conference Board released its consumer confidence report, which improved to a level that exceeded expectations, rising to 63.3 in May, compared to the expectation of an improvement to 57.9. However, April’s reading was slightly downwardly revised to 57.7 from 57.9. The headline number gained as respondents’ gauge of the present economic situation being “good” rose, while those saying conditions are “bad” declined. Also, those saying jobs are “hard to get” decreased, but those saying jobs are “plentiful” ticked lower. The report also revealed that expectations of improvement for the next six months in business conditions, employment, and income all increased and those anticipating worsened conditions fell.

In other economic news, the Richmond Fed Manufacturing Index deteriorated in April to 26 from 30 in March, matching the forecast of economists, but a reading above zero denotes expansion.

The yield curve flattened at the long end as Treasuries finished mixed amid continued flight-to-safety buying on the uneasiness out of Europe and Asia. The yield on the 2-year note was up 2 bps to 0.76%, while the yield on the 10-year note lost 3 bps to 3.17%, and the 30-year bond yield declined 2 bps to 4.07%.

Spanish bank consolidation and geopolitical concerns weigh on global markets

Euro-area debt fears remained at the forefront in European trading, after the report that four regional savings banks in Spain with about 135 billion euros in assets, per Bloomberg, are being pushed to merge with stronger partners in the nation. The announcement comes only days after the Bank of Spain seized control over regional savings bank CajaSur. As well, Germany’s Finance Ministry proposed new legislation to extend the ban on naked-short selling— a trading practice of short selling a financial instrument that has not been positively determined to exist—to include stocks in of all German companies and credit-default swaps on some euro-area bonds. With traders seeking less risky assets amid the uneasiness and risk aversion, the yield on 10-year government German bonds, known as bunds, fell to a record low today.

Tensions between North and South Korea ratcheted higher surrounding the alleged late-March sinking of a South Korean ship with the North saying it will “totally freeze” any relations with the South, and has ordered its military to be on alert, while the South has stepped up military exercises in preparation for any attack.

The euro-zone worries and Asian uneasiness overshadowed a plethora of economic data in Europe, headlined by a 0.3% quarter-over-quarter (q/q) expansion in the UK’s 1Q GDP, which matched economists’ expectations but was upwardly revised from the 0.2% increase that was initially reported. Moreover, a separate report showed euro-zone industrial new orders jumping 5.2% m/m in March, well above the 2.5% increase that was anticipated. Other economic reports in the region included a larger-than-expected increase in Italian retail sales, an unexpected rise in the unemployment rate in Sweden, and a bigger-than-forecasted gain in producer prices in Spain.

More housing data, as well as durable goods orders, to be released tomorrow

New home sales will be released tomorrow, and are expected to show a 3.4% m/m increase in April to an annual rate of 425,000 units and are considered a more timely indicator of conditions in the housing market than existing home sales, as they reflect contract signings. Existing home sales data was released yesterday, and showed a 7.6% m/m increase to an annual rate of 5.77 million units.

Durable goods orders will also be reported on Wednesday, expected to rise 1.2% m/m in April after falling 1.2% in March, while ex-transportation, orders are also forecasted to have grown 0.6% m/m, after rising 3.7% in March. The durable goods data is volatile on a month-to-month basis as the large size of orders for items such as airplanes and military equipment can have a tendency to distort the data. As well, MBA Mortgage Applications will be reported.

Internationally, the economic docket includes a measure of German consumer confidence, French consumer spending, business confidence in France and Italy, mortgage approvals in the UK and Japan’s trade balance,