Morning Market Update

Bulls Seeing Red as Global Uneasiness Keeping Bears Fed

Stocks are under solid pressure in morning trading, as the bulls are being stalled by continued euro-area debt fears, courtesy of consolidation of regional banks in Spain, and on uneasiness toward geopolitical concerns toward Korea. Treasuries are solidly higher amid some flight-to-safety buying, showing little reaction to a mixed reading of housing prices, and before reports on consumer confidence and the Richmond Fed Manufacturing Index. The global fears are overshadowing some relatively light US equity news, with Medtronic Inc and AutoZone Inc both topping analysts’ profit projections. Overseas, Asia came under broad-based pressure, and Europe is finding some heavy resistance in afternoon trading.

As of 8:46 a.m. ET, the June S&P 500 Index Globex future is 27 points below fair value, the Nasdaq 100 Index is 39 points below fair value, while the DJIA is 216 points below fair value. Crude oil is down $2.62 at $67.59 per barrel, and the Bloomberg gold spot price is down $0.83 at $1,190.83 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 1.1% at 87.17.

Medtronic Inc. (MDT $41) 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.

AutoZone Inc. (AZO $184) 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.

Home prices mixed, consumer confidence due out later this morning

Just before the opening bell, 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%. Treasuries remained higher following the report, maintaining solid gains amid continued flight-to-safety buying on the uneasiness out of Europe and Asia.

Later this morning, the economic calendar will yield the release of the Conference Board’s Consumer Confidence Index, expected to increase to 58.5 in May, from April’s 57.9. It will be interesting to see to what extend the recent surge in euro-area debt fears, which has caused some to worry that the global economic recovery could be threatened, will impact today’s reading of consumer confidence. First, the 2008 crisis centered on the massive US housing market and financial institutions, while the current one is overseas in relatively small countries. While there are concerns the European debt crisis could still spread, it seems after recent actions that the European Union, the European Central Bank (ECB) and the International Monetary Fund (IMF) are, at least for now, committed to keeping that from happening.

Second (and perhaps more important), it's clear that both the US and global economies are well into recovery, and even expansion mode. The financial crisis in 2008 was certainly exacerbated by the global economy sinking into recession.

Also, the Richmond Fed Manufacturing Index will be released, forecasted to decline from 30 in April to 26 in May, with a reading above zero denoting expansion.

Europe hamstrung by geopolitical concerns and consolidation in Spanish banking system

Stocks in Europe are under heavy pressure, even after coming off the worst levels of the day in afternoon action as euro-area debt contagion fears continue to stymie sentiment, while worsening tensions in Korea are exacerbating sentiment across the pond. Euro-area debt fears are remaining at the forefront in European trading, with the announcement that four regional savings banks with about 135 billion euros in assets, per Bloomberg, are being pushed to merge with stronger partners in the nation. Traders are seeking less risky assets amid the uneasiness and this risk aversion has boosted the price of 10-year government bonds in Germany—Europe’s largest economy—known as bunds, which sent its yield to a record low today. Financials and basic materials are the worst performers on the day.

Meanwhile, there is a plethora of economic data in Europe for traders to digest, 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. However, the aforementioned euro-zone worries and Asian uneasiness is causing these economic reports to have little impact on soothing sentiment in the region. Other economic reports include 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.

Britain’s FTSE 100 Index is down 2.6%, France’s CAC-40 Index is 3.3% lower, Germany’s DAX Index is declining 2.7%, and Sweden’s OMX Stockholm 30 Index is off 2.4%. Elsewhere, Spain’s IBEX 35 Index is tumbling 3.7%, Portugal’s PSI 20 Index is dropping 3.0%, and Greece’s Athex Composite Index is decreasing 3.6%.

Korean uneasiness and lingering euro-area concerns pressure Asia

Stocks in Asia were solidly lower across the board as the fears about the euro-zone debt crisis continue to fester and elevated tensions between North and South Korea dampened sentiment in the region. Japan’s Nikkei 225 Index fell 3.1% as the aforementioned uneasiness prompted further flight-to-safety buying, which has resulted in the yen surging recently versus most major currencies, almost reaching an 8 ½ year high versus the euro. The strength in the yen weighs on shares of issues that rely on sales in major markets outside of Japan, such as Europe and the US. Meanwhile, Asian sentiment took some fire from a different front, in the form of geopolitical concerns in Korea, following reports that North Korea has ordered its military to be on alert as tensions with South Korea worsen, exacerbated since the late-March sinking of a South Korean ship. South Korea’s Kospi Index was down 2.8%. Meanwhile, Australia’s S&P/ASX 200 Index fell about 3% to help pace the decline as the aforementioned concerns are dampening optimism about the global economic recovery and hampering the outlook for demand for commodities, whose prices are also finding some pressure from the strength in the US dollar amid the elevated risk aversion. Stocks in China also came under pressure, with Hong Kong’s Hang Seng Index falling 3.5% and the Shanghai Composite Index decreasing 1.9%. Rounding out the dismal day in the Asia/Pacific region, Taiwan’s Taiex Index was 3.2% lower and India’s BSE Sensex 30 Index finished 2.7% in the red.