Morning Market Update

Traders Search for Values, View Glass Half-Full

Stocks are poised to move higher today, as traders look to bargain hunt after steep declines and after yesterday’s trading session saw a movement to pare early losses. The sentiment toward the global economic recovery has been hit by worries about European growth amid a debt crisis but got a boost from today’s US durable goods orders, which rose more than expected, and a jump in the mortgage applications index, while new home sales are to be reported after the market open. In equity news, Vertex Pharmaceuticals reported positive clinical trial results, homebuilder Toll Brothers said it believed a recovery was underway in the housing market and added land for the first time since 2006, while Apple Inc is reportedly the subject of an informal inquiry into its business practices as it relates to Amazon.com. Treasuries are lower and overseas markets are higher.

As of 8:46 a.m. ET, the June S&P 500 Index Globex future is 12 points above fair value, the Nasdaq 100 Index is 21 points above fair value, while the DJIA is 92 points above fair value. Crude oil is up $1.95 at $70.70 per barrel, and the Bloomberg gold spot price is up $7.68 at $1,211.93 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.5% at 86.72.

Vertex Pharmaceuticals (VRTX $37) is advancing after a late-stage clinical trial showed its experimental hepatitis-C drug made treatment more effective when added to a standard therapy. The company will report the data from two other large trials in the third quarter and will file for approval in the second half of 2010.

Toll Brothers (TOL $21) reported a 2Q net loss of $0.24 a share, a penny above Street forecasts, after revenue fell 22% to $311.3 million. Toll said it believes a recovery is underway in the housing market and is adding land for the first time since 2006. The CEO cautioned that with high unemployment and volatility in the financial markets, “we don’t expect housing to roar back right away.” Net signed contracts rose 41% and the cancellation rate fell to 5.3% from 21.7% a year earlier. Backlog increased to $993.5 million as of April 30, the first quarter-over-quarter increase in three years.

Apple Inc’s (AAPL $245) music-business practices are the subject of an informal inquiry by the US Justice Department according to The New York Times. The agency is looking at whether Apple pressured music publishers to not give Amazon.com Inc (AMZN $125) one day of exclusive access to music that is about to be released so that Apple could create marketing promotions around the music.

Durable goods orders rise and mortgage apps jump, new home sales on tap

Durable goods orders rose 2.9% month-over-month (m/m) in April, higher than the forecast of a 1.3% increase, while ex-transportation, orders fell 1.0%, while the expectation was for a 0.5% increase. Prior months were revised higher for both measures, with the headline figure coming in unchanged in March versus the initially reported 1.3% decline, and the ex-transportation figure was adjusted higher to 4.8% in March versus the previously reported 2.8% increase. 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. Treasuries are lower as the equity market rises.

In other economic news, the US MBA Mortgage Application Index jumped 11.3% last week, after the index, that can be quite volatile on a week-to-week basis, fell 1.5% in the previous week. The increase came amid a 3.3% increase in the Purchase Index, which tumbled 27.1% the week before, and a 17% surge in the Refinance Index, which rose 14.5% the prior week. The share of applications filed to refinance rose to 72% of total applications from 68% the previous week. The increase in the overall index came after a 3 basis-point decrease in the average 30-year mortgage rate, which declined to 4.80%, closer to the record low of 4.61% that was reached at the end of March 2009.

At 10 a.m. Eastern, new home sales will be released, 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 Monday, and showed a 7.6% m/m increase to an annual rate of 5.77 million units.

Europe rises on bargain hunting

Stocks in Europe are higher and the euro has pared an early loss as traders look to bargain hunt after shares have suffered from steep losses this year. Financial shares were higher after US Representative Barney Frank late yesterday said a proposal to restrict banks’ use of derivatives “goes too far.” The euro-area debt concerns have moved to the situation with European banks after the last two days saw four regional savings banks in Spain merged and one bank was taken over by the Bank of Spain. Today, Ireland’s central bank said that some of the country’s banks “are not moving with purpose” and a Polish newspaper is reporting that Poland is considering putting together a consortium of local companies to bid for a 70% stake in Bank Zachodni WBK that is being sold by Allied Irish Banks Plc (AIB $3), citing unnamed sources. Meanwhile, European Union Financial Services Commissioner Barnier said that banks should be taxed to pay for future crises and CNBC is reporting that US Treasury Secretary Geithner is urging Europeans to conduct a bank stress test. Elsewhere, Italy’s government approved 24 billion euros ($30 billion) in budget cuts that include a three-year wage freeze for civil servants and a crackdown on tax evasion to address a deficit of 5.3% in 2009 and a debt-to-GDP ratio of 115.8%.

In other equity news, Swatch (SWGNF $44) rose after its CEO said that sales rose by 33% in January, 58% in February, and 45% in March, Burberry Group Plc (BURBY $20) advanced after saying it would accelerate store openings and reported strong earnings results.

In economic news, mortgage applications in the UK rose m/m and 15% year-over-year, consumer confidence in Germany fell, and French consumer spending declined worse than forecast at 1.2% m/m, versus the expectation of a 0.5% decrease.

Britain’s FTSE 100 Index is up 2.5%, France’s CAC-40 Index is higher by 3.1%, and Germany’s DAX Index is advancing 2.3%. Elsewhere, Spain’s IBEX 35 Index is up 2.4%, Italy’s FTSE MIB Index is higher by 3.1%, and Greece’s Athex Composite Index is increasing 1.3%.

Asian shares advance

Stocks in Asia were higher as commodity prices rose and a price measure for shipping companies, the Baltic Dry Index, rose to the highest level in six months. Japan’s Nikkei 225 Index rose 0.7% despite the yen being nearly unchanged after almost reaching an 8 ½ year high against the euro in recent sessions and after minutes from the last Bank of Japan (BoJ) meeting implied that some members believed there were few options left to further stimulate the economy. Several BoJ members said that the bank should “devise ways to avoid excessive involvement in resource allocation among individual firms.” Elsewhere, the Korean won reversed some of yesterday’s plunge on elevated tensions between North and South Korea after the South Korean Vice Finance Minister said that “authorities will supply sufficient foreign currency liquidity if needed.” South Korea’s Kospi Index rose 1.4%.

Meanwhile, Australia’s S&P/ASX 200 Index rose 1.0% as resource related shares moved on the advance in commodities and after BHP Billiton (BHP $62), Xstrata Plc (XSRAY $3) and 11 other coal miners in Australia bid $4 billion for the nation’s largest railroad to head off the state government’s planned initial public offering and Rio Tinto (RTP $43) said that China’s demand for iron ore, copper, coal and aluminum is expected to grow over the next 15 years, “after which time we expect to see increasing demand from India.” The Jakarta Composite Index jumped 7.3% led by mining companies and India’s BSE Sensex 30 Index finished 2.3% higher.

Hong Kong’s Hang Seng Index rose 1.1% after the Shanghai Securities News reported China will allow domestic insurers to invest in shares listed on the Hong Kong exchange, while current regulations allow investments only in Hong Kong H-shares and red chips. Gome Electrical Appliances Holdings Ltd (GMELY $36) soared 14% after winning a distribution contract with LG Electronics worth as much as 9.3 billion yuan ($1.4 billion) this year. The Shanghai Composite Index decreased 1.9%.