Evening Market Update

Stocks Lose Ground Late in Volatile Trading Day

After losing ground early in the session, stocks see-sawed along the flatline for most of the day before falling sharply in the final hour of trading. Disappointing manufacturing news out of China generated early-morning concern, but equities showed resiliency on the heels of the ISM Manufacturing Index release, which slowed at a smaller pace than expected and remained in expansion territory and an unexpected jump in construction spending. Treasuries moved higher on the economic news, but lost ground throughout the day to finish mixed. In equity news, Apple Inc said it sold over two million iPads since the device was launched sixty days ago and Dow component Hewlett-Packard announced it will invest $1 billion to update its enterprise service business. In M&A news, American International Group Inc. announced that it will not amend the terms of its agreement to sell its Asian unit to Prudential Plc, while Ev3 agreed to be acquired by Covidien Plc for a total of $2.6 billion and a NY Post report said multiple bids were submitted in an effort to acquire electronics retailer RadioShack.

The Dow Jones Industrial Average lost 113 points (1.1%) to close at 10,024, the S&P 500 Index fell 19 points (1.7%) to finish at 1,071, and the Nasdaq Composite decreased 35 points (1.5%) to 2,222. In moderate volume, 1.4 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil lost $1.79 to $72.18 per barrel, wholesale gasoline fell $0.05 to $1.98 per gallon, and the Bloomberg gold spot price gained $9.25 to $1,225.45 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.3% to 86.75.

Apple Inc. (AAPL $261) moved higher after the company announced yesterday that it has sold over two million iPads since the device’s launch on April 3rd. APPL added that it began shipping iPads in Australia, Canada, Japan, and Europe this past weekend and it will be available in nine more countries in July and additional countries later this year.

In other technology news, Dow member Hewlett-Packard Co. (HPQ $46) announced that it will invest $1 billion to update its enterprise service business, built on its technology and software to improve its service delivery, consolidating commercial data centers, management platforms, networks, tools and applications. HPQ added that as a result of productivity gains and automation, it expects to eliminate roughly 9,000 positions over a multiyear period. Shares were lower.

American International Group Inc. (AIG $34) was lower after it announced that, “after careful consideration,” it will adhere to the original terms of its previously announced agreement to sell its Asian unit to the UK’s Prudential Plc (PUK $17), and it will not consider revisions to those terms. The original deal calls for PUK to purchase the unit from AIG for about $35.5 billion, but appears to be in jeopardy as AIG has rejected PUK’s weekend proposal to lower the value of the offer to $30.4 billion. Shares of PUK were higher.

Ev3 Inc. (EVVV $22) traded sharply higher after Covidien Plc(COV $41) signed a definitive agreement to acquire the vascular treatment firm for $22.50 per share in cash, for a total of $2.6 billion, net of cash acquired. COV said the deal positions it to become the leading endovascular player. COV finished lower.

In other M&A news, shares of RadioShack (RSH $21) moved higher on a report from the NY Post, citing sources familiar with the matter, that said an initial round of bids to acquire the electronics retailer were completed last week and that executives are giving presentations to bidders this week. The report suggests that private equity firm Blackstone Group L.P. (BX $10) is a lead participant in the talks and that Best Buy Co Inc. (BBY $41) may also be involved in the bidding process. A spokesman for RSH says the company will not comment on rumors or speculation. Shares of BX and BBY were lower.

Manufacturing activity slows but better than forecasted, construction spending strong

The ISM Manufacturing Index declined to 59.7 in May from 60.4 in April, better than the fall to 59.4 that was expected. The reading marks the tenth consecutive month the manufacturing sector has been above the 50 level that separates contraction versus expansion, and indicates the overall economy grew for the 13th consecutive month. The rate of growth was driven by continued strength in new orders, flat at 65.7, and production, which fell 0.3 to a still strong reading of 66.6. Elsewhere, the employment component rose to 59.8 from 58.5, marking the sixth consecutive growth reading, and the report showed that the recovery continued to broaden, with 16 of 18 industries reporting growth.

The ISM said that there were a number of reports, particularly within the tech sector, of shortages in components as the result of excessive inventory de-stocking during the downturn. Manufacturing has been stronger on export strength and as factories have ramped up after businesses allowed inventories to plunge by unsustainable amounts, however the recent strength in the dollar could weigh on the price competitiveness of US exports later in the year. On the flip side, the ISM Non-Manufacturing Index has been more volatile on a month-to-month basis, and is expected to increase to 55.8 in May from 55.4 in April when it is released on Wednesday (economic calendar). The April reading of the services index was flat, and the services sector has posted only six readings in expansion territory over the past eight months.

The manufacturing reading in April was the highest since June 2004, but the decline in May is not that unexpected, as the continued increases in some indicators are simply unsustainable.

Elsewhere, construction spending was also released this morning and unexpectedly rose, increasing by 2.7% m/m in April, compared to the expectation of flat reading, and March’s 0.2% increase was revised to a 0.4% gain. Private construction spending led the way, with residential spending gaining 4.4% m/m in April.

Treasuries were mostly higher, although most of the early gains from the positive economic news were pared throughout the day. The yield on the 2-year note was flat at 0.77%, the yield on the 10-year note lost 3 bps to 3.26%, and the 30-year bond yield decreased 3 bps to 4.17%.

Canada increases benchmark interest rate, China manufacturing slows

The economic front provided a plethora of reports out of the euro-zone, with PMI Manufacturing Indices in Germany, the UK, and Italy all depicting larger-than-expected expansion in activity, while separate reports showed manufacturing activity in the euro-zone and France came in below economists’ estimates. Meanwhile, the euro-zone unemployment rate unexpectedly ticked higher to 10.1% in April, from 10.0% in March, while the unemployment change in Germany fell by 45,000, compared to the decline of 17,000 that was anticipated, and the unemployment rate in Europe’s largest economy surprisingly fell from 7.8% in April to 7.7% in May. Elsewhere, Italy’s unemployment rate ticked higher to 8.9%, Germany’s retail sales rose 1.0% in April, as expected, and Switzerland’s 1Q GDP rose 0.4% compared to the previous quarter, which was smaller than the 0.7% advance that economists had forecasted.

In economic news in the Americas, the Bank of Canada became the first G-7 central bank to increase its benchmark interest rate following the global recession, increasing the overnight interest rate by 25 basis points to 0.5%. The move was widely expected by economists, especially after Canada reported a Q1 GDP of 6.1%, paced by rising consumer spending and housing prices. However, the bank was cautious in its comments accompanying the rate hike, saying “a weak and uneven global recovery will mean extra care in removing government support.” Meanwhile, Brazil reported that industrial output grew 17.4% y/y in April, which was higher than the 16.1% increase expected by analysts, and May PMI Manufacturing came in at 52.4, slightly lower than the previous reading of 53.8.

In Asia/Pacific news, China’s PMI Manufacturing Index deteriorated from 55.7 in April to 53.9 in May, compared to the 54.5 reading that economists surveyed by Bloomberg had expected. However, a reading above 50 depicts expansion and the index has recorded 15-consecutive months above the 50 mark. Also, the HSBC Manufacturing PMI—a separate gauge of Chinese manufacturing activity—fell from 55.2 in April to 52.7 in May, touching the lowest level in a year, per Bloomberg. Elsewhere, a report out of Japan showed some of the Japanese population is calling for the Prime Minister to step down, leading to some uneasiness toward the nation’s political system. Bloomberg reported that Japan’s Prime Minister said he will consider his political future and do “what’s best for the people of Japan.” The Reserve Bank of Australia left its benchmark interest rate unchanged at 4.5%, matching expectations of economists. Also, a report showed building approvals fell much more than anticipated, overshadowing a separate release that showed retail sales in the nation rose more than forecasted. In other economic news, South Korea’s consumer prices rose by a smaller amount than expected, Taiwan’s manufacturing activity slowed, while India’s manufacturing rose.

Tomorrow’s US economic calendar will contain weekly MBA Mortgage Applications, which jumped 4.0% last week after a 2.9% decrease in the previous week, as well as pending home sales for April, which economists are expecting to increase 5.0%, after a 5.3% increase in March.

On the international calendar, the UK will report consumer credit and mortgage approvals, while the euro-zone will announce PPI and Australia will release its Q1 GDP, which is expected to be 0.5%, which would be lower than the previous-quarter reading of 0.9%.