Evening Market Update

Greek Debt Downgrade Wipes Away Day’s Gains

After holding onto gains for most of the day, the equity markets turned mostly negative in late trading, as an inline-downgrade of Greek debt by Moody’s into junk status reminded investors of the influence the European debt crisis still holds. Treasuries were mixed, as there were no major economic releases on the domestic front, although FOMC member James Bullard did make some comments on the timing of a fed funds rate hike and the euro-area debt crisis. In equity news, Cablevision Systems reached an agreement to acquire Bresnan Communications for $1.4 billion and separately announced a $500 million share repurchase program. Elsewhere, CVS Caremark Corp reported a new $2 billion stock buyback program, while Human Genome Sciences received disappointing feedback from the FDA regarding its treatment for hepatitis C and Lincoln Financial Corp said it will sell up to $1.085 billion in stock and debt in order to repay its loan from the government under the TARP program.

The Dow Jones Industrial Average lost 20 points (0.2%) to close at 10,191, the S&P 500 Index fell 2 points (0.2%) to finish at 1,090, and the Nasdaq Composite was flat at 2,244. In moderately light volume, 1.1 billion shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil gained $1.25 to $75.03 per barrel, wholesale gasoline gained $0.02 to $2.07 per gallon, and the Bloomberg gold spot price lost $4.25 to $1,222.45 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 1.0% to 86.63.

Cablevision Systems Corp. (CVC $25) announced that the company and Bresnan Communications reached a definitive agreement under which CVC will acquire Bresnan in a transaction valued at about $1.4 billion. Bresnan is majority owned by private equity firm Providence Equity Partners and has cable operating systems in Colorado, Montana, Wyoming and Utah. CVC also announced that it has authorized a share repurchase program to buy up to $500 million of its shares. CVC overcame an early loss and finished solidly higher.

Also, CVS Caremark Corp. (CVS $32) announced that it has approved a new share repurchase program for up to $2.0 billion of its outstanding common stock. The program will expire at the end of 2011 and during the 2Q this year it completed a previous $2 billion repurchase program that was authorized in November 2009. CVS said it will continue to invest in internal projects that meet its return hurdles and use the rest of its remaining free cash flow to increase shareholder value. The company added that over the next five years, it expects to generate “significantly” more free cash flow than what it generated in the past five years and it expects to use the majority of that cash flow in the near-term to enhance shareholder returns through dividends and share repurchases. Shares of CVS were lower.

Human Genome Sciences Inc. (HGSI $26) announced that the US Food and Drug Administration (FDA) provided feedback on an approval application submitted for treatment of chronic hepatitis C, expressing concerns regarding the risk benefit assessment of the drug dosed every two weeks. HGSI said it has concluded that licensure of this dosing regimen is “unlikely.” Shares traded lower.

Lincoln National Corp. (LNC $27) said it will sell at least $335 million of common stock and up to $750 million of senior notes and will use the proceeds to repurchase the government’s preferred shares acquired under the Troubled Asset Relief Program (TARP). The government took that stake as a condition of LNC’s $950 million rescue early last year, after the U.S. Treasury allowed life insurers to participate in the TARP program, which had originally been intended for banks. The company had previously announced that it planned to repay the funds by the end of 2010 and shares of LNC were nicely higher on the news of an earlier repayment.

Economic calendar quiet today, Fed official offers rate-hold outlook

Treasuries finished the day lower, as there were no major economic reports released on today’s economic calendar. The yield on the 2-year note was up 1 bp to 0.73%, the yield on the 10-year note gained 2 bps to 3.26%, and the 30-year bond yield increased 4 bps to 4.19%. However, there was some Fedspeak in morning action as Federal Reserve Bank of St. Louis President and voting member of the Federal Open Market Committee (FOMC) James Bullard spoke at a press conference in Tokyo, Japan. Bullard noted that the US economic recovery would “have to be firmer than it is right now and we’ll have to see more improvement” before the FOMC raises the fed funds rate, but he added that he expects the US economy to see further improvement and 5.0% annualized growth in the US over the next two quarters combined “seems like a reasonable possibility.” On the European debt crisis, Bullard said, “Even though it’s a very serious crisis and could get worse, I don’t think it’s strong enough to derail the global recovery at this point.” The Fed official also pointed out that Asia should continue to lead economic growth “into 2011 and beyond,” per Dow Jones Newswires, quoting Bullard at a separate event.

Moody’s downgrades Greece’s debt to junk

In late-day US trading, Moody’s cut Greece’s credit rating four steps to non-investment grade, or junk, citing the country’s economic “risks”. The cut to Ba1 from A3 follows a similar downgrade last month by Standard & Poor’s and Moody’s notes that the new rating “incorporates a greater, albeit, low risk of default.” Greece agreed to an austerity package last month in order to qualify for financial aid from the European Union and the International Monetary Fund. The Greek government said the downgrade failed to reflect the progress it has made in reining in its deficit, and added that it “remains absolutely committed to the task of fiscal adjustment and improving the country’s growth prospects.”

Elsewhere in Europe, euro-zone industrial production rose 0.8% m/m in April, above the 0.5% increase that was anticipated by economists, and the y/y rate gained 9.5%, compared to the consensus forecast of an 8.7% rate of growth. However, the UK government issued a report which showed its forecast for GDP next year was downwardly revised to a rate of growth of 2.6%, but it said its budget deficit will be lower than expected, ahead of its budget report on June 22nd.
In other economic news in the region, Italy’s labor costs increased more than expected in 1Q, Sweden’s unemployment rate declined to a level below economists forecasts, Switzerland’s producer and import prices increased, and Spain’s housing transactions jumped 17.6% y/y.

On the Asia/Pacific economic front, the Bank of Japan began its monetary policy meeting, and later today, it is expected to leave its benchmark interest rate unchanged at 0.1%, and a report showed the nation’s industrial production rose 1.3%. Elsewhere, a report out of South Korea showed export and import prices in the region increased, while Hong Kong’s industrial production and producer prices increased in 1Q, and India’s wholesale prices jumped 10.16% y/y in May, above the 9.60% that economists expected. Australian markets were closed for a holiday, and China’s markets did not trade, and will not trade through Wednesday due to a holiday.

The US economic calendar will begin to pick up tomorrow, with the release of the import price index, which is expected to have decreased by 1.2% in May, and the Empire Manufacturing Index, which economists are predicting will increase to 20.00 in June, after a May reading of 19.11.

The international economic calendar will yield the German ZEW Survey, the euro-zone trade balance, UK CPI, and the minutes from the Reserve Bank of Australia’s June meeting. Additionally, the Bank of Japan will conclude its two-day policy meeting.