Evening Market Update

Stocks Find the Green, BP Chief Takes More Gulf Shots

Stocks posted modest gains to finish out the week in a lackluster session with no major US economic reports released, even amid the backdrop of quadruple witching, wherein futures and options on stocks and indexes expire. Treasuries came under pressure amid continued easing of global economic fears aided by waning euro-area debt concerns, courtesy of the announcement from the EU that individual bank stress tests will be released next month. In US equity news, Dow member Caterpillar Inc offered a mixed report on May sales, while CVS Caremark and Walgreen Co announced a new contract for continued participation by Walgreen in CVS Caremark's pharmacy network. Elsewhere, the Wall Street Journal reported that Motorola will pump cash into a cell phone spinoff, and Qualcomm came under a new antitrust investigation by the European Commission. In Europe, BP fell in late-day trading in the wake off the company’s CEO testimony in Washington, but was modestly higher in US trading amid reports that its CEO was being relieved of day-to-day Gulf operations.

The Dow Jones Industrial Average gained 16 points (0.2%) to close at 10,451, the S&P 500 Index rose 1 point (0.1%) to finish at 1,118, and the Nasdaq Composite increased 3 points (0.1%) to 2,310. In moderate volume, 1.6 billion shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil rose $0.39 to $77.18 per barrel, wholesale gasoline dipped $0.01 to $2.15 per gallon, and the Bloomberg gold spot price gained $10.78 to $1,255.93 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was flat at 85.65. For the week, including dividends, the DJIA and the S&P 500 Index rose 2.4%, and the Nasdaq Composite increased 3.0%.

Dow member Caterpillar Inc. (CAT $66 ¹) issued an update on machinery and engine sales for a three-month period ending in May, reporting that world machine sales rose 11% year-over-year (y/y), led by a jump of 38% in the Asia/Pacific region. This was the first y/y sales gain for the company since the September 2008 period, per Dow Jones Newswires. However, CAT said world engine sales fell 10% y/y, led by declines in marine and petroleum industry sales, while industrial sales rose 17%. Shares were higher.

CVS Caremark (CVS $32) and Walgreen Co (WAG $30) traded higher after the two companies announced they reached an agreement on terms under which Walgreen will continue participating in the CVS Caremark pharmacy benefit management national retail network for existing, new or renewal plans, although financial terms of the new contract were not disclosed. Both companies said they are pleased with the outcome, and with the continuing participation of WAG, the CVS national pharmacy network will have more than 64,000 participating pharmacies.

The Wall Street Journal is reporting that Motorola (MOT $7) is planning to buy back most of its debt and give the bulk of its remaining cash reserves, roughly $3-4 billion, to a new division centered on the mobile phone business, citing people familiar with the matter, while the company spokeswoman declined to comment on specific plans. The new division would also include the cable set-top box business and be called Motorola Mobility, while the remaining company would be called Motorola Solutions. MOT overcame an early loss and finished higher.

Qualcomm (QCOM $36) said it is facing a new antitrust investigation by the European Commission, just months after the Commission withdrew a previous four-year antitrust probe. The new complaint is based on allegations from UK wireless chip maker Icera and Dow Jones is reporting the issue appears to be related to how QCOM links patents from other companies to its own patent offering as a means of increasing its sales. Shares finished near the unchanged mark.

In the ongoing fallout from the Gulf oil spill, BP Plc (BP $32) fell in the final hour of European trading on the heels of CEO Tony Hayward facing strong criticism in a long testimony before the US Congress Thursday, highlighted by the revelation of over 760 safety violations in the past half decade and calls of "stonewalling" by the CEO. Moreover, today Moody's Investor Service became the third agency to downgrade the company's credit rating this week. Also, this week, BP agreed to fund a $20 billion escrow account to cover Gulf spill claims, and the company suspended its dividend for the remainder of the year. However, after Friday's closing bell in Europe, reports surfaced that CEO Hayward will hand off daily Gulf operations. BP did not comment on the report and shares finished modestly higher in the US.

Bulls reflect on resilient week amid the lack of US data

Treasuries remained lower as traders digested a week of mixed economic data, although some stability in Europe buoyed confidence, and there were no US economic releases scheduled for today. The yield on the 2-year note was up 1 bps to 0.71%, the yield on the 10-year note gained 3 bps to 3.22%, and the 30-year bond yield increased 2 bps to 4.15%.

Stocks finished the week with gains as the bulls showed some resilience to a plethora of disappointments from the global economic front, mainly data out of the US. The week got off to a rough start and appeared to be headed for another week in the red, with a final-hour slide on Monday following a late-day downgrade of Greece's debt rating to junk status by Moody's Investor Services. But the bulls dusted themselves off and managed to push the equity markets into the green, shrugging off sharp drops in the Philly Fed Manufacturing Index and housing starts and building permits and a disappointing outlook from FedEx Corp. (FDX $78) and a large profit miss by retailer Best Buy Co. Inc. (BBY $38). Moreover, stocks managed to remain above the flatline despite a larger-than-expected drop in homebuilder sentiment and an unexpected increase in jobless claims.

Euro-area sentiment continues to ease

Euro-area debt fears continue to ease, aided by Thursday's announcement from the European Union that it would release the results of stress tests on Europe’s 25 largest banks in the second half of July, "at the latest," according to European Central Bank President Trichet, although investors are divided on whether the tests are tough enough. German Chancellor Angela Merkel said it was important to give "maximum transparency," and when asked what action would be taken if the tests revealed shortcomings, she said the EU has "taken precautions," including the 750 billion euro rescue package. In other European economic news, the UK reported a smaller-than-expected fiscal deficit and a report showed mortgage approvals rose more than forecast, while Italian industrial orders came in above estimates.

Elsewhere, in Asia, the new Japanese administration pledged to cut public debt and Prime Minister Kan said he'd consider an opposition party proposal to raise the consumption tax. Also, Japan announced a stricter lending rule, which caps interest rates at 20% and prohibits lending to borrowers with consumer debt equal to a third or more of their annual income. In China, the National Development and Reform Commission said it will draw up a plan to curb "substantial" gains in medicine prices and curb profiteering.

In North American economic news, Canada’s Leading Indicators rose 0.9% month-over-month (m/m) in May, compared to the 0.7% advance that economists had expected.

Heavy dose of US economics, housing and Fed meeting to be the focus

Housing data comes into view next week, beginning with Tuesday's release of existing home sales, forecasted to increase 7.1% month-over-month (m/m) in May to an annual rate of 6.2 million units. Sales of existing homes reflect closings from contracts entered one to two months earlier, and therefore include a full benefit from the tax credit rush. However, new home sales are expected to show a 14.7% slump in May to an annual rate of 430,000 units when released on Wednesday, after jumping 14.8% in April, as they are accounted for at the time of contract signing.

Durable goods orders will be reported on Thursday, expected to have fallen 1.2% m/m in May after jumping 2.9% in April, while ex-transportation, orders are forecasted to have grown 1.1% m/m, after declining 1.0% in April. Economic releases conclude on Friday, with the final reading on 1Q gross domestic product (GDP), expected to be unchanged from the second reading, wherein 3.0% growth was reported, a decline from the 5.6% rate in 4Q, while personal consumption gained 3.5%, accelerating from the 4Q pace of 1.6%, and real final sales, which exclude changes in inventory, were 1.4% higher, versus 1.7% in 4Q. Inflation was benign, as the GDP Price Index rose 1.0%, and the core PCE Index, which excludes food and energy, increased 0.6%.

However, the highlight of the week will be the two-day Federal Open Market Committee (FOMC) meeting that concludes with the release of the statement mid-day Wednesday. While no interest rate changes are expected, the status of the extra measures the Fed has taken to address liquidity and the cost of capital will continue to be monitored. Minutes from the April meeting showed that there was debate about the pace and timing of asset sales on the Fed's balance sheet, while the crisis in Europe prompted the Fed on May 10th to re-open its currency swap lines to central banks to ensure financial institutions had access to dollars in conjunction with the larger European rescue package that was unveiled that day. The Fed's balance sheet expanded very modestly after the action, but has since leveled off, remaining fairly flat over the past two months. Since the last meeting, economic growth forecasts globally have been revised lower due to the European crisis and the likelihood of a slowdown in China, and traders have pushed out the timing of the first US rate hike from December 2010 to March of 2011.

In testimony earlier this month, Fed Chair Ben Bernanke said that incoming data suggested a sustained recovery, and the Fed's Beige Book released in early June indicated subdued inflation, as higher input costs were not being passed along to customers and wage pressures continued to be minimal.

Other reports on next week's US economic calendar include, the Richmond Fed Manufacturing Index, the MBA Mortgage Applications Index, weekly initial jobless claims, and the final University of Michigan Consumer Sentiment Index for June.

Economic releases in Asia/Pacific next week include Japanese department store sales and CPI, while Australia will announce its leading index.

In Europe, releases include euro-zone PMIs for services and manufacturing, as well as industrial new orders, German import prices and the IFO survey of business confidence, French consumer spending and employment, and Italian wages and retail sales. Additionally, the UK budget report and Bank of England minutes will be released, and the central bank of Norway meets to discuss monetary policy.

Elsewhere in the Americas, Brazil employment, as well as Canadian CPI and retail sales will be released.