Morning Market Update

China Manufacturing Data Disappoints to Drive Losses

The global equity markets are under pressure and US stocks are returning from a holiday weekend in the red, on the heels of some disappointing manufacturing reports out of China, which exacerbated already wavering global economic recovery sentiment. Treasuries are higher on the mid-to-long end of the curve on the broad-based weakness and ahead of a busy week on the economic front, commencing with today’s release of the ISM Manufacturing Index after the opening bell, and culminating with Friday’s labor report. In equity news, Dow component Hewlett-Packard announced it will invest $1 billion to update its enterprise service business, and American International Group Inc. reported that it will stick to the original terms of its deal to sell its Asian unit to the UK’s Prudential Plc for about $35.5 billion. Overseas, Asian stocks declined on the Chinese manufacturing reports, and Europe is under pressure as traders digest a plethora of economic data and as BP Plc’s “top kill” effort to stop the massive oil leak in the Gulf of Mexico failed.

As of 8:48 a.m. ET, the June S&P 500 Index Globex future is 14 points below fair value, the Nasdaq 100 Index is 11 points below fair value, and the DJIA is 106 points below fair value. Crude oil is down $1.31 at $72.66 per barrel, and the Bloomberg gold spot price is up $9.85 at $1,226.05 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.6% at 87.05.

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.

American International Group Inc. (AIG $35) is 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’sPrudential Plc (PUK $16), 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 are higher on the news.

Manufacturing report to kick off economic calendar

Treasuries are higher on the mid-to-long end of the curve in morning action amid the global slide in the equity markets and ahead of the release of the ISM Manufacturing Index later this morning, expected to show a decrease to 59.0 in May from 60.4 in April, with 50 being the level that separates contraction versus expansion in the economy (economic calendar). Meanwhile, the ISM Non-Manufacturing Index, which has been more volatile on a month-to-month basis, is expected to increase to 55.6 from 55.4, and will be released on Thursday. The manufacturing sector expanded for the ninth-consecutive month in April and was the fastest since June 2004, while the services index came in flat, posting only six readings in expansion territory over the past eight months, suggesting manufacturing activity continues to lead the economic recovery. Manufacturing has been stronger on export strength and as factories ramped up after businesses allowed inventories to plunge by unsustainable amounts, however manufacturing strength could be hampered later in the year as a stronger dollar could weigh on the price competitiveness of US exports.

Construction spending will also be released after today’s opening bell, forecasted to come in flat for April, after increasing 0.2% in March.

Nonfarm payrolls will headline the week on Friday, with the Bloomberg survey of economists forecasting payrolls grew by 511,000 in May after increasing 290,000 in April, while excluding government hiring, private sector payrolls are expected to increase 175,000, after expanding by 231,000 in April. Temporary hiring for the Census is distorting the headline number, as it added 66,000 in April, while the government has said that Census hiring could peak in May at nearly 500,000, while state and local and postal service jobs have continued to decline. The unemployment rate is estimated to decline to 9.8% from 9.9%, after the rate increased in April from 9.7% as workers re-entered the workforce as job openings increase.

Other releases on this week’s busy US economic calendar include factory orders, pending home sales, MBA Mortgage Applications, the ADP Employment Change Report, nonfarm productivity, initial jobless claims, and consumer credit.

Europe in the red amid flood of data

Stocks in Europe are under pressure in afternoon trading amid the backdrop of disappointing Chinese manufacturing data and as traders digest a plethora of economic reports in the euro-area. Oil & gas issues are the worst performers across the pond, led by a steep decline in shares of BP Plc (BP $43) after its latest “top kill” method to stop the massive oil leak in the Gulf of Mexico failed.

The economic front is providing the bulk of the news in 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.

The UK FTSE 100 Index is 2.1% lower, France’s CAC-40 Index is off 2.3%, Germany’s DAX Index declining 1.7%, Italy’s FTSE MIB Index is dropping 3.5%, and Switzerland’s Swiss Market Index is down 1.0%.

Asia under pressure after disappointing Chinese data

Stocks in Asia were mostly lower, led by declines in China following separate reports that showed manufacturing activity slowed in May, causing Hong Kong’s Hang Seng Index to fall 1.4% and the Shanghai Composite Index to decline 0.9%. 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, adding to the pressure on shares in the region. Stocks in Japan were also lower, with the Nikkei 225 Index declining 0.6% amid the uneasiness from the data out of China, and on some uneasiness toward the nation’s political system as a report showed some of the Japanese population are calling for the Prime Minister to step down. Bloomberg reported that Japan’s Prime Minister said he will consider his political future and do “what’s best for the people of Japan.” Strength in the yen versus the dollar and the euro on the Chinese economic data and lingering concerns about the euro-area debt crisis added to the negative backdrop, as it dampens the outlook for revenues of export companies that rely heavily on sales outside Japan.

Meanwhile, Australia’s S&P/ASX 200 Index declined 0.4% after the Reserve Bank of Australia left its benchmark interest rate unchanged at 4.5%, matching expectations of economists. Also, the decline in Australia came amid a report that 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. The South Korean Kospi Index decreased 0.7%, Taiwan’s Taiex Index fell 1.2% and India’s BSE Sensex 30 Index dropped 2.2%, despite the better-than-expected manufacturing data.