Morning Market Update

Stocks Digest Yesterday’s Gains

After yesterday’s rally erased the S&P 500 Index’s loss for the year, stocks are declining today, as economic data was mixed, with wholesale inflation remaining tame, while housing starts and building permits fell more than expected but mortgage applications rose, and Treasuries are higher. In equity news, FedEx beat estimates but issued cautious guidance, Coca-Cola Enterprises raised its growth forecast, and overseas, Nokia lowered its device and profit guidance, while BP Plc is slightly lower after President Obama’s pledged to make the company “pay” for its “recklessness.” Later today, industrial production will be released and Obama is set to meet with BP management. European shares erased an early gain after the disappointing housing start data in the US, while Asian markets gained traction, building on yesterday’s gains in the US.

As of 8:47 a.m. ET, the September S&P 500 Index Globex future is 5 points below fair value, the Nasdaq 100 Index is 10 points below fair value, and the DJIA is 37 points below fair value. Crude oil is down $0.79 at $76.15 per barrel, and the Bloomberg gold spot price is up $2.50 at $1,236.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.4% at 86.34.

FedEx Corp (FDX $80) announced 4Q earnings of $1.33, one cent better than analyst estimates, as revenues rose 20% year-over-year (y/y) to $9.43 billion, while the Street forecast was for revenues of $9.06 billion. FedEx said that results in the quarter were due to sequential growth in volume and the ability to leverage its networks to take advantage of a recovering economy. However, shares are lower after the company issued guidance below consensus estimates, saying full-year EPS would be between $4.50-5.00, while the Street was at $5.05, and 1Q EPS would be $0.85-1.05, while analysts were expecting $1.03. In its outlook, FDX said that resumed growth in industrial production and global trade was increasing demand for its services, but that increases in compensation, pension and healthcare costs, as well as volume-related aircraft maintenance expenses would constrain profits.

Coca-Cola Enterprises (CCE $26), slated to be acquired by Dow component Coca-Cola Co. (KO $52), increased its forecast of 2010 profit growth before currency effects, to 10-12%, while the previous estimate was for 10% growth. The company said that at current rates, currency is expected to have a negative full year impact on earnings of approximately $0.10 per share. In commenting on the increased forecast, management said a strong first quarter and positive second quarter trends, which include inline expectations in North America and “a modestly improving outlook in Europe, give us increased confidence in the full year outlook,” while also crediting company specific strategies and initiatives.

Housing starts disappoint, inflation subdued, and production data due later

Housing starts for May fell more than expected, by 10.0%, to an annual rate of 574,000 units, from a downwardly revised 659,000 in April, and compared to economists’ expectations, which called for starts to come in at 648,000. Building permits also fell, by 5.9% m/m, to an annual rate of 574,000, while April was slightly upwardly revised to 610,000 from 606,000. The expectation was for permits to be 625,000 units.

Elsewhere, the Producer Price Index showed prices at the wholesale level dipped 0.3% month-over-month (m/m) in May, after decreasing 0.1% in April. The average economist forecast surveyed by Bloomberg called for prices to fall by 0.5%. Meanwhile, the core rate, which excludes food and energy, rose 0.2% m/m, more than the forecast of economists, which called for the core rate to increase 0.1%. On a year-over-year basis, headline producer prices were 5.3% higher, and the core rate was up 1.3%. Treasuries are higher, gaining ground on the inflation and housing data.

In other economic news, the US MBA Mortgage Application Index jumped 18% last week, after the index that can be quite volatile on a week-to-week basis, dropped 12.2% in the previous week. The increase came after refinancing rose to the highest level in a year and purchases increased for the first time in six weeks. The Purchase Index rose 7.3% after declining 5.7% the week prior to the lowest level since 1997, while the Refinance Index surged 21% after falling 14.3% the week prior, with refinance applicants rising to 74.8% of overall applications. The increase in the overall index came despite a 1 basis-point increase in the average 30-year mortgage rate to 4.82%, near the record low of 4.61% that was reached at the end of March 2009.

The other US economic release slated for today, at 9:15 a.m. EST, is the May reading of industrial production and capacity utilization, where economists are forecasting industrial production to climb 0.8%, matching a 0.8% increase last month, and capacity utilization is expected to come in at 74.5%, up from a previous reading of 73.7%.

European shares erase early gains

Stocks in Europe erased an early advance after the weak housing data in the US was released, ending a five-day winning streak after suffering steep losses in May. Shares of BP Plc (BP $37) are lower after US President Obama’s Oval Office speech, wherein he vowed to make BP “pay” for all damages caused by its “recklessness” in relation to the Gulf of Mexico oil spill. Obama is meeting with BP management at 10 a.m. EST today to discuss arrangements to ensure claims will be paid.

In other news, Nokia (NOK $9) is falling after lowering its forecast for devices below prior views, as well as decreasing its 2Q and full-year earnings guidance, citing lower average selling prices and volumes, while chipmaker Infineon Technology (IFNNY $6) is reportedly weighing options for its mobile-chip unit that could include a sale according to people familiar with the matter, while the company has not commented on the matter. Sweden’s Volvo AB (VOLVY $12), Europe’s second-largest truckmaker according to Bloomberg, is higher after reporting a 44% rise in truck deliveries in May. Cairn Energy (CRNCY $13) is higher after announcing it had received approval to drill its first two wells in the Disko West area of Greenland, CGG Veritas (CGV $21) is rising after announcing an agreement with Petrobras (PBR $38) to develop technology for oil drilling in offshore Brazil, and supermarket owner J Sainsbury Plc (JSAIY $19) is advancing after announcing a 1.1% y/y rise in same-store sales. European economic news was light, with the euro-zone CPI rising 0.1% in May, inline with estimates, and the UK reporting a larger-than-expected fall in jobless claims.

News on plans to reduce deficits continued today, with Spain’s Prime Minister announcing a labor-law overhaul, and France announcing pension reform that raises the retirement age to 62 from 60. However, concerns continued in the market, with spreads on the bonds of Spain rising despite the European Union denying a report that the IMF, EU and the US were putting together a 250 billion euro ($307 billion) credit line for Spain.

The UK FTSE 100 Index is flat, France’s CAC-40 Index is down 0.5%, Germany’s DAX Index is declining by 0.4%, Italy’s FTSE MIB Index is decreasing 1.5%,Spain’s IBEX 35 Index is down by 1.3%, Greece’s Athex Composite Index is falling 1.0%, while Portugal’s PSI 20 Index is up by 0.1%.

Asian stocks rise, build on gains in US markets yesterday

Stocks in Asia advanced, led by a 1.8% gain in the Nikkei 225 Index as the yen weakened relative to the dollar, boosting shares of exporters, and after the Japanese Trade Ministry said demand for services rose for the first time in three months. Shares of Nintendo (NTDOY $36) were higher after the company unveiled a new handheld gaming console that shows 3D images without glasses. Resources names were higher on optimism that a global recovery continues apace, albeit at a slower pace, contrary to the extreme pessimism that dominated recent trading, and Australia’s S&P/ASX 200 Index increased 1.2%, despite the Westpac Leading Index coming in unchanged for the month of April. Meanwhile, Hanjin Shipping, South Korea’s largest shipping line according to Bloomberg, added to the bulls’ case, after saying that they carried 32% more containers in May from a year earlier, and volume increased 14% month-over-month, and Korea’s Kospi Index advanced 0.9%. Elsewhere, Reliance Industries, India’s largest company by market value, said it plans to build at least one large power plant in India, marking the oil company’s entry into commercial electricity generation. Bloomberg is reporting that Reliance is considering bidding on a 4,000 megawatt coal-fired plant in Eastern India that may cost as much as $3.4 billion to build, quoting officials briefed on the plan, while the company did not comment on the details of a bid. India’s BSE Sensex 30 Index rose 0.3%. Markets in Hong Kong, China and Taiwan were closed for a holiday.