Evening Market Update

Eking Out an Advance to Cap Off Upbeat Week

Stocks moved higher during the session on Friday, ending at the highs for the day, extending an advance for the week. After entering the week on sour sentiment, traders have pared back their bearish positions this week as the market moved closer to receiving more certainty, as earnings season begins next week, the European banking system stress test methodology was released this week, Asian central banks such as Australia and South Korea noted continued expectations of economic recovery, and US jobless claims came in better than expected. News today was relatively light, with an increase wholesale inventories the sole US economic report, while equity news included Google announcing a new web browsing license in China and smartphone technology companies receiving a lawsuit from private company NTP Inc. Elsewhere, Air Products and Chemicals Inc announced an increased offer for Airgas. Treasuries moved lower on the day as the equity markets posted an advance.

On Friday, the Dow Jones Industrial Average advanced 59 points (0.6%) to close at 10,198, the S&P 500 Index gained 8 points (0.7%) to finish at 1,078, and the Nasdaq Composite rose 21 points (1.0%) to 2,196. In light volume, 880 million shares were traded on the NYSE and 1.6 billion shares were traded on the Nasdaq. Crude oil rose $0.65 to $76.09 per barrel, wholesale gasoline added $0.02 to $2.07 per gallon, while the Bloomberg gold spot price gained $12.30 to $1,210.40 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was 0.3% higher at 83.98. For the week, including dividends, the DJIA rose 5.3%, the S&P 500 Index added 5.5%, and the Nasdaq Composite advanced 5.0%.

Google Inc. (GOOG $467) was higher after the company said its Chinese web browsing license has been renewed. The world's largest internet search engine said on its blog, that it looks "forward to continuing to provide web search and local products to our users in China," without providing any other details. GOOG warned earlier in the year that it may walk away from China in protest of censorship of its search results, and it had begun to redirect Chinese visitors to an uncensored website in Hong Kong. Last week, GOOG stopped redirecting users, signaling it may be willing to go back to providing web searching in China.

In related industry news, NTP Inc. announced that it has filed a lawsuit in a US District Court against Google Inc., Apple Inc. (AAPL $260), HTC Corp. (HTCXF $20), LG Electronics, Microsoft Corp. (MSFT $24) and Motorola Inc. (MOT $7) over patents related to the wireless delivery of email to cellphones. NTP sued and won a $600 million settlement over email technology from Blackberry maker Research in Motion (RIMM $53) in 2006. RIMM posted a solid gain on the day, possibly aided by the aforementioned news, and on a separate report from Reuters that RIMM is planning to open an applications store and consumer internet services in China. RIMM did not officially comment on the Reuters report. Shares of AAPL were higher, and MSFT and MOT fell.

In M&A news, Air Products and Chemicals Inc. (APD $70) announced that it has increased its offer to purchase all of the outstanding shares of Airgas Inc. (ARG $65) by $3.50 per share to $63.50 per share in cash. The revised offer is a 46% premium over the closing price of ARG the day before the initial offer and APD said the acquisition is expected to be accretive to its EPS immediately. ARG confirmed the sweetened offer and said it will review it to determine the course of action that it believes is in the best interests of the company and its stockholders. Shares of both firms were higher.

Inventories rise, Canada's hiring jumps, highlighting the North American economic front

Wholesale inventories for May increased 0.5% month-over-month (m/m), just above the 0.4% advance that economists surveyed by Bloomberg had forecasted, but April's 0.4% rise was revised to a 0.2% gain. Inventories of machinery increased 1.7% and computers were up 1.6%, while stockpiles of petroleum were 6.0% lower. Sales dipped 0.3% in May, led by declines in nondurable goods and farm product raw materials, offsetting increases in durable goods, computers, and metals and mineral-excluding petroleum. The inventory-to-sales ratio-the amount of time it would take to deplete inventories at the current sales pace-increased from 1.13 months to 1.14.

In other North American news, Canada reported that its net change in employment jumped by 93,200 in June, compared to the 20,000 increase that economists were anticipating, and the unemployment rate unexpectedly fell from 8.1% in May to 7.9% for June. This added to earlier favorable employment figures globally, including an earlier report from Australia, and Thursday's larger-than-forecasted drop in US weekly initial jobless claims, prompting some of the improvement in global economic sentiment.

Treasuries were lower as the equity market advanced, with the yield on the 2-year note gaining 2 bps at 0.63%, the yield on the 10-year note adding 3 bps to 3.06%, and the 30-year bond yield rising 3 bps to 4.04%.

Asian economic news buoys overseas markets

There was a plethora of European economic news, headlined by favorable industrial production reports in France, Italy and Sweden. Meanwhile, Germany's consumer prices were left unchanged at a 0.1% rate of growth on a month-over-month basis and a 0.9% increase year-over-year, as expected. Elsewhere, UK producer output prices unexpectedly fell, while a separate report showed the UK trade deficit widened in May.

However economic news from Asia provided the main boost to sentiment after a Chinese media reported that some Shanghai-based commercial banks have resumed providing loans for third-home purchases and have eased lending policies for second-home purchases, according to Bloomberg, which cited the Oriental Morning Post. However, Bloomberg said spokespeople from three Chinese lenders said in interviews that they are complying with a government order to freeze lending for third homes. However, the Chinese stock market is likely to see continued volatility until there is clarity on improved economic growth prospects and a reacceleration in construction activity.

Additionally, the South Korean central bank unexpectedly boosted its benchmark lending rate by 25 basis points to 2.25%, whereas economists had expected no change to rates. The move suggested confidence in the health of the economy and added to the optimistic global backdrop. Separately, producer prices in Korea remained at a 4.6% y/y rate in June.

Meanwhile, sentiment in Japan was cautious ahead of Sunday's Upper House election, as media reports suggested Japanese Prime Minister Kan and his Democratic Party of Japan may lose control of both Houses, potentially hampering the government's ability to implement legislation.

Signs of global sentiment shifting help bulls do the heavy lifting

Coming into the holiday-shortened week, the global psyches of traders remained frazzled amid China slowdown concerns, euro-area financial market fears, and the emergence of some disappointing US economic data. Given this backdrop, the broad-based advance in the global equity markets was impressive as the bulls were able to run despite a larger-than-forecasted decline in the ISM Non-Manufacturing Index and a mixed bag of same-store sales-sales at stores open at least a year-by US retailers, which saw Target Corp. (TGT $50) miss the Street's expectations. A favorable earnings outlook from US banking firm State Street Corp. (STT $37) and a larger-than-expected drop in US weekly initial jobless claims helped the market incubate some resilience, but the bulk of optimistic data was imported from overseas, with euro-area debt concerns easing and favorable Asian data.

The European banking sector was in focus, as optimism, ahead of the late-July release of the stress tests of the group, rose regarding whether the results will instill confidence in the sector's ability to attract capital and find sustainable functionality. The optimism carried the group even as some still remained skeptical about whether the stress test scenarios were stringent enough to promote the aforementioned sentiment toward the sector. Adding to the optimism toward the euro-area, Spain held a successful debt auction, and European Central Bank President Jean-Claude Trichet offered some soothing comments pertaining to the stress tests and the ability of the euro-zone economy to grow despite the impact of the ongoing debt crisis. The comments came after the ECB kept its benchmark interest rate unchanged at 1.0%, along with the Bank of England, which also kept its lending rate unchanged at 0.5%, as expected. Global economic sentiment also found some support from Asia, as Australia posted much better-than-expected employment statistics and the Reserve Bank of Australia offered upbeat comments regarding the health of the Asian economy. Also, South Korea's unexpected interest rate increase helped foster some optimism regarding the global economy, helping cap off a positive week for the global equity markets.

Health of the consumer, level of inflation and earnings in view next week

The week starts off with the unofficial beginning of the 2Q earnings season, as Dow component Alcoa (AA $11) releases earnings after the bell on Monday.

The economic calendar heats up Wednesday with advance retail sales, forecasted to fall 0.3% month-over-month (m/m) in June, after declining 1.2% in May, while sales ex-autos are estimated to be flat in June after decreasing 1.1% in May. Same-store sales results-sales at stores open at least a year-reported by retailers were mixed and marked by steeper than usual discounts. The retail sales report includes spending at supermarkets and gas stations.

Traders will be closely monitoring the Federal Reserve's release of the minutes from the June Federal Open Market Committee (FOMC) meeting mid-day Wednesday. There were no changes to interest rates at the meeting, but the Fed downgraded its assessment of the economy stating that financial market conditions were "less supportive" of economic growth, noting the debt crisis in Europe. Additionally, the Fed said that underlying inflation had trended lower and that bank lending had continued to contract. However, Kansas City Fed President Thomas Hoenig dissented for the fourth-straight meeting, stating that a "commitment" to keeping rates exceptionally low for an extended period could result in future imbalances and increase risks to longer-run macroeconomic and financial stability. While the Fed effectively expanded its balance sheet by re-opening dollar swap lines in response to the European debt crisis, Fed Governor Kevin Warsh said in a June speech that any further balance sheet expansion should be subject to strict scrutiny.

Thursday brings the Producer Price Index (PPI), expected to show prices at the wholesale level fell 0.1 m/m in June, on the heels of a 0.3% decrease in May, while the core rate, which excludes food and energy, is expected to rise a mere 0.1% after increasing 0.2% the prior month. On a year-over-year (y/y) basis, the PPI is expected to show a continued deceleration, to 3.1% in June versus 5.3% the prior month on a headline basis, and a 1.1% increase at the core level, down from a 1.3% increase in May. The release precedes Friday's report on the Consumer Price Index (CPI), forecasted to show a 0.1% m/m decrease, while ex-food and energy, it is expected to rise 0.1% m/m. The CPI is also expected to decelerate on a y/y basis, to 1.2% at the headline level and 0.9% y/y at the core level.

Rounding out the busy week is Thursday's reading on industrial production, expected to be flat in June after rising 1.3% in May, and capacity utilization, forecasted to come in at 74.2% in June after being downwardly revised to 74.1% in May.

Other releases on the US economic calendar include the import price index, the Empire Manufacturing Index, MBA Mortgage Applications, business inventories, initial jobless claims, the Philadelphia Fed's Business Activity Index, and the University of Michigan Consumer Sentiment Index.

The international economic calendar in Europe includes the German ZEW survey and PPI, euro-zone industrial production, CPI, and trade balance, UK final 1Q GDP, CPI, retail price index (RPI), house prices, consumer confidence, jobless claims, and retail sales.

Economic releases in Asia/Pacific next week include Japanese industrial production, capacity utilization, consumer confidence, machine tool orders, and department store sales, as well as the Australia's business and consumer confidence. China is set to release the majority of their monthly economic statistics, including its trade balance, housing prices, money supply, new loans, 2Q GDP, PPI, CPI, retail sales, industrial production and foreign direct investment.

In central bank action, the Bank of Japan will meet to discuss monetary policy.