Morning Market Update

Euro Debt Fears and China Policy Tightening Stymie Sentiment

The US equity markets are lower in morning action of a holiday-shortened week, on the heels of a solid decline in European markets on debt and interest rate hike concerns, and on the heels of China’s fourth increase in its bank reserve requirement ratio this year, which caused uneven action in Asia. Treasuries are higher in morning action amid the decline in stocks and ahead of a report on homebuilder sentiment. Meanwhile, earnings reports are ramping up, with Citigroup Inc topping the Street’s earnings expectations, but its revenues were lower than forecasted, while Eli Lilly & Co exceeded analysts’ revenue and profit projections. In other equity news, Community Health Systems Inc changed its $3.3 billion bid to acquire Tenet Healthcare Corp to an all-cash offer. Finally, crude oil prices are moving lower after OPEC said the market is oversupplied, and as Saudi Arabia cut its output.

As of 8:47 a.m. ET, the June S&P 500 Index Globex future is 4 points below fair value, the Nasdaq 100 Index is 5 points below fair value, and the DJIA is 46 points below fair value. WTI crude oil is $1.41 lower at $108.23 per barrel, and the Bloomberg gold spot price is down $4.93 at $1,481.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.7% at 75.33.

Citigroup Inc. (C $4) reported 1Q EPS of $0.10, one penny above the consensus estimate of analysts surveyed by Reuters, but revenues declined 22% year-over-year (y/y) to $19.7 billion, compared to the $20.5 billion that the Street forecasted. The company said net credit losses declined 25% y/y—having fallen for seven-straight quarters—and it released $3.3 billion in loan-loss reserves.

Elsewhere, Eli Lilly & Co. (LLY $36) reported 1Q EPS ex-items of $1.24, above the $1.17 that analysts anticipated, with revenues increasing 6% y/y to $5.8 billion, exceeding the $5.7 billion that the Street was looking for. The drugmaker said growth in international markets and the strong performance of Cymbalta, Alimta and its animal health business drove revenue growth, despite a significant decline in Gemzar sales due to generic competition.

In M&A news, Community Health Systems Inc. (CYH $32) announced that it is now offering $6.00 per share in cash, or about $3.3 billion, to acquire all outstanding shares of Tenet Healthcare Corp. (THC $7). CYH had originally offered $5.00 per share in cash and $1.00 per share in CYH common stock. CYH said converting its offer to all cash underscores its commitment to completing this transaction and renders THC’s irresponsible and inaccurate lawsuit irrelevant to its offer. Last week, THC filed a lawsuit against CYH, accusing the hospital operator of overbilling Medicare, and CYH said it is confident that its business practices are appropriate and it will respond in detail to THC’s claims in due course.

Housing data to headline the economic calendar in a holiday-shortened week

Treasuries are higher in morning action amid the decline in the equity markets and ahead of a report on homebuilder sentiment, with the yield on the 2-year note flat at 0.69%, while the yields on the 10-year note and the 30-year bond yield are decreasing 3 bps to 3.38% and 4.44%, respectively.

Later this morning, the US  economic calendar will yield the release of the NAHB Housing Market Index, forecasted to remain at 17 in April, with any reading below 50 indicating more homebuilders feel conditions are poor.

This week will be largely focused on the housing market, with tomorrow bringing the releases of housing starts, expected to rise 8.6% month-over-month (m/m) in March to an annual rate of 520,000 units, and building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, forecasted to increase a modest 1.1% m/m to 540,000 units. Meanwhile, Wednesday will bring the March existing home sales report, which reflects closings from contracts entered one to two months earlier, forecasted to rise 2.5% m/m to an annual rate of 5.0 million units.

Other releases on this week’s US economic calendar include: the MBA Mortgage Applications Index, weekly initial jobless claims, the Philadelphia Fed’s Business Activity Index, and the Conference Board’s Index of Leading Indicators. Also, US markets will be closed on Friday in observance of Good Friday.

Europe under pressure on debt and interest rate hike concerns

The equity markets in Europe are solidly lower in afternoon action, with financials finding pressure to pace the downward move. Sentiment remains soured by the prospect of further interest rate hikes by the European Central Bank (ECB) and continued uncertainty regarding a possible debt restructuring by troubled peripheral euro-area nation Greece. Comments over the weekend are fostering some of the interest rate uneasiness, with an Austrian ECB council member saying that expectations of 50 basis points in additional increases to the ECB’s benchmark interest rate are “well-founded,” and a Belgium member saying monetary “conditions are too accommodative,” per Bloomberg. Meanwhile, debt concerns remain as the Wall Street Journal reported that the International Monetary Fund (IMF) sees Greece’s debt as unsustainable and the government should consider restructuring as early as next year, according to people familiar with the matter. However, Greece’s finance minister said the nation has no plan for debt restructuring, according to Bloomberg. In equity news, shares of Synthes Inc. are solidly higher after the Swiss medical technology firm confirmed that it is in talks with Dow member Johnson & Johnson (JNJ $61) about a possible takeover that could reach nearly $20 billion. Synthes Inc said, “No assurances can be given as to whether, when or on what terms any possible transaction might occur.” In economic news, a read on UK home prices increased in April.

The UK FTSE 100 Index is dropping 0.9%, France’s CAC-40 Index is declining 1.3%, Germany’s DAX Index is decreasing 0.9%, and Greece’s Athex Composite Index is falling 1.3%.

Asia mixed as China raises reserve requirement

Stocks in Asia finished mixed on the heels of the announcement that China will raise its reserve requirement ratio—the amount of cash banks have to keep in reserve instead deploying it into the financial system—for the fourth time this year. The ratio will be lifted by 0.5% to 20.5% for the nation’s largest banks, as China tries to limit the liquidity in the financial system to attempt to cool inflation and the formation of asset bubbles. China’s central bank governor said monetary tightening will continue for “some time,” and he said he sees no “absolute” limit on how high reserve requirements can go, per Bloomberg. The nation also raised its benchmark interest rates earlier this month for the fourth time since that financial crisis. The equity markets in China finished mixed following the announcement, with the Shanghai Composite Index rising 0.2% and the Hong Kong Hang Seng Index dropping 0.7%. Also, stocks in India finished solidly lower, with the BSE Sensex 30 Index falling 1.5%, led by another steep decline in shares of Infosys Technology Ltd. (INFY $63) following last week’s disappointing earnings and guidance. Elsewhere, Japan’s Nikkei 225 Index declined 0.4% and South Korea’s Kospi Index decreased 0.1%, while Australia’s S&P/ASX 200 Index rose 0.2%.