Evening Market Update

Markets Extend Rally on Microsoft, Skype Deal

US equities finished higher on news that Dow member Microsoft will acquire Skype Technologies SA, signs of strength in the US economy and overseas, and eased Greek debt concerns. Wholesale inventories in the US were better than expected and sales rose solidly, while China’s trade surplus exceeded forecasts. In earnings news, Activision Blizzard reported better-than-expected profit and revenues, Dean Foods bested the Street’s forecasts despite reporting higher dairy costs, while Wendy’s/Arby’s Group lowered its full-year earnings outlook citing commodity price pressures. Elsewhere, General Motors announced a hiring spree. Treasuries ended lower amid the strength in stocks and following reports that showed import prices were hotter than forecasted and small business optimism deteriorated by a larger amount than expected. 

The Dow Jones Industrial Average gained 76 points (0.6%) to 12,760, the S&P 500 Index rose 11 points (0.8%) to 1,357, and the Nasdaq Composite advanced 29 points (1.0%) to 2,872. In moderate volume, 835 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.33 to $103.88 per barrel, wholesale gasoline jumped $0.10 to $3.38 per gallon, while the Bloomberg gold spot price added $2.43 to $1,516.16 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.1% lower at 74.57.

In M&A news, Dow member Microsoft Corp. (MSFT $26) announced that it has reached an agreement to acquire internet phone company Skype Technologies SA for $8.5 billion in cash, including debt. MSFT said Skype will support its devices like Xbox and Kinect, Windows Phone and other Windows devices, while Skype users will be connected to Lync, Outlook, Xbox Live and other communities. MSFT traded lower.

Activision Blizzard Inc. (ATVI $12) reported 1Q earnings ex-items of $0.13 per share, above the $0.08 that analysts surveyed by Reuters had expected, with revenues increasing 5.7% year-over-year (y/y) to $755 million, versus the $668 million that the Street had expected. The video game publisher said its results were driven by digital sales and the continued strength of its Call of Duty and World of Warcraft franchises. The company increased its full-year guidance. Despite the results, ATVI was mostly unchanged, as the company expressed some concern about the impact on customer satisfaction of its video games from the outage of Sony Corp’s (SNE $29) PlayStation Network after it was attacked by hackers and compromised customer information, per the Wall Street Journal. However, ATVI said the outage, which has been in effect since April 20, has not yet had a material financial impact on the company, but SNE has yet to resume access to its online gaming network.

Dean Foods Co. (DF $12) announced 1Q EPS of $0.14, compared to the $0.06 that analysts had estimated, as revenues rose 3% y/y to $3.05 billion, versus the $3.07 billion that the Street had anticipated. The company said revenues were aided by strong sales growth at its WhiteWave-Alpro segment and the pass-through of higher overall dairy commodity costs that were partially offset by soft volumes at its Fresh Dairy Direct-Morningstar business. Looking ahead, DF said volumes across the conventional milk industry are expected to “remain soft” over the coming quarters and it has stepped up its agenda to reduce costs. Also, it is focused on pricing to offset inflation through efficient pricing mechanisms. DF was sharply higher.

Wendy’s/Arby’s Group Inc. (WEN $5) erased early losses and was higher despite the fast-food chain posting 1Q adjusted earnings of $0.01 per share, below the $0.02 that analysts were expecting, and lowering its full-year earnings outlook, due to “significantly higher commodity cost expectations.” WEN did report 1Q revenues that exceeded expectations, with North American same-store sales—sales at stores open at least a year—at its Arby’s unit growing 5.5% y/y, while saying it expects strong sales growth at its Wendy’s restaurants for the remainder of the year.

Elsewhere, General Motors Co. (GM $32) said that it plans to add or keep more than 4,000 jobs in eight states, as the automaker looks to gain market share amid an industry that is in the midst of change due to higher fuel prices and the Japanese earthquake. Company officials said the new jobs will first go to a pool of 2,000 workers that were laid off, adding that those workers should be back on the job some time this year. GM closed higher.

Import prices and wholesale inventories rose, while small business optimism declines

The Import Price Index rose 2.2% month-over-month (m/m) for April, compared to the expectation of economists surveyed by Bloomberg, which called for the index to increase by 1.8%. Year-over-year, import prices are higher by 11.1%, versus the 10.4% forecast of economists.

Elsewhere, wholesale inventories rose slightly ahead of forecasts, increasing 1.1% m/m in March, compared to the 1.0% increase that was forecasted by economists, while February’s 1.0% gain was unrevised. Also, sales rose 2.9%, with petroleum and construction materials leading the way. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—decreased to 1.13 in March from February’s 1.15 rate.

In other economic news, the NFIB Small Business Optimism Index declined by a larger amount than expected, decreasing from 91.9 in March to 91.2 in April, compared to the expectation of economists, which called for the index to decline to 91.8. The decrease came as the number of firms reporting expectations of higher sales dipped, along with plans to increase capital spending, while those planning to increase inventory declined into the red and expectations of a better economy fell further into negative territory. The declines in the above components offset a gain in expectations of higher selling prices, while plans to hire remained unchanged.

Treasuries were lower amid the gains in the equity markets and following the data, with the yield on the 2-year note 5 bps higher at 0.60%, the yield on the 10-year note up 4 bps to 3.21%, and the 30-year bond yield was 3 bps higher at 4.34%.

Greek debt worries ease, China’s trade widens

Sentiment overseas was mostly positive after fears of a debt restructuring in Greece eased, amid talk that the debt-laden nation may receive new aid from the European Union. However, a Greek official told Reuters that Greece is not holding discussions on any new aid package. As well, Greece conducted a short-term debt auction, but the interest rate it had to pay to raise capital moved higher compared to its previous auction in April.

However, economic news across the pond was less than favorable on disappointing manufacturing data in the region, with France reporting that its manufacturing and industrial production unexpectedly fell in March, while growth in Italian industrial production rose at a smaller-than-estimated pace. On the positive side, a read on UK home prices unexpectedly improved.

In Asia, trading was lighter than usual with markets in Hong Kong and South Korea closed for holidays. But, the mood was mostly positive after China reported that its trade surplus widened by a much larger amount than expected, fueled by the nation’s exports outpacing imports in April. As well, Australia’s trade balance swung to a surplus during March.

Tomorrow, the US economic calendar will yield the trade balance, where economists are forecasting the deficit to widen to $47.0 billion in March from $45.8 billion in February, and MBA Mortgage Applications will also be reported. Internationally, China is set to provide reads on inflation, industrial production, fixed asset investment, and retail sales, Japan will report its leading index, and South Korea will post its unemployment rate. In Europe, Germany reports CPI, and the UK will release its trade balance.