Evening Market Update

Stocks Sour on Weak Data, European Debt Anxiety

US equities finished lower to start the trading week as festering eurozone debt concerns and some disappointing economic and earnings reports out of the US hampered sentiment. Technology issues led the decline, along with weakness in commodity prices. A gauge of manufacturing activity in the New York region fell well below what economists were expecting, while homebuilder sentiment remained unchanged at a depressed level. On the equity front, J.C. Penney Co. posted profits that beat analysts’ forecasts, but revenues missed, while Lowes Companies fell short of both earnings and revenue forecasts. In M&A news, Nasdaq OMX Group and IntercontinentalExchange said that they will withdraw their joint proposal to acquire NYSE Euronext, while a consortium of banks and pension funds in Canada announced that they are launching a rival bid for Toronto securities exchange operator TMX Group Inc. Treasuries finished higher.

The Dow Jones Industrial Average fell 47 points (0.4%) to 12,548, the S&P 500 Index lost 8 points (0.6%) to 1,329, and the Nasdaq Composite declined 46 points (1.7%) to 2,782. In moderate volume, 907 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil closed $2.28 lower at $97.37 per barrel, wholesale gasoline tumbled $0.14 to $2.93 per gallon, while the Bloomberg gold spot price fell $2.10 to $1,491.50 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.3% to 75.51.

J.C. Penney Co. Inc. (JCP $37) reported 1Q earnings of $0.28 per share, above the $0.25 consensus estimate of analysts surveyed by Reuters, with revenues rising 0.4% year-over-year (y/y) to $3.9 billion, compared to the $4.0 billion that the Street was looking for. Also, the department store said 1Q same-store sales—sales at stores open at least a year—rose 3.8% y/y, on strong gains in both men’s and women’s apparel businesses, while the steps to manage expenses also aided bottom-line results. JCP raised its full-year EPS outlook. Shares gave up an early gain and finished lower, possibly on concerns that the recent surge in food and energy prices could hurt future profitability.

Lowes Companies Inc. (LOW $25) announced 1Q EPS of $0.34, two cents short of analysts’ forecasts, with revenues decreasing 1.6% y/y to $12.2 billion, below the $12.5 billion that the Street expected. 1Q same-store sales at the world’s second-largest home improvement retailer declined 3.3% y/y. The company said its sales were lower than expected as it faced ongoing economic pressures, unfavorable weather conditions and tough comparisons to last year’s government stimulus programs. LOW lowered its full-year guidance to a level that was below analysts’ estimates. LOW traded lower.

In M&A news, Nasdaq OMX Group Inc. (NDAQ $26) and IntercontinentalExchange Inc. (ICE $2 announced that they are withdrawing their joint proposal to acquire NYSE Euronext (NYX $36), following discussions with the Antitrust Division of the US Department of Justice. NDAQ said the decision to withdraw the offer came as it “became clear that we would not be successful in securing regulatory approval.” Shares of Deutsche Boerse (DBOEF $80) finished nicely higher in Europe following the announcement as the German exchange has already agreed to a merger with NYX. Shares of NDAQ lost ground and NYX was sharply lower, while ICE finished solidly higher.

Elsewhere, a consortium of banks and pension funds in Canada announced that they are launching a rival bid of C$3.6 billion ($3.7 billion) for Toronto securities exchange TMX Group Inc. (TMXGF $45), in an attempt to stymie a previous merger agreement between the Canadian exchange and London Stock Exchange Group Plc (LDNXF $14). The Canadian group said its deal will “secure the future growth and ongoing integrity of the Canadian capital markets.” LDNXF said it remains committed to its bid for TMXGF, which said it will evaluate the new offer, but it will continue to pursue the approval for its merger with LDNXF, per the Wall Street Journal. Both companies finished in the green.

New York manufacturing activity decelerates, homebuilder sentiment unchanged

The Empire Manufacturing Index, a measure of manufacturing in the New York region, slowed in May to a level of 11.90, compared to the estimates of economists surveyed by Bloomberg, which expected a decrease to 19.55, from the previous month’s level of 21.70. The larger-than-forecasted decline came as new orders and shipments slowed, offsetting gains in employment, inventories, and unfilled orders. However, the index remains in expansionary territory depicted by a reading above zero. Also, the report showed the prices paid component rose by more than 12 points to 69.89, exacerbating concerns about inflation. The report is the first major piece of data looking at manufacturing conditions in May, and Thursday gives us a look at activity in the Mid-Atlantic region in the form of the Philadelphia Fed Manufacturing Index, forecasted to improve from 18.5 in April to 20.0 in May.

Meanwhile, the  NAHB Housing Market Index, a gauge of homebuilder sentiment, remained unchanged at 16 in May—the sixth month out of the last seven that it has posted this level—with any reading below 50 indicating more respondents feel conditions are poor. The index remained unchanged as the future sales component declined to offset improvements in present sales and prospective buyers’ traffic components of the report.

Treasuries ended modestly higher following the data. The yield on the 2-year note was down 1 bp to 0.53%, the yield on the 10-year note lost 3 bp to 3.15%, and the 30-year bond yield was 3 bps lower at 4.28%.

European debt leaders approve Portugal bailout

Festering debt uneasiness hampered sentiment overseas as European leaders began meetings to discuss how to handle the fiscal problems facing the recently bailed out peripheral nations of Greece, Ireland, and Portugal. During the meetings, and after the close of European markets, the finance ministers approved Portugal’s 78 billion euro ($110.8 billion) rescue package in a unanimous vote. The two bailout funds, the European Financial Stability Facility (EFSF) and the European Financial Stabilization Mechanism (EFSM) will each front one-third of the package, with the International Monetary Fund (IMF) covering the remaining part. The finance officials dubbed Portugal’s austerity measures as “ambitious but credible.” However the gathering was clouded by news of the weekend arrest of IMF Managing Director Dominique Strauss-Kahn on charges of attempted rape. Strauss-Kahn, who was expected to be a leading candidate for the presidency of France, was arraigned today and was denied bail.

In economic news across the pond, eurozone core consumer prices—excluding food and energy—came in hotter than expected in April, while the eurozone trade balance swung back to a surplus. Elsewhere, a read on UK home prices rose for May.

In Asia, the anxiety toward the euro-area debt crisis also soured sentiment, along with uncertainty regarding the health of the global economy. Australia reported that home loans in the nation unexpectedly fell in March, while Goldman Sachs downgraded its outlook on stocks in the Asian nations of Japan and South Korea. As well, monetary policy tightening concerns were exacerbated by Hong Kong raising its inflation and economic growth forecast following Friday’s stronger-than-expected 1Q GDP report out of the nation. On the plus side, Japanese machine orders rose 2.9% m/m in March, compared to the 10% drop that economists forecasted.

In economic news out of the US’ neighbor to the north, Canada reported a 1.9% m/m increase in manufacturing shipments during March, above economists’ forecasts of a 1.7% rise and following a revised 1.8% decline in February.

Readings on housing and industrial production out tomorrow

Tomorrow’s US economic calendar begins with housing starts, expected to rise 3.6% m/m in April to an annual rate of 569,000 units after rising 7.2% in March, while building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, are forecasted to increase 0.9% m/m to 590,000 units after jumping 11.2% in March.

Later, just before the market open, the industrial production report will be released, expected to show production gained 0.4% m/m in April after rising 0.8% in March, while capacity utilization is forecasted to increase to 77.6% from 77.4%.

International releases include Japan’s machine tool orders, UK CPI and retail price index, the German Zew Economic Sentiment Survey, Chinese foreign direct investment, and the Reserve Bank of Australia releases the minutes from its last monetary policy meeting.