Evening Market Update

Euro-area Debt Uneasiness Hampers Stocks Globally

With the domestic economic calendar dormant and little market-moving equity news as a catalyst, stocks ended lower on the first trading day of the week, courtesy of a plethora of negative news from overseas. Chinese manufacturing activity fell sharply, followed by reports out of the eurozone that showed manufacturing decelerated far more than economists’ forecasts. However, center stage belonged to global uneasiness surrounding the euro-area debt crisis, after Standard & Poor’s downgraded its outlook for Italy, Fitch lowered its outlook on Belgium, debt restructuring in Greece remained uncertain, and Spain’s ruling party was trounced in regional elections over the weekend. In light equity news, Campbell Soup bested the Street’s EPS estimates, but a decline in sales at its soups division pressures shares, the US Department of Justice filed a civil antitrust lawsuit to obstruct H&R Block’s proposed acquisition of TaxACT, while Sony warned of a full-year loss, citing the impact of the March earthquake and tsunami in Japan and the security breach of its online gaming network. Treasuries finished mostly higher.

The Dow Jones Industrial Average fell 131points (1.1%) to 12,381, the S&P 500 Index declined 16 points (1.2%) to 1,318, and the Nasdaq Composite lost 44 points (1.6%) to 2,759. In moderate volume, 868 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $2.40 to $97.70 per barrel, wholesale gasoline was unchanged at $2.94 per gallon, and the Bloomberg gold spot price rose $4.65 to $1,516.88 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.6% to 76.14.

Campbell Soup Co. (CPB $35) reported fiscal 3Q earnings of $0.57 per share, above the $0.52 consensus estimate of analysts surveyed by Reuters, with revenues increasing 1% year-over-year (y/y) to $1.8 billion, inline with what the Street was looking for. The food company said its baking and snacking sales rose 10% y/y, but shares came under pressure as the company’s US soup, sauces and beverages unit saw an 8% decline in sales. CPB said it sees full-year results at the high-end of its prior guidance.

H&R Block Inc. (HRB $16) finished lower after the US Department of Justice (DoJ) filed a civil antitrust lawsuit to block its proposed acquisition of TaxACT, a digital tax preparation software provider. The DoJ said the deal would “substantially lessen” competition in the US digital do-it-yourself tax preparation software market.

After the closing bell of Japanese trading, Sony Corp. (SNE $27) warned that it will post a loss for the full-year—which ended March 31—versus a previously forecasted profit, due to a large write-off stemming from the March earthquake and tsunami, coupled with the security breach of its PlayStation online network. However, SNE maintained its operating profit outlook, excluding items, and noted that the current year’s operating results will be similar to last year. The company is expected to report its full-year results on Thursday and shares were solidly lower in US trading.

US economic front quiet

The US  economic calendar was void of any major releases today, allowing the concerns out of Europe to garner the full spotlight. Treasuries finished mostly higher,, with the yield on the 2-year note flat at 0.53%, while the yield on the 10-year note was 2 bps lower at 3.13%, and the 30-year bond rate was down 3 bps to 4.27%.

Tomorrow, the economic calendar will give us a look at the April reading of new home sales, expected to remain unchanged at an annual rate of 300,000 units, after March’s rebound from the record low posted in February. New home sales are considered a timely indicator of conditions in the housing market as it is based on contract signings, but they represent a small portion of total sales in the sector, with existing homes sales making up the bulk of the activity. Last week’s data did little to evoke optimism that the key spring selling season is off to a positive start, with May homebuilder sentiment remaining well below a level depicting conditions are good, April building permits and housing starts falling more than expected, and existing home sales decreasing unexpectedly for April. Also, new home sales are likely to remain near record lows as they face intense competition from existing homes on the market, due to the flood of foreclosures and continued tight credit conditions.

The only other item on the domestic economic docket is the Richmond Fed Manufacturing Index, forecast to tick slightly lower to a level of 9 for May from 10 in April.

Anxiety over Europe escalates, manufacturing data also stymies sentiment

The euro-area debt crisis was front-and-center on the global stage, courtesy of festering worries about a possible restructuring of Greece’s debt following Friday’s rating downgrade by Fitch Ratings, while the troubled nation held a meeting to discuss fiscal austerity today. Moreover, the ratings downgrade on Greece was followed by Standard & Poor’s cutting its credit-outlook on Italy, due to economic growth concerns and “diminished” prospects for a reduction of government debt. S&P lowered its outlook for Italy from stable to negative, and said the rating has a one-in-three chance of being lowered within the next 24 months. Italy said in a statement that it will “intensify” structural changes in the economy and push ahead with measures to balance the budget by 2014, according to Bloomberg. Moreover, Fitch lowered its outlook on Belgium to negative late in the day, exacerbating the negative sentiment across the pond, and further pressuring the region’s markets. The move came as the ratings agency said a political stalemate in the country complicates the fiscal reform process, where the peripheral eurozone nation needs to cut its budget deficit to less than three percent of GDP by next year. Elsewhere, Spain’s ruling Socialists party suffered a severe defeat in local and regional elections, creating hurdles in its fiscal reform process.

Adding fuel to the fire, eurozone manufacturing activity slowed much more than economists had forecasted, as PMI Manufacturing data out of Germany—Europe’s largest economy—and France posted much slower-than-expected rates of expansion.

In Asia, a preliminary report on manufacturing activity in China suggested the slowest pace of expansion in ten months, exacerbating the negative sentiment in the region. The HSBC Flash China Manufacturing PMI report declined from 51.8 in April to 51.1 in May, the lowest reading since July 2010. Per Reuters, HSBC said manufacturers continued to reduce inventories amidst slowing new business flows.

Tomorrow’s international economic calendar will provide 1Q GDP and the Ifo Business Climate Index from Germany, a measure of business confidence in France, and industrial orders out of the eurozone.