Morning Market Update

Modestly Lower Following ADP Jobs Data, Earnings and M&A

The US equity markets have pared losses and are modestly below the flatline amid some M&A activity and some better-than-expected earnings reports, while the ADP reported that although private sector jobs were softer than expected, payrolls have risen above 150,000 for five-straight months. Early losses came from declines in the international markets on weakness in commodities and as traders focused on the headwinds facing the global economy. In earnings news, Comcast Corp and Time Warner Inc both exceeded analysts’ earnings projections. In M&A news, Applied Materials Inc agreed to acquire Varian Semiconductor Equipment Associates Inc for about $4.9 billion, while ConAgra Foods Inc reported that it has made a proposal to acquire Ralcorp Holdings Inc for about $4.9 billion, including the assumption of debt. Treasuries are mixed after the jobs data and a report that showed mortgage applications rose, but a read on service-sector activity is due out later this morning. Overseas, Asia was lower, while the UK markets are leading a decline in Europe.

As of 8:52 a.m. ET, the June S&P 500 Index Globex future is 1 point below fair value, the Nasdaq 100 Index is at fair value, and the DJIA is 6 points below fair value. WTI crude oil is $0.05 lower at $111.00 per barrel, and the Bloomberg gold spot price is up $5.22 at $1,541.12 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.4% to 72.84.

Comcast Corp. (CMCSA $27) reported 1Q earnings ex-items of $0.36 per share, two cents above the consensus estimate of analysts surveyed by Reuters, but revenues, although rising 32% year-over-year (y/y) to $12.1 billion, came in below the $12.8 billion that the Street had anticipated. The company said its cable unit saw continued momentum in both its residential and business services operations, while it had “particularly strong” growth in high-speed internet, consistent growth in voice services, and improved video customer results.

Time Warner Inc. (TWX $38) posted 1Q EPS ex-items of $0.58, two pennies above the Street’s estimate, with revenues increasing 6% y/y to $6.7 billion, compared to the $6.4 billion that analysts had expected. TWX said its advertising revenues rose 20% y/y, led by a jump at its Turner Broadcasting unit from the NCAA Division 1 men’s basketball championship events, as well as strong domestic pricing and international expansion. The company reaffirmed its full-year EPS outlook.

In M&A news, Applied Materials Inc. (AMAT $15) announced that it signed a definitive agreement to acquire Varian Semiconductor Equipment Associates Inc. (VSEA $41) for $63 per share in cash for a total price of about $4.9 billion. AMAT said the transaction is expected to be accretive to its adjusted earnings in the first year.

Moreover, ConAgra Foods Inc. (CAG $25) reported that it has made a proposal to acquire the parent of the Post cereal brand, Ralcorp Holdings Inc. (RAH $83) for $86 per share in cash, or about $4.9 billion, including the assumption of $2.5 billion in debt. CAG said it estimates the proposed combination will result in about $250 million in annual cost savings by the third year after the deal closes, primarily from supply chain efficiencies.

ADP jobs rise less than expected, mortgage apps gain, while a service sector read later

The ADP Employment Change Report showed private sector payrolls rose by 179,000 jobs in April, below the forecast of economists surveyed by Bloomberg, which called for a 198,000 increase, but March’s 201,000 job gain was revised to a rise of 207,000 jobs. The release does not include government hiring and firing and comes ahead of Friday’s broader nonfarm payrolls report, where economists expect an increase of 185,000 jobs in April, after posting a 216,000 increase in March (economic calendar). Excluding government hiring, April private sector payrolls are expected to increase 200,000, after expanding by 230,000 in March.

In other economic news, the MBA Mortgage Application Index increased by 4.0% last week, after the index that can be quite volatile on a week-to-week basis, fell by 5.6% in the previous week. The gain came as the Refinance Index rose 6.0%, while the Purchase Index posted a 0.3% increase, and the average 30-year mortgage rate declined by 4 basis points (bps) to 4.76%.

Treasuries are mixed after the employment data, with the yield on the 2-year note up 2 bps to 0.62% and the yield on the 10-year note 1 bp higher at 3.25%, while the 30-year bond is 1 bp lower at 4.34%.

Later this morning, the US economic calendar will bring a look at service-sector activity for April, in the form of the ISM Non-Manufacturing Index, expected to rise slightly from March’s smaller-than-expected reading of 57.3 to 57.5, continuing to show expansion denoted by a reading above 50. While services are relatively less-sensitive to rising commodity and food prices, the inflation component of today’s report should garner some attention as traders try to gauge whether broader inflation is taking hold. However, the employment component will likely command the lion’s share of attention ahead of Friday’s jobs report.

Europe lower on weakness in mining and energy stocks

The equity markets in Europe are lower in afternoon action, led by solid losses in mining and oil & gas stocks as global economic concerns are resurfacing, with traders focused on the fiscal problems facing the US, the ongoing European debt crisis, and the prospect of further policy tightening in China. Meanwhile, economic data across the pond is exacerbating sentiment, with reports on April service-sector activity in Italy, France, and Germany—Europe’s largest economy—all showing smaller-than-forecasted expansion, resulting in the euro-zone services report growing at a rate that was below economists’ expectations. Also, UK stocks are leading the decline in the region, after it reported a much larger-than-anticipated deceleration in construction activity, an unexpected decline in home prices, and mortgage approvals that were below projections. However, retailers are showing some resilience in the face of a report that showed euro-zone retail sales fell much more than estimated in March, aided by a steep gain in shares of Next Plc. (NXGPY $16) after the fashion retailer raised its guidance and reported 1Q sales that topped analysts’ expectations. In other equity news, BMW (BAMXY $31) reported better-than-expected results, and German industrial conglomerate Siemens (SI $144) boosted its outlook.

The UK FTSE 100 Index is down 0.9%, France’s CAC-40 Index is 0.2% lower, Germany’s DAX Index is declining 0.3%, and Italy’s FTSE MIB Index is decreasing 0.3%.

Asia finds pressure as commodity issues slide

Stocks in Asia finished lower on the heels of a pullback in commodity prices and a decline in the US yesterday as several disappointing earnings reports weighed on sentiment. Mining and energy-related equities paced the decline amid the pressure on commodity prices, with Australia’s S&P/ASX 200 Index falling 0.9%. Also, concerns about the impact of the recent rise in the Australian dollar on the nation’s trade contributed to the decline, as well as banking issues after Westpac Banking Corp. (WBK $134) moved solidly lower as the company reported first-half net profits that missed analysts’ forecasts. However, stocks in China paced the broad-based decline in Asia, with the Hong Kong Hang Seng Index dropping 1.4% and the Shanghai Composite Index falling 2.3% as the uneasy sentiment was exacerbated by concerns over further monetary policy tightening after the nation’s central bank reiterated that controlling inflation was its top priority, per Bloomberg. Elsewhere, South Korea’s Kospi Index declined 0.9% with technology issues also finding pressure, along with shipbuilding issues. The downward move in the region may have been amplified by lighter-than-usual volume as Japanese markets remained closed in relation to the Golden Week holiday celebration.