Morning Market Update

Euro Worries and Disappointing US Data Dampening Sentiment

The US equity markets are beginning the week in lackluster fashion, with stocks finding some pressure from festering eurozone debt concerns, and some unfavorable economic and earnings reports out of the US. The world’s second-largest home-improvement retailer posted lower-than-forecasted earnings and revenues, while a gauge of manufacturing activity in New York fell much more than economists expected. Treasuries are mostly lower in morning action amid the data, ahead of a report on homebuilder sentiment and a speech by Fed Chairman Ben Bernanke. In other earnings news, J.C. Penney Co. Inc posted 1Q profits that topped analysts’ forecasts. In M&A news, Nasdaq OMX Group Inc and IntercontinentalExchange Inc announced that they are withdrawing 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. Overseas, Asia finished lower, while European equities are finding some pressure in afternoon trading.

As of 8:51 a.m. ET, the June S&P 500 Index Globex future is 6 points below fair value, the Nasdaq 100 Index is 10 points below fair value, and the DJIA is 46 points below fair value. WTI crude oil is $1.09 higher at $$98.56 per barrel, and the Bloomberg gold spot price is down $1.77 at $1,493.38 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% to 75.65.

J.C. Penney Co. Inc. (JCP $38) reported 1Q earnings of $0.28 per share, above the $0.25 consensus estimate of analysts surveyed by Reuters, with revenues rising slightly, gaining 0.4% year-over-year (y/y) to $3.9 billion, compared to the $4.0 billion that the Street was looking for. The department store said 1Q same-store sales—sales at stores open at least a year—rose 3.8% y/y.

Lowes Companies Inc. (LOW $26) announced 1Q EPS of $0.34, two cents below the forecast by analysts, 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.

In M&A news, Nasdaq OMX Group Inc. (NDAQ $27) and IntercontinentalExchange Inc. (ICE $118) announced that they are withdrawing their joint proposal to acquire NYSE Euronext (NYX $41), 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 $77) are higher following the announcement as the German exchange has already agreed to a merger with NYX.

Elsewhere, a consortium of banks and pension funds in Canada announced that they are launching a rival bid C$3.6 billion ($3.7 billion) for Toronto securities exchange TMX Group Inc. (TMXGF $42), in an attempt to stymie a previous merger agreement between the Canadian exchange and London Stock Exchange Group Plc (LDNXF $13). 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 has not commented on the new proposal.

New York manufacturing activity decelerates, homebuilder sentiment due out later

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. However, the index remains in expansionary territory depicted by a reading above zero. The report is the first major piece of data looking at manufacturing conditions in May.

Treasuries are mostly lower in morning action following the data, with the yield on the 2-year note flat at 0.53%, while the yields on the 10-year note and the 30-year bond yield are gaining 1 bp to 3.18% and 4.32%, respectively.

Later this morning, the economic calendar will yield the release of the NAHB Housing Market Index, and the gauge of homebuilder sentiment is expected to improve from 16 in April to 17 in May, with any reading below 50 indicating more homebuilders feel conditions are poor.

Also, Fed Chairman Ben Bernanke will speak at a conference in Washington discussing innovation, research, and development pertaining to jobs and economic growth. There will be no Q&A session to follow and the conference is expected to start at 9:00 a.m. ET.

Today’s housing data will be the first report of a few on the housing sector as tomorrow brings housing starts, expected to rise 3.8% m/m in April to an annual rate of 570,000 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 be 0.5% higher m/m at 588,000 units after jumping 11.2% in March. Also, Thursday will bring the April existing home sales report, which reflects closings from contracts entered one to two months earlier, forecasted to rise 2.0% m/m to an annual rate of 5.2 million units.

Meanwhile, the other report due out this week that will likely garner some attention will be the Wednesday’s midday release of the minutes from the April Federal Open Market Committee (FOMC) meeting. The last meeting brought no changes on rate or the outlook, and was followed by the first-ever post-meeting press conference by the Chairman. With regard to the asset purchase program known as QE2, the Fed said that it would complete purchases by the end of the second quarter, and would regularly review its balance sheet. During the Q&A session at the press conference, Bernanke said that there wasn’t much the Fed could do about gas prices or the growth rates in emerging markets, and said that the policy regarding the US dollar was under the purview of the Treasury department.

Other major US reports for this week include: industrial production and capacity utilization, the MBA Mortgage Applications Index, weekly initial jobless claims, the Conference Board’s Index of Leading Indicators and the Philadelphia Fed’s Business Activity Index.

Europe under pressure as officials set to hold talks about the debt crisis

The European equity markets are broadly lower in afternoon action, led by financials on festering eurozone debt uneasiness as European leaders are expected to meet to discuss how to handle the fiscal problems facing the recently bailed out peripheral nations of Greece, Ireland, and Portugal. Moreover, the euro-area debt concerns are being exacerbated by the news over the weekend that International Monetary Fund (IMF)—a key entity in the eurozone bailout efforts—Director Dominique Strauss-Kahn was arrested and charged with attempted rape. However, shares of Deutsche Boerse are nicely higher after the announcement that Nasdaq OMX Group Inc and IntercontinentalExchange Inc are withdrawing their rival joint proposal to acquire NYSE Euronext. Also, shares of London Stock Exchange Group Plc are moving solidly to the upside after the announcement from a consortium of financial entities in Canada that they are launching a rival bid for Toronto securities exchange TMX Group Inc.

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

The UK FTSE 100 Index is down 0.7%, France’s CAC-40 Index is 1.3% lower, and Germany’s DAX Index is declining 1.2%. Elsewhere, Greece’s Athex Composite Index is falling 2.1%, Ireland’s Irish Overall Index is decreasing 0.9%, and Portugal’s PSI 20 Index is declining 0.3%.

Asia lower on euro-area debt concerns

Stocks in Asia finished lower on the heels of the solid declines in the US on Friday as uneasiness toward the euro-area debt crisis soured sentiment, along with uncertainty regarding that health of the global economy. Commodity issues found some pressure to weigh on equities in Australia, as the S&P/ASX 200 Index fell 1.3%, as key metals prices were lower and crude oil prices pulled back. Also, stocks in Australia were pressured by a report that showed home loans in the nation unexpectedly fell in March. Elsewhere, Japan’s Nikkei 225 Index declined 0.9% and South Korea’s Kospi Index decreased 0.8% amid the aforementioned uneasiness and after Goldman Sachs downgraded its outlook on stocks in these Asian nations. The decline in Japan came even as a report showed Japanese machine orders rose 2.9% m/m in March, compared to the 10% drop that economists forecasted. Finally, stocks in China were lower amid concerns about further monetary policy tightening in the region, exacerbated by Hong Kong raising its inflation and economic growth forecast following Friday’s stronger-than-expected 1Q GDP report. The Hong Kong Hang Seng Index fell 1.4% and the Shanghai Composite Index declined 0.8%.