Morning Market Update

Nearly Unchanged Despite Upbeat Earnings

The US equity markets have pared an early advance and are near the flatline in morning action, as some of wind has come out of the bulls’ sails, despite some better-than-forecasted earnings reports. Dell Inc announced that its enterprise solutions led a trouncing of the Street’s profit estimates for the computer maker and Target Corp said increased profitability at its credit card unit helped the retailer exceed analysts’ earnings expectations, while Deere & Co posted forecast-topping bottomline and revenue results on sales of large machinery. Treasuries are mixed after showing a muted reaction to the third-straight weekly increase in mortgage applications, ahead of the release of the minutes from the Federal Reserve’s most recent monetary policy meeting. Overseas, Asia was mostly higher amid some bargain hunting, while most major equity markets in Europe are being supported by a rebound in commodity-related stocks.

As of 8:50 a.m. ET, the June S&P 500 Index Globex future is 1 point below fair value, the Nasdaq 100 Index is 6 points below fair value, and the DJIA is 8 points below fair value. WTI crude oil is $1.00 higher at $97.91 per barrel, and the Bloomberg gold spot price is up $4.55 at $1,491.25 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.1% to 75.48.

Dell Inc. (DELL $16) reported 1Q EPS ex-items of $0.55, well above the $0.44 consensus estimate of analysts surveyed by Reuters, but revenues, which rose 1% year-over-year (y/y) to $15.0 billion, came in below the $15.4 billion that the Street had forecasted. The computer maker said its results were aided by its enterprise solutions and services business, led by an 11% increase in server revenue, while it saw improved profitability in end-user-computing, particularly its client desktop and laptop offerings. DELL increased its full-year operating profit outlook as it expects to benefit from stronger spending among state and local governments and education customers, a solid consumer back-to-school spending season, and above average seasonality from its small and medium business and consumer segments.

Target Corp. (TGT $51) announced 1Q earnings of $0.99 per share, topping the $0.94 that the Street was expecting, with revenues increasing 2.2% y/y to $15.9 billion, but just below analysts’ expectations of $16.0 billion. The retailer posted a 2.0% y/y increase in 1Q same-store sales—sales at stores open at least a year. TGT said its 1Q results were the result of stronger-than-expected profitability in its credit card segment, which offset the impact of weaker-than-anticipated sales in its retail segment.

Deere & Co. (DE $87) posted fiscal 2Q profits of $2.12 per share, above the $2.06 that analysts had projected, with revenues increasing 25% y/y to $8.9 billion, exceeding the $8.1 billion that the Street was forecasting. The farm and construction equipment maker said sales of large machinery, particularly in the US, Canada and Brazil, are continuing to support the company’s performance and construction equipment shipments are moving higher in spite of lingering weakness in the residential and commercial construction sectors. DE increased its full-year earnings outlook as markets for construction equipment in the US and farm machinery in Europe “are in the early stages of a recovery.”

Mortgage applications post another weekly gain, inside look at Fed meeting due out later

The MBA Mortgage Application Index increased by 7.8% last week—the third-straight monthly gain—as the Refinance Index rose by 13.2%, to more than offset a 3.2% decline in the Purchase Index, while the average 30-year mortgage rate declined by 7 basis points (bps) to 4.60%.

Treasuries are mixed following the data, with the yield on the 2-year note up 1 bp to 0.53% and the yield on the 10-year note 1 bp lower at 3.11%, while the 30-year bond rate is unchanged at 4.23%.

However, the highlight of today’s US economic calendar will be the afternoon release of the minutes from the April Federal Open Market Committee (FOMC) meeting. The last meeting brought no changes to the 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.

In another change in conjunction with press conferences after two-day meetings, the Fed issued its economic forecast after the meeting, instead of within the minutes. Similar to the reduced growth in the 1Q GDP report and moderating PMIs, the Fed reduced its expectation of economic growth, and also raised its inflation forecast, while positively reducing the unemployment rate projection.

Commodity issues rebounding to help offset disappointing data

The equity markets in Europe have pared some early gains and the major stock markets in the region are mostly higher, buoyed by strength in basic materials and oil & gas issues as commodity prices are rebounding somewhat following recent declines. The strength in resource-related issues are helping offset a report that showed eurozone construction output declined in March, and a separate release that revealed UK jobless claims unexpectedly increased in April, which added to the recent flare-up in concerns about a slowing global economy. Helping limit the damage to sentiment, shares of Land Securities Group Plc. (LSGOF $13) are surging after the
UK’s largest real estate investment trust, per Bloomberg, reported better-than-forecasted full-year earnings. The report is helping property issues move higher. In other economic news, the Bank of England (BoE) released the minutes from its early May monetary policy meeting, which showed policymakers remained split 6-3 on keeping the benchmark interest rate unchanged, with the three votes calling for an increase to the BoE’s interest rate.

The UK FTSE 100 Index and France’s CAC-40 Index are gaining 0.6%, while Germany’s DAX Index is rising 0.3%.

Asia mostly higher with South Korea leading the way

Stocks in Asia finished mostly higher as traders shrugged off recent global economic uneasiness, seeking out shares that had found pressure recently, led by a 1.6% rise in South Korea’s Kospi Index on strength in automakers and shipbuilders. Also, Japan’s Nikkei 225 Index posted a 1.0% advance amid some M&A speculation in the region and as Tokyo Electric Power Co. (TKECY $5) rose solidly after the nuclear power plant operator said it expects to cool the reactor that was damaged by the March earthquake and tsunami by as early as October. Moreover, shares of Renesas Electronics Corp. (RNECY $4) moved nicely higher to help the Japanese equity markets after The Nikkei news outlet reported that the chipmaker plans to resume operations at its production facility, which was damaged by the March natural disaster. The company did not comment on the report. Elsewhere, Australian stocks eked out a modest gain, as the S&P/ASX 200 Index rose 0.2%, despite a report that showed the nation’s consumer confidence deteriorated, and after paring gains following a downgrade of the long-term debt ratings of the nation’s largest banks by Moody’s Investors Service. However, India’s BSE Sensex 30 Index was one of the few losers in today’s session as it declined 0.3%. Finally, stocks in China moved higher, with the Hong Kong Hang Seng Index rising 0.5%, aided by a sharp gain in shares of SJM Holdings Ltd. (SJMHF $2) after the casino operator posted a surge in 1Q profits, while the Shanghai Composite Index increased 0.7%.