Morning Market Update

Stocks Leaking More Oil as Commodity Continue to Fall

The US equity markets are under pressure in morning action as commodity prices are extending yesterday’s declines, exacerbated by further monetary policy tightening in China, a disappointing outlook by Dow member Cisco Systems Inc, and a mixed bag of economic data. Treasuries are modestly higher, showing little reaction to retail sales that were mostly below expectations, but the previous month’s results were revised nicely higher, hotter-than-expected producer prices, and a smaller-than-forecasted drop in jobless. In other earnings news, Kohl’s Corp matched the Street’s expectations, but increased its guidance, while Symantec Corp posted better-than-expected results and issued favorable guidance. Later this morning, business inventories will be released and Fed Chairman Bernanke will testify in Washington. Overseas, Asia was broadly lower following the sell-off in the US yesterday, while the weakness in commodities is pressuring European action.



As of 8:50 a.m. ET, the June S&P 500 Index Globex future is 7 points below fair value, the Nasdaq 100 Index is 12 points below fair value, and the DJIA is 55 points below fair value. WTI crude oil is $2.19 lower at $96.02 per barrel, and the Bloomberg gold spot price is down $12.49 at $1,488.93 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.3% to 75.55.



Dow member Cisco Systems Inc. (CSCO $18) reported fiscal 3Q EPS ex-items of $0.42, above the $0.37 consensus estimate of analysts surveyed by Reuters, with revenues increasing 5% year-over-year (y/y) to $10.9 billion, roughly inline with the Street’s estimate. However, the networking company warned in a conference call with analysts that 4Q will “continue to show weakness,” but it is planning to cut $1 billion in annual costs by 1Q 2012, including reducing its global workforce. CSCO issued 4Q revenue and EPS guidance that came in below analysts’ forecasts.



Kohl’s Corp. (KSS $54) posted 1Q EPS of $0.73, inline with expectations on the Street, as revenues, which grew 3.1% y/y to $4.2 billion, also matched analysts’ projections. The retailer said same-store sales—sales at stores open at least a year—increased 1.3% y/y. KSS increased its full-year EPS outlook, while issuing 2Q EPS guidance that exceeded expectations, saying it believes that it will see “pent-up demand” for seasonal businesses in 2Q.



Symantec Corp. (SYMC $19) announced adjusted 4Q earnings of $0.38 per share, two cents above the Street’s expectations, with revenues rising 9% y/y to $1.7 billion, above the $1.6 billion that analysts expected. The internet security and storage company said it saw market share gains and growth in its backup, software-as-a-service, data loss prevention, and consumer segments. SYMC issued 1Q revenue guidance that topped the Street’s forecasts.



Retail sales mixed, producer prices rise, jobless claims fall, business inventories later



Advance retail sales (chart) for April rose 0.5% month-over-month (m/m), just below the 0.6% increase that was forecasted by economists surveyed by Bloomberg, but March’s 0.4% gain was revised to a 0.9% advance. April sales ex-autos increased 0.6%, matching expectations, and March’s 0.8% rise was revised favorably to a 1.2% gain. Sales ex-autos and gas gained 0.2% in April, versus the 0.5% increase that was anticipated, and its March figure was revised from a 0.6% increase to a 0.7% gain.



Elsewhere, the Producer Price Index showed prices at the wholesale level rose 0.8% m/m in April, after increasing by an unrevised 0.7% in March, above the forecast of economists, calling for a 0.6% increase. Also, the core rate, which excludes food and energy, increased 0.3% m/m, above forecasts of a 0.2% rise. On a year-over-year basis, headline producer prices were 6.8% higher, versus the 6.5% increase that was projected, and the core rate was up 2.1%, inline with expectations.



Also, weekly initial jobless claims fell by 44,000 to 434,000, versus last week's figure which was upwardly revised by 4,000 to 478,000, but above the decline to 430,000 that economists had expected. However, the four-week moving average, considered a smoother look at the trend in claims, rose by 4,500 to 436,750, and continuing claims increased by 5,000 to 3,756,000, above the forecast of economists, which called for continuing claims to come in at 3,700,000.



Treasuries are modestly higher, as the data had little impact on trading, with the yield on the 2-year note unchanged at 0.54%, while the yield on the 10-year note is 2 bps lower to 3.17%, and the 30-year bond yield is losing 1 bp to 4.30%.



Later today, the US economic calendar will yield the release of business inventories, forecasted to rise 0.9% m/m in March, after gaining 0.5% in February. Also, Federal Reserve Chairman Ben Bernanke will testify at a Senate Banking Committee hearing this morning.



Europe lower amid continued commodity weakness and disappointing data



The equity markets in Europe are under pressure in afternoon trading, led by weakness in oil & gas and basic materials as commodity prices are extending yesterday’s steep losses, exacerbated by some disappointing data across the pond. Eurozone industrial production unexpectedly fell, declining 0.2% m/m in March, compared to the 0.3% increase that economists expected, and the y/y rate also came in below forecasts. Moreover, UK manufacturing and industrial production in March rose at smaller-than-estimated amounts. In other economic news, France’s consumer prices rose at a smaller rate than forecasted m/m in April. However, the drop in oil prices is helping airline stocks buck the trend amid eased concerns about the impact on profitability of the industry of higher jet fuel costs. In other equity news, shares of German insurer Allianz (AZSEY $14) are solidly lower after the company posted a steep decline in profits on natural disaster claims in Asia.



The UK FTSE 100 Index is down 1.0%, while France’s CAC-40 Index and Germany’s DAX Index are falling 1.3%.



Asia finds pressure after commodity fueled sell-off in the US



Stocks in Asia finished broadly lower following the solid losses posted in the US yesterday as commodity prices fell sharply. Japan’s Nikkei 225 Index dropped 1.5% amid the broad-based declines in the region, despite a solid gain in shares of Toyota Motor Corp. (TM $81) after it announced that it will resume production that was halted by the March earthquake and tsunami earlier than estimated. Also, losses came even as Hitachi (HIT $56) posted a respectable upward move after it reported a sharp increase in profits. In economic news, Japan’s trade surplus narrowed by a larger amount than forecasted for March. After the closing bell in Japan, Nissan Motor Corp. (NSANY $19) reported profits that exceeded expectations and announced that it will return to normal production in October.



Elsewhere, Australia’s S&P/ASX 200 Index fell 1.8% amid the recent drop in commodities, and after a report showed the nation’s employment change unexpectedly fell in April, while South Korea’s Kospi Index dropped 2.0% to lead the decline ahead of tomorrow’s monetary policy meeting by the nation’s central bank, in which it expected to increase its benchmark interest rate by 25 bps to 3.25%. India’s BSE Sensex 30 Index declined 1.3% despite a report that showed the nation’s industrial production rose much more than expected, possibly fostering concerns that the central bank may need to increase interest rates further to try to fight inflation. Finally, stocks in China finished lower, with the Hong Kong Hang Seng Index decreasing 0.9% and the Shanghai Composite Index falling 1.4%. After the trading day was over in China, the government announced that it will increase the reserve requirement ratio for its banking sector—the amount of money banks need to set aside instead of returning it into the financial system—by another 50 bps as the nation tries to battle inflation.