Evening Market Update

Conviction Tested Amid Mixed Developments

After rising out of the gate on Friday, stocks lost some luster into the close, finishing mixed. While a softened stance from Germany regarding funding for Greece, and hopes of a quick resolution buoyed sentiment, there remains uneasiness regarding the eurozone debt crisis and quadruple witching, the simultaneous expiration of options and futures on indexes and stocks, likely added to the moves in late-day trading. US economic news also provided a varied picture, with a rebound in the Leading Index offsetting a decline in consumer sentiment, and Treasuries were mixed. In equity news, Canada’s Research in Motion Ltd plunged after the maker of BlackBerry smartphones issued a disappointing forecast, and shares of credit agency firms fell on a report of a probe by the SEC. In M&A news, Capital One Financial Corp confirmed the purchase of ING Groep NV’s online banking business in the US for $9 billion and BJ’s Wholesale Club Inc received a buyout offer.

Friday, the Dow Jones Industrial Average gained 43 points (0.4%) to 12,005 and the S&P 500 Index rose 4 points (0.3%) to 1,272, while the Nasdaq Composite fell 7 points (0.3%) to 2,616. In heavy options expiration-related volume, 1.6 billion shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.94 to $93.01 per barrel, wholesale gasoline was unchanged at $2.95 per gallon, and the Bloomberg gold spot price rose $8.85 to $1,538.43 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was 0.7% lower at 75.00. For the week, including dividends, the DJIA gained 0.4%, the S&P 500 Index was flat, and the Nasdaq Composite declined 1.0%.

Canada’s  Research in Motion Ltd. (RIMM $28) was down over 20% after the maker of BlackBerry smartphones issued disappointing 2Q and full-year guidance. RIMM said it expects 2Q EPS ex-items to range between $0.75-1.05, and revenues to come in between $4.2-4.8 billion, while full-year EPS are projected to span a range of $5.25-6.00. Analysts surveyed by Reuters had forecasted 2Q earnings of $1.40 per share and revenues of $5.4 billion, while full-year EPS at the company was anticipated to come in at $6.25.

The company said fiscal 2012 has "gotten off to a challenging start," as the slowdown it saw in 1Q is continuing into 2Q, and delays in new product introductions into the very late part of August are leading to a lower-than-expected outlook in 2Q. The guidance came as the company reported 1Q EPS of $1.33, one penny ahead of expectations, and a 12% quarter-over-quarter (q/q) drop in revenues to $4.9 billion, below the $5.1 billion that the Street had anticipated.

Shares of Moody’s Investors Service (MCO $36) and Standard & Poor’s owner McGraw-Hill Cos (MHP $40) were lower after the Wall Street Journal reported that a probe by the SEC into mortgage bond deals in the lead up to the 2008 crisis had widened to include the role of credit agencies, and whether the companies committed fraud by failing to do enough research to provide adequate ratings. A spokesperson for Standard &Poor's declined to comment and a Moody's representative said that although Moody's was "uncertain as to what the WSJ is referring, we would certainly cooperate with any requests we receive from the SEC."

In M&A news, Capital One Financial Corp (COF $49) confirmed that it has reached a definitive agreement to purchase the US online banking business of ING Groep NV (ING $12) in a deal valued at $9 billion, consisting of $6.2 billion in cash and $2.8 billion in stock. ING will assume a 9.9% ownership stake in COF, which expects to finance the cash portion of the deal through a public equity raise of about $2 billion and debt offerings of approximately $3.7 billion. COF said the deal is anticipated to be “immediately accretive to EPS and tangible book value per share.” COF traded lower, while ING was nicely higher.

Elsewhere, BJ's Wholesale Club Inc. (BJ $48) rose after private-equity firms Leonard Green & Partners LP, and CVC Capital Partners offered to acquire the retailer, though financial terms of the deal were not disclosed. The offer had been widely expected.

Consumer sentiment declines, while leading indicators rebound

The preliminary University of Michigan's Consumer Sentiment Index showed consumers were less optimistic in June than expected, as the index fell from 74.3 in May to 71.8 in June, compared to the slight decrease to 74.0 that economists surveyed by Bloomberg had projected. The larger-than-anticipated deterioration came as the economic outlook component fell from 69.5 to 66.8, and the current economic conditions piece of the report declined from 81.9 to 79.6. Also, the 1-year inflation outlook ticked lower from 4.1% to 4.0%, while the 5-year expectation ticked higher from 2.9% to 3.0%.

Elsewhere, the Conference Board's Index of Leading Economic Indicators, (LEI) for May rebounded from April’s unfavorably revised 0.4% decline, which was the largest since February 2009, rising 0.8% month-over-month (m/m), compared to the 0.3% increase that economists expected. The index has gained ground in ten out of the last eleven months, led by increases in the components pertaining to jobless claims, building permits, money supply, consumer goods orders, and consumer expectations, offsetting declines in the pace of deliveries and yield curve portions of the data.

Treasuries were mixed, with the yield on the 2-year note flat at 0.38%, the yield on the 10-year note up 1 bps to 2.93%, and the 30-year bond yield down 1 bp to 4.16%.

Greek concerns ease to help boost European equities

The equity markets in Europe pared some gains but finished broadly higher with financials leading the way following comments from Germany and France suggesting that a deal to help the troubled nation of Greece was closer to an agreement. In a joint press conference with German Chancellor Merkel and French President Sarkozy, the dissension among key eurozone members regarding the role of private bondholders in a rescue plan for Greece appeared to dissipate somewhat. Merkel noted that Germany would like to have a participation of private creditors "on a voluntary basis," retreating from previous demands that bondholders should be forced to shoulder a “substantial” share of the Greek bailout, per Bloomberg. Also, hopes of a deal to help Greece meet its debt obligations in the short-term were boosted following the press conference as the two major eurozone powers urged rapid action in constructing a plan for Greece and vowed to protect the euro, with Merkel saying that the issue must be resolved “as quickly as possible.”

However, any rescue efforts for Greece depend on the debt-laden nation's ability to carry out its tough austerity measures and Greek Prime Minister Papandreou has reshuffled his cabinet in order unify the government to make tackling the fiscal problems an easier task, and he faces a confidence vote next week. Eurozone finance minsters are set to meet for two days beginning on June 19 to discuss the situation in Greece and a Brussels summit of European Union leaders is expected late next week, per Bloomberg. The euro erased early losses and traded higher compared to the US dollar amid the optimism of a deal for Greece.

Meanwhile other economic news overseas took a back seat to the attention on Greece, with reports showing construction output in the eurozone rose in April and the euro-area trade deficit widening more than expected having little impact on the markets. In Japan, the nation's department store sales fell 2.4% year-over-year (y/y) in May.

Ongoing Greek debt concerns continue to stunt stocks

Although the Dow Jones Industrials snapped a string of losing weeks on the heels of some favorable economic data out the US and China, gains were modest and the broader markets finished nearly unchanged or in the red. Sentiment remained hamstrung and the markets continued to be at the mercy of concerns about a possible sovereign debt default in Greece and the potential for contagion spreading across the eurozone and other parts of the world economy. The debt concerns took precedent among traders, overshadowing some positive economic data early in the week, highlighted by China's industrial production and fixed asset investment coming in above economists' forecasts, to sooth concerns of hard landing of the Asian economy. However, the stronger-than-expected data and separate reports of elevated inflation, led to China's central bank announcing the ninth increase in the nation’s banking sector’s reserve requirement since last October.

Meanwhile, some data from the US economic calendar gave the bulls some needed encouragement as May retail sales came in better than anticipated and jobless claims declined more than expected, while housing starts and building permits rose to level that were above economists' forecasts. All was not on the positive side, however, as small business confidence declined, producer and consumer prices came in hotter than anticipated, homebuilder sentiment unexpectedly deteriorated, and regional manufacturing reports out of New York and Philadelphia unexpectedly depicted contractions in activity.

Housing and Fed the focus for the upcoming week

The bulk of the Street's attention on the US economic calendar next week will be paid to the struggling housing sector and the Federal Reserve.

With a dormant docket on Monday, the economic calendar will begin with Tuesday's release of existing home sales, forecasted to drop 5.0% m/m to an annual rate of 4.80 million units in May, after unexpectedly falling to 5.05 million units in April. Existing home sales represent the largest portion of the total market and reflect closings from contracts entered one to two months earlier. The rest of the home sales picture for May will come in the form of Thursday's new home sales report, expected to drop 4.0% m/m to an annual rate of 310,000 units, after April’s unexpected increase to 323,000 units. New home sales are based on contract signings.

Moreover, Wednesday will bring the Federal Open Market Committee (FOMC) meeting. No major changes are expected to the Fed's stance and the statement will be released at its new time of 12:30 p.m. EST, followed by the post-statement news conference and Q&A session led by Fed Chair Ben Bernanke beginning at 2:15 p.m. EST.

Other releases scheduled for next week’s US economic calendar include: the MBA Mortgage Applications Index, weekly initial jobless claims, durable goods orders, and the final reading of 1Q GDP. Other reports in the Americas include: Canada's Leading Index and retail sales, Brazil's trade balance and unemployment rate, as well as Mexico's retail sales, unemployment rate, Consumer Price Index and trade balance.

On the international front, we will get: eurozone industrial new orders, consumer confidence, and PMI manufacturing and services reports across the region, German producer prices, the ZEW Survey of Economic Sentiment Index and the Ifo Business Climate Index, UK home prices, French business confidence, the Japanese Leading Index, and the Australian Leading Index and the Reserve Bank of Australia's monetary policy meeting minutes.