Evening Market Update

Ongoing Debt Crisis in Europe Drags

The US equity markets continued to be subject to swings in sentiment regarding the Greek debt crisis, while corporate profit reports from the technology sector added to the negative sentiment, and stocks ended the day solidly in the red. Eurozone sentiment, which received a new negative in the form of concerns about Italian banks on Friday, outweighed good news from US durable goods orders, upbeat comments on inflation in China, and an uptick in German business confidence. Negative earnings reports from Oracle Corp and Micron Technology pressured the technology sector. Elsewhere, Dow member Pfizer and Pain Therapeutics fell after a delay in approval from the FDA, and Williams Companies announced an unsolicited bit to acquire Southern Union Co for roughly $4.86 billion. Treasuries were mixed and the US dollar rose.

At 12:55 p.m. ET, the Dow Jones Industrial Average is down 0.9%, the S&P 500 Index is declining 1.1%, and the Nasdaq Composite is decreasing 1.2%. WTI crude oil is down $1.00 at $90.02 per barrel, wholesale gasoline is dropping $0.07 to $2.71 per gallon, and the Bloomberg gold spot price is $18.40 lower at $1,503.00 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-is up 0.4% to 75.58.

Oracle Corp. (ORCL $31) reported fiscal 4Q EPS ex-items of $0.75, four cents above the consensus estimate of analysts surveyed by Reuters, with revenues growing 12% year-over-year (y/y) to $10.8 billion, roughly inline with the Street’s forecast. The enterprise software company said new software license revenues were up 19% y/y, while software license updates and product support revenues were 15% higher. However, shares were under pressure as the company reported a 6% drop in hardware systems products revenues.

Meanwhile, Micron Technology Inc. (MU $7) posted fiscal 3Q earnings ex-items of $0.10 per share, below the $0.16 estimate that the Street had expected, with revenues declining 6.5% y/y to $2.1 billion, missing the $2.4 billion forecast of analysts. The chip company said revenues from DRAM products-chips used in PCs, laptops, and video game consoles-fell 7% quarter-over-quarter (q/q) as sales volumes decreased, and revenues from NAND Flash products-chips used in smartphones, MP3 players and digital cameras-declined 5% q/q due to a decrease in average selling prices. Shares fell nearly 15%.

Elsewhere, Dow member Pfizer Inc. (PFE $20) was solidly lower and Pain Therapeutics Inc. (PTIE $5) traded down over 40% after the US Food and Drug Administration (FDA) postponed for the second time the approval of an application for a new pain relieving drug used to treat drug abuse that was jointly developed by the two companies. PFE said it is working to evaluate the issues described by the FDA and plans to have further discussions with the agency around them.

In M&A news, Williams Companies Inc. (WMB $29) announced that it has proposed an unsolicited bid to acquire US natural gas firm Southern Union Co. (SUG $40) for $39.00 per share in cash, or about $4.86 billion. The offer comes a week after SUG agreed to be acquired by Energy Transfer Equity LP (ETE $43) for roughly $4.2 billion. SUG confirmed that it has received the proposal by WMB and it will review the offer in due course, while ETE said it believes its binding agreement provides superior value to SUG shareholders compared to the WMB offer. SUG was up over 15% and WMB fell, while ETE traded to the downside.

Durable goods orders rise, while 1Q GDP adjusted slightly higher

Durable goods orders rose slightly more than expected, gaining 1.9% month-over-month (m/m) in May, compared to the 1.5% increase that was expected by economists surveyed by Bloomberg, and April's figure was favorably revised to a 2.7% decline from the 3.6% drop that was initially reported. Meanwhile, ex-transportation, orders were modestly below forecasts, increasing 0.6% in May, compared to the expectation of a 0.9% rise, while April's figure was adjusted favorably to a 0.4% increase, after the initial 1.5% drop that was reported. Elsewhere, orders for non-defense capital goods excluding aircraft, considered a good proxy for business spending, exceeded expectations, rising by 1.6% in May, compared to the 1.0% increase that was anticipated, after falling by a positively revised 0.8% in April, from the initial report of a 2.6% decline.

Transportation equipment led the stronger-than-forecasted increase in the headline figure, rebounding from April's 9.4% tumble, to a 5.8% gain in May, as orders for nondefense aircraft and parts surged 36.5%, while motor vehicles and parts rose 0.6% after falling 5.3% in the previous month. Moreover, machinery orders rose 1.2%, up from a 0.2% gain in April, while orders for electrical equipment, appliances, and components increased 3.2% after falling 5.2% in the previous month.

Elsewhere, the final revision of 1Q Gross Domestic Product, the broadest measure of economic output, showed expansion was adjusted slightly higher to a 1.9% q/q annualized rate of growth, after the 1.8% expansion reported in the first revision, matching forecasts of economists. 1Q's growth follows the 3.1% increase in 4Q. Also, personal consumption was left unrevised at a 2.2% increase, as expected, down from the 4.0% that was posted in 4Q.

The GDP Price Index rose 2.0%, up from the previous adjustment of 1.9%, where economists anticipated it to remain, while the core PCE Index, which excludes food and energy, was unexpectedly revised to a rise of 1.6%, versus the 1.4% unadjusted rate that was expected.

Treasuries were mixed as pressure on equities offset the manufacturing and GDP data, with the yield on the 2-year note down 1 bp to 0.33% and the 10-year note declining 4 bps to 2.87%, while the 30-year bond rate rose 3 bps to 4.20%.

Mixed messages overseas as Greece overshadows positive Chinese comments

Global sentiment continues to swing with events concerning Greece, buoyed by yesterday's announcement that Greece reached a new five-year austerity agreement with the International Monetary Fund (IMF) and the European Union (EU) and the optimism that Greece would therefore receive its next installment of financial aid from the eurozone bailout, avoiding a sovereign debt default. The IMF and EU approved the new austerity package after Greece agreed to implement extra tax increases and spending cuts that plugged a 3.8 billion euro funding gap, per Reuters. The agreement also lifted the outlook that Greece's austerity measures could be sufficient to gain approval from the IMF and EU for a second wave of rescue funds to help it avoid a default in the medium term. However, the austerity plan and legislation to implement the measures needs to be passed by the Greek Parliament next week, and voiced rejection of the plan by the opposition party and continued skepticism that the plan still lacks enough fiscal changes to result in long-term sustainability of the troubled nation weighed on sentiment. The euro traded higher initially but gave up gains and was lower compared to the US dollar and most other major currencies.

Friday, the financials led the declines in Europe as the debt uneasiness was exacerbated by a temporary halt of trading in some major Italian banks. The halt came amid heavy selling volume of the stocks on concerns about the capital positions of the nation's banking sector and the impact of the euro-area debt crisis, exacerbated by a European Central Bank (ECB) Board member cautioning that the euro-area debt crisis will not end soon. Moreover, the weakness in the Italian banks followed Moody’s Investors Service's warning yesterday that it may downgrade 13 banks in the country, continued rumors of a potential downgrade for the Italian government and worries about capitalization needs potentially identified under the ongoing bank stress tests. However, the economic front provided some support for stocks, as the German Ifo Business Confidence Index unexpectedly improved and Italian retail sales surprisingly rose.

However there were some constructive comments out of China regarding its battle with inflation, easing concerns about further monetary policy tightening by the government after China's Premier Wen said the nation's efforts to thwart inflation have succeeded. Wen said in the Financial Times that "China has made capping price rises the priority of macro-economic regulation and introduced a host of targeted policies. These have worked." He added that "We are confident price rises will be firmly under control this year."

Gains early in the week get pared by data and euro-debt concerns

The major US equity markets finished mixed for the week as early gains that were racked up on Tuesday's successful confidence vote for Greek Prime Minister Papandreou, were given back amid lingering longer-term Greek default worries and some disappointing global economic data. In the US, weekly initial jobless claims increased more than expected and the Federal Reserve concluded its monetary policy meeting with the Central Bank downwardly revising its GDP and employment forecasts. Outside the US, the data was also on the negative side with reports on manufacturing activity in the eurozone and China decelerating.

Finally, the energy complex was a major focus this week with crude oil prices falling sharply on the day of the announcement from the International Energy Agency (IEA) of a coordinated release of oil for the third time in history, "in response to the ongoing disruption of oil supplies from Libya." The IEA also noted that the normal seasonal increase in refiner demand expected for this summer will exacerbate the shortfall further and "greater tightness in the oil market threatens to undermine the fragile global economic recovery."

Manufacturing reads and votes in Greece key next week

Major economic releases scheduled in the US start off with Tuesday's S&P/CaseShiller Home Price Index, forecasted to fall 0.2% month-over-month and decrease 4.0% y/y in April. Pricing data lags sales data by a month and prices are expected to remain under pressure amid a still depressed housing market. The other major report is Friday's ISM Manufacturing Index, forecasted to decline to 51.5 from 53.5, according to a Bloomberg survey of economists.

Other releases on the US economic calendar include personal income and spending, Consumer Confidence, the Richmond Fed Manufacturing Index, MBA Mortgage Applications, pending home sales, initial jobless claims, the Chicago Purchasing Manager’s Index, construction spending, and vehicle sales. Elsewhere in the Americas, Canada reports CPI and April GDP and Brazil releases its manufacturing PMI, industrial production and trade balance.

The situation in Greece will remain in focus with the Parliament vote on the austerity package, as well as continued meetings by policymakers. Economic releases in Europe include eurozone consumer confidence, manufacturing PMI reports from the euro-zone and the UK, UK home prices, mortgage approvals and final 1Q GDP, and German CPI, import prices, retail sales and employment.

Asia/Pacific reports will include Japan's retail sales, industrial and vehicle production, construction orders, manufacturing PMI, housing starts household spending, CPI, jobless rate, vehicle sales and the quarterly Tankan survey, Australia's home prices and sales, China's manufacturing and services PMIs, leading index and industrial profits, and South Korea's industrial production.