Evening Market Update

US Equities Extend Winning Streak, End Q2 on a Positive Note

Stocks posted another solid session of gains to close out the second quarter today, due in large part to an unexpected rise in a measure of manufacturing in the Midwest, as well as carried-over enthusiasm from the passage of the Greek austerity measures yesterday. The fourth-straight day of gains leaves the major indexes mixed for the quarter, while the end of the month also signals the end of the Federal Reserve’s asset purchase program. Treasuries were mixed on the day, as the only other report from the domestic economic calendar was a smaller-than-expected drop in weekly initial jobless claims. Equity news was light again today, with Samsung Electronics filing a patent lawsuit against Apple, while the merger between the London Stock Exchange Group and the TMX Group fell apart due to lack of shareholder approval, which has led to speculation that the UK exchange may be in the sights of Nasdaq OMX Group.

The Dow Jones Industrial Average gained 152 points (1.2%) to 12,414, the S&P 500 Index rose 13 points (1.0%) to 1,321, and the Nasdaq Composite advanced 33 points (1.2%) to 2,774. In moderate volume, 962 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.33 to $95.10 per barrel, while wholesale gasoline gained $0.03 to $3.03 per gallon, and the Bloomberg gold spot price was $13.05 lower at $1,499.28 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.3% lower at 74.34.

Samsung Electronics Co. (SSNLF $800) filed a lawsuit against Apple Inc. (AAPL $336) alleging that the company infringed on patents surrounding technology used in its popular iPhone and iPad devices, seeking to block the import of items that contain the technology cited in the complaint. The suit is yet another in the battle between the two companies over patent rights, with AAPL having its own complaints filed against the South Korean chipmaker over “blatantly” copying its technology and designs. Shares of AAPL, however, traded higher.

London Stock Exchange Group Plc’s (LDNXF $17) bid for its Canadian counterpart owned by TMX Group Inc. (TMXGF $46) fell apart after proxy votes already cast ahead of today’s shareholder vote indicated that the required two-third threshold would likely not be achieved. The collapse of the deal led to speculation that Nasdaq OMX Group Inc. (NDAQ $25) may renew its bid for LDNXF that it started in 2006. LDNXF and NDAQ were higher, while TMXGF finished modestly lower.

Chicago manufacturing shows improvement, initial claims tick slightly lower

The Chicago Purchasing Managers Index unexpectedly rose, increasing from 56.6 in May to 61.1 in June, led by accelerations in production and new orders. A reading above 50 depicts expansion. However, inventories moved lower and prices paid declined, and the employment component decreased from 60.8 in May to 58.7 in June. 

Weekly initial jobless claims fell by 1,000 to 428,000, versus last week's figure which was unrevised at 429,000, and compared to the 421,000 level that economists surveyed by Bloomberg had expected. Also, the four-week moving average, considered a smoother look at the trend in claims, rose by 500 to 426,750, while continuing claims dropped by 12,000 to 3,702,000, above the forecast of economists, which called for continuing claims to come in at 3,690,000.

The Federal Reserve’s asset purchase program, which consists of $600 billion of longer-term Treasuries, ended today. However, as indicated in its last monetary policy statement, in order to promote a stronger pace of recovery and help ensure inflation over time is consistent with its mandate, it will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee also said it will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. In his post-statement news conference on June 22, Fed Chair Bernanke said there has been no talk of an additional round of quantitative easing, pointing out that the recent asset purchase program succeeded in mitigating the risk of deflation that existed last year, leaving the Fed closer to meeting its dual mandate position.

Treasuries were mixed after paring early gains, as the yield on the 2-year note was flat at 0.47%, the yield on the 10-year note advanced 5 bps to 3.16%, and the 30-year bond yield was flat at 4.38%.

Greek votes overshadowed lackluster economic news

Optimism in Europe spilled over from yesterday’s parliamentary approval of Greek Prime Minister Papandreou’s austerity plan and after the government body also followed through by passing a bill for implementation of the package, which was widely expected. Also aiding sentiment was an announcement from German Finance Minister Wolfgang Schauble that Germany’s largest banks have agreed to rollover 2 billion euros ($2.9 billion) of Greek debt holdings that mature through 2014, giving the troubled peripheral eurozone nation more cushion in paying its debts. The remaining conditions of the European Union’s (EU) plan to help the peripheral eurozone nation hold off a sovereign default is an agreement by private investors to shoulder some of the burden, and Schauble is seeking an agreement with the country’s banks before a meeting of euro-area finance ministers in Brussels scheduled for July 3.

In other European economic news, France reported an unexpected decline in consumer spending, while producer prices also surprised economists by declining in May. Elsewhere, retail sales in Germany fell sharply on a month-over-month basis, but showed a gain year-over-year, and the German unemployment rate was unchanged at 7.0%. Also, consumer prices in Italy eked out a slight gain that was inline with economists’ forecasts, while housing prices in the UK were stable and housing permits in Spain declined further from the month prior, but slightly less than expectations.

In Asia/Pacific, mixed economic data out of Japan tempered enthusiasm in the eastern nation after a slightly better-than-expected read on housing starts and a narrower decline in vehicle sales was offset by a deceleration in construction orders. Japanese vehicle sales declined 30.9% year-over-year (y/y) during May, reflecting the continued effects of the devastating earthquake and tsunami in March, but when compared to the 60.1% y/y drop seen in April, the data indicates the eastern nation may be slowly pulling itself out of the aftermath of the tragedy. Meanwhile, Taiwan’s central bank upped its benchmark interest rate by 12.5 bps to 1.875%, as expected, in its efforts to cool housing prices, and South Korea reported a larger-than-expected rise in industrial production and a 1.3% y/y improvement in its leading index.

Back in the Americas, Canada’s GDP was flat in April on a m/m basis, as growth in mining, retail trade and the public sector was offset by weakness in manufacturing and the real estate sector.

Manufacturing in June global focus for tomorrow

In addition to the final reading of the University of Michigan Consumer Sentiment Index, which is expected to be revised up to 72.0 from the initial reading of 71.8, construction spending, expected to rise 0.1% in May, and vehicle sales reports from automakers, the state of manufacturing will come under the microscope tomorrow. The ISM Manufacturing Index is expected to fall to 52.0 in June from 53.5 in May, remaining above the 50 level that denotes expansion, and the prices paid component is forecasted to decrease to 70.9 from 76.5. May’s report was unusually disappointing across all subcomponents.

The differentiated jump in the Chicago PMI relative to the Empire and Philly Fed surveys, and the spike in Japanese industrial production in May, could be indicating a forthcoming bounce in automotive production, but it is unclear if the US national ISM figure will reflect this. 

The US manufacturing report will be accompanied by a slew of PMI reports globally, including the final readings in the eurozone and China, as well as readings from the UK, Australia, South Korea, Taiwan and Brazil. Other international reports will include Japan’s jobless rate, household spending, CPI, vehicle sales and the 2Q Tankan report, unemployment in the eurozone, Australian home sales, the trade balance in South Korea and industrial production in Brazil.