Morning Market Update

Global Economic Sentiment Continues to Pressure Stocks

The US equity markets are under pressure amid some disappointing data out of Germany and following Federal Reserve Chairman Ben Bernanke’s lowered assessment of the US economy, adding to the recent increase in global economic uneasiness. Treasuries are modestly higher amid the declines in stocks, showing little reaction to a dip in mortgage applications, and ahead of the release of a report on economic conditions in all of the nation’s Fed Districts. In equity news, Dow member McDonald’s Corp reported disappointing May same-store sales and Ciena Corp missed the Street’s 2Q expectations and offered a lackluster revenue outlook, while Citigroup Inc announced that it has reached an agreement to sell a $1.7 billion portfolio of private equity assets to European insurer AXA SA’s AXA Private Equity. Overseas, Asia finished mixed as a favorable economic report helped Japanese stocks move higher, while the data out of Germany is pressuring European equities.

As of 8:53 a.m. ET, the June S&P 500 Index Globex future is 3 points below fair value, the Nasdaq 100 Index is 7 points below fair value, and the DJIA is 21 points below fair value. WTI crude oil is $0.59 lower at $98.50 per barrel, and the Bloomberg gold spot price is down $8.92 at $1,535.21 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.4% to 73.83.

Dow member McDonald’s Corp. (MCD $81) reported May global same-store sales—sales at stores open at least thirteen months—increased 3.1% year-over-year (y/y), which was below analysts’ projections, as US sales rose a smaller-than-estimated 2.4%. Elsewhere, European sales increased 2.3%, while its Asia/Pacific, Middle East and Africa unit saw sales gain 4.3%.

Shares of Ciena Corp. (CIEN $24) reported an adjusted fiscal 2Q net loss of $0.24 per share, compared to the loss of $0.11 per share that analysts surveyed by Reuters had expected, with revenues of $418 million, versus the $428 million that the Street had forecasted. Moreover, the company issued 3Q revenue guidance that missed analysts’ projections.

Citigroup Inc. (C $38) announced that it has reached an agreement to sell a $1.7 billion portfolio of limited partnership interests in private equity buyout funds and a portfolio of direct stakes in companies to European insurer AXA SA’s (AXAHY $21) AXA Private Equity. Citigroup said the sale marks the completion of a significant share of Citi Holdings’ proprietary private equity investments and demonstrates the progress it is making in reducing non-core assets on its balance sheet.

Mortgage applications dip, Fed report due out later today

The MBA Mortgage Application Index decreased slightly, dipping by 0.4% last week, after the index that can be quite volatile on a week-to-week basis, declined by 4.0% in the previous week. The decrease came as a 1.3% increase in the Refinance Index was offset by a 4.4% drop in the Purchase Index even as the average 30-year mortgage rate declined by 4 basis points (bps) to 4.54%.

Treasuries are higher amid the pressure on the equity markets, showing little reaction to the housing data, with the yield on the 2-year note down 1 bp to 0.39%, while the yields on the 10-year note and the 30-year bond are declining 3 bps to 2.97% and 4.22%, respectively.

Just before the market closed yesterday, Federal Reserve Chairman Ben Bernanke noted that US economic growth looks to have been somewhat slower than expected, due to a loss of momentum in the labor market and supply chain disruptions associated with the tsunami and earthquake in Japan. However, Bernanke added that growth seems likely to pick up somewhat in the second half of the year. The Fed Chairman also gave no signal that another wave of economic stimulus was in the offing.

In afternoon trading, we will get a look at economic conditions across the nation as the Federal Reserve will release its Beige Book, wherein Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for June 21-22 (economic calendar). In the April report, moderate economic improvement was noted, but some contacts voiced uncertainties about the future outlook due to the disruptions out of Japan, the geopolitical climate and “ambiguity about US government spending plans.” We should get a better idea of the magnitude of the Japanese disruptions in today’s report, and after Friday’s dismal labor data, we will likely get more evidence suggesting whether this was a hiccup in job creation or symptoms of a soft patch in the economy. The job report last week severely missed economists’ expectations, which may have been boosted by the strongest part of April’s Beige Book and the commentary regarding jobs, with four Districts citing examples of concern among contacts about “being able to obtain certain types of skilled workers,” and most Districts reporting signs of improvement in at least some parts of their labor markets.

Europe under pressure as materials are falling on depressed economic sentiment

The equity markets in Europe are broadly lower in afternoon action, with basic materials leading the way after US Federal Reserve Chairman noted that the US economy was growing at a slower rate than expected, while some disappointing data out of Germany—Europe’s largest economy—exacerbated global economic sentiment. German exports fell more than expected in April, while a separate report showed the nation’s industrial production unexpectedly declined month-over-month (m/m) in April. In other economic news, 1Q eurozone GDP was left unrevised at a 0.8% quarter-over-quarter (q/q) rate of expansion, matching economists’ expectations. Meanwhile, shares of Kabel Deutschland Holding AG (KBDHF $64) are solidly lower after the German cable operator posted a full-year loss. Euro-area debt concerns continue to stymie stocks across the pond, with interest rates in debt-laden Greece moving higher as traders continue to grapple with the impact of a possible restructuring of the country’s debt holdings.

The UK FTSE 100 Index and France’s CAC-40 Index are falling 0.9%, Germany’s DAX Index is dropping 1.2%, and Greece’s Athex Composite Index is decreasing 2.1%.

Asia mixed following Bernanke’s comments

Stocks in Asia finished mixed following Federal Reserve Chairman Ben Bernanke’s assessment of the current US economic environment, which weighed on commodity-related issues and Australia’s S&P/ASX 200 Index declined 0.7%, despite a report that showed home loans in the nation rose more than expected. However, Japan’s Nikkei 225 Index managed to finish higher, rising 0.1%, as the economic uneasiness was offset by the release of a survey of economists, which showed sentiment toward the current and future economic environment in Japan improved. The data helped stocks in Japan shrug off a solid decline in shares of Nintendo Co. (NTDOY $28), which saw a negative reaction to the company’s unveiling of its first high-definition video-game console. Meanwhile, equities in South Korea moved lower, with the Kospi Index falling 0.8% amid some weakness in carmakers, as well as shipping issues, courtesy of a steep decline in shares of Hyundai Heavy Industries (HYHZF $391) after the shipyard said it may consider acquiring a $2.4 billion stake in Hynix Semiconductor Inc, which rose on the announcement. In economic news, South Korea revised its 1Q GDP figure slightly lower from an initial 1.4% q/q rate of growth to a 1.3% pace of expansion. Finally, stocks in China finished mixed, with the Hong Kong Hang Seng Index falling 0.9% and the Shanghai Composite Index rising 0.2%.