Morning Market Update

Nearly Unchanged Amid Mixed Sentiment

The US equity markets are nearly unchanged in morning action as the news that Greece struck a new five-year austerity agreement with eurozone officials is being met with continued long-term skepticism, while early losses were pared by a mostly better-than-forecasted increase in May US durable goods orders. Treasuries are modestly lower in early action following the economic data, which also included a slight upward revision to the final read on 1Q GDP. Meanwhile, equity news is on the negative side, with Oracle Corp finding pressure amid a decline in hardware revenues and Micron Technology Inc posting disappointing quarterly results. However, there is some M&A news, with Williams Companies Inc announcing an unsolicited bid to acquire US natural gas firm Southern Union Co for about $4.86 billion. Overseas, Asian stocks moved higher amid the austerity deal out of Greece and some upbeat comments from China on inflation, while Europe is mostly higher on some favorable German business sentiment data and the Greek agreement, but euro-area debt uneasiness continues to keep enthusiasm in check.

As of 8:53 a.m. ET, the September S&P 500 Index Globex future is 2 points above fair value, the Nasdaq 100 Index is 5 points below fair value, and the DJIA is 12 points above fair value. WTI crude oil is $0.22 higher at $91.24 per barrel, and the Bloomberg gold spot price is down $2.90 at $1,518.50 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.2% at 75.39.

Oracle Corp. (ORCL $32) 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 are under pressure as the company reported a 6% drop in hardware systems products revenues.

Meanwhile, Micron Technology Inc. (MU $8) 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 smarphones, MP3 players and digital cameras—declined 5% q/q due to a decrease in average selling prices.

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 $34) 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 $46) 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.

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.

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 are lower in morning action following the manufacturing and GDP data, with the yields on the 2-year and 10-year notes rising 2 bps to 0.36% and 2.93%, respectively, while the 30-year bond rate is 1 bp higher at 4.18%.

Europe mostly higher after Greek austerity deal

The equity markets in Europe are mostly higher in afternoon trading, with materials rebounding from yesterday’s declines that came amid some disappointing global economic data, while the announcement that Greece reached a new five-year austerity agreement with the International Monetary Fund (IMF) and the European Union (EU) is providing a slight boost to sentiment. Debt-laden Greece received approval from the IMF and EU after it agreed to implement extra tax increases and spending cuts that plugged a 3.8 billion euro funding gap, per Reuters. The news boosted optimism that the Greek government will gain access to the next installment of financial aid from the eurozone bailout package to meet its debt obligations that are coming due next month, avoiding a sovereign debt default. 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 needs to be passed by the Greek Parliament next week and some of the enthusiasm is being tempered by continued skepticism that the plan still lacks enough fiscal changes to result in long-term sustainability of the troubled nation. The euro was trading higher in early trading but has given up gains and is lower compared to the US dollar and most other major currencies.

Elsewhere, financials are under some pressure across the pond after a temporary halt in trading of Italian banks after Moody’s Investors Service warned yesterday that it may downgrade 13 banks in the country, while a European Central Bank (ECB) Board member cautioned that the euro-area debt crisis is not over. In economic news, French consumer confidence remained unchanged as expected, the German Ifo Business Confidence Index unexpectedly improved, and Italian retail sales surprisingly rose.

The UK FTSE 100 Index is 0.9% higher, France’s CAC-40 Index is gaining 1.0%, Germany’s DAX Index is rising 0.7%, and Greece’s Athex Composite Index is advancing 0.4%, while Italy’s FTSE MIB Index is declining 0.3%.

Asia higher after Greece agreement report and Chinese inflation comments

Stocks in Asia finished broadly higher following yesterday’s announcement that Greece had reached a new five-year austerity plan agreement with EU and IMF officials, while comments out of China regarding its battle with inflation helped support sentiment in the region. Chinese stocks led the way, with the Shanghai Composite Index rallying 2.2% and the Hong Kong Hang Seng Index gaining 1.9% amid eased concerns about further monetary policy tightening by the government after China’s Premier Jiabao said the nation’s efforts to thwart inflation have succeeded. Jiabao 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.” Elsewhere, Japan’s Nikkei 225 Index rose 0.9% and South Korea’s Kospi Index jumped 1.7%, while Australia’s S&P/ASX 200 Index inched 0.2% higher, as yesterday’s plethora of disappointing global economic data weighed on commodity-related stocks to limit gains. Moreover, energy issues found some pressure following yesterday’s sharp drop in oil and gas prices after the IEA announced a coordinated release of oil from its strategic reserves for the third time in history.