Evening Market Update

Pausing to Reflect, Awaiting More Data

After posting the best week in over two years, stocks traded in a narrow range today and closed mixed. Moody’s Investors Service was in the news after questioning Chinese bank debt as well as issuing a late-day downgrade of Portugal’s sovereign debt rating to junk status, which pushed the US dollar higher. Meanwhile, factory orders rose at a slower rate than expected and Treasuries rose. Equity news was dominated by M&A activity, with Energy Transfer Equity LP raising its offer for Southern Union Co, Chinese search engine Baidu Inc entering a partnership with Microsoft’s Bing for English-language results, and Immucor agreeing to be purchased by TPG Capital.

The Dow Jones Industrial Average lost 13 points (0.1%) to 12,570 and the S&P 500 Index fell 2 points (0.1%) to 1,337, while the Nasdaq Composite rose 10 points (0.4%) to 2,826. In light volume, 907 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.95 to $96.89 per barrel, wholesale gasoline gained $0.01 to $2.98 per gallon, and the Bloomberg gold spot price advanced $18.33 to $1,514.53 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.6% higher at 74.67.

Chinese search engine Baidu Inc. (BIDU $146) will begin sourcing some of its English-language searches from Microsoft Corp’s (MSFT $26) Bing search facility, the companies reported yesterday. The move comes as BIDU is looking to solidify its lead over Google Inc. (GOOG $532) in the Asian nation, and to expand its presence overseas, while MSFT too is hoping to expand its reach in China. The deal adds to a revenue-sharing agreement between the two companies, and a BIDU spokesperson said it is “always open” to further cooperation between the two firms. MSFT was nearly unchanged, while BIDU and GOOG rose.

In M&A news, Energy Transfer Equity LP (ETE $45) sweetened its bid to acquire Southern Union Co. (SUG $42) to $8.9 billion, substantially topping Williams Cos.’ (WMB $31) $5 billion offer it made for SUG on June 23. Under the terms of the deal, SUG shareholders will receive $40 per share in cash or 0.903 shares of ETE for each share owned. SUG’s Chairman and CEO said the combination would be highly complementary, provide a broader range of services and market access, deliver superior value to shareholders, and create the largest natural gas pipeline operator in the world. Shares of both ETE and SUG were higher, while WMB was slightly lower.

Shares of Immucor Inc. (BLUD $27) were over 30% higher on news that it has entered into a definitive agreement to be acquired by TPG Capital LP for $27 per share in cash, or $1.9 billion, representing a 30% premium over BLUD’s closing price on July 1. The blood-transfusion instrument company’s CEO said that the transaction will allow shareholders to realize significant immediate value “while at the same time allowing Immucor to remain well-positioned to continue pursuing growth opportunities.” The transaction was unanimously accepted by the company’s board of directors, and is expected to close in the second half of 2011 pending regulatory approval.

Slow start to economic week

Factory orders rose less than expected, increasing 0.8% month-over-month (m/m) in May, compared to the 1.0% gain that economists surveyed by Bloomberg had expected, but April’s initial 1.2% decrease was favorably revised to a 0.9% decline. May durable goods orders—reported last week—were revised to a 2.1% gain from the initially reported 1.9% increase.

Treasuries rose, with the yield on the 2-year note declining 4 bps at 0.43%, the 10-year note 6 bps lower at 3.12%, while the 30-year bond rate was down 1 bp at 4.38%.

Lackluster economic data, credit agency reports cool sentiment overseas

Debt issues continued to weigh on markets overseas, despite reports that Greece is on track to receive its next quarterly funding by mid-July. However, concerns shifted to the makeup of the next bailout package, with Reuters noting that details would not be finalized until September. German leaders have insisted on private sector participation as a key component of the second bailout. On this front, Moody’s Investors Service said that banks rolling over Greek debt will likely need to take impairment charges, and Standard & Poor’s rattled investors Monday by saying that any rollover of Greek debt could create a credit event and likely put the country in “selective default.” However, the Financial Times cited a senior official in its report that the European Central Bank would rely on the best rating available from the top four ratings agencies, including Canada’s DBRS. Moody’s and DBRS have not commented on the so-called “French proposal” for voluntary bank debt rollovers. After trading closed in Europe, Moody’s cut Portugal’s long-term debt rating four notches to Ba2, a non-investment grade rating, while also downgrading its short-term debt to “not-prime” from “prime-2.”

Meanwhile the health of the Chinese economy continues to be questioned, after service PMIs fell and Moody’s Investors Service issued a report indicating that Chinese banks may be holding more problem loans than initially thought, the latest in a string of concerns about banks’ holdings of local government debt. The report disclosed that loans to local governments by lenders in the Asian nation are about 3.5 trillion yuan ($540 billion) more than the national auditors’ forecast, which could result in a downgrade in the nation’s credit outlook. 

In international economic news, the eurozone composite services PMI came in slightly lower than economists’ forecasts, as reports from France, Germany, and the UK showed some deceleration in activity, while Italy’s reading fell further into contraction territory, denoted by a reading below 50. Additionally, retail sales in the eurozone fell 1.1% month-over-moth during May, slightly lower than the 1.0% decline expected by economists surveyed by Bloomberg, while on a year-over-year basis, sales fell more than triple forecasts. In other news, the Reserve Bank of Australia left its benchmark interest rate unchanged at 4.75%, as expected, but central bank Governor Stevens said that “growth through 2011 is now unlikely to be as strong as earlier forecast,“ pressuring Australian shares.

US service sector in view tomorrow

The week’s economic calendar, will heat up tomorrow with the release of the ISM Non-Manufacturing Index, anticipated to fall to 53.7 during June from 54.6 in May, with 50 being the level that separates expansion from contraction. Last week’s ISM Manufacturing Index pleasantly surprised to the upside on several fronts, edging up to 55.3 from 53.5, bucking the global trend where June manufacturing showed a slower pace of growth.

The other US report scheduled for tomorrow is the MBA Mortgage Applications Index, while internationally, Japan’s leading index, UK housing prices, German factory orders, and Canadian building permits will be released.