Evening Market Update

Stocks in the Green After Shrugging Off Portugal Downgrade

US equities finished modestly higher, after overcoming early adversity on Moody’s downgrade of Portugal to junk status late yesterday, and an increase in the benchmark interest rate in China for the third time this year. The domestic economic front also did little to support equities, as a read on the US service sector showed a slight deceleration, while mortgage applications declined more than economists expected. Equity news was light again today as traders prepare for the kick-off of earnings season next week, although there were some stories making headlines. Exxon Mobile Corp was ordered by the US Dept. of Transportation to rebury a pipeline that caused an oil leak in the Yellowstone River, while shares of News Corp moved lower as the company fights new allegations over phone hacking incidents. Treasuries finished the day slightly higher. 

The Dow Jones Industrial Average gained 56 points (0.4%) to 12,626, the S&P 500 Index rose 1 point (0.1%) to 1,339, while the Nasdaq Composite advanced 8 points (0.3%) to 2,834. In light volume, 821 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.26 to $96.63 per barrel, wholesale gasoline gained $0.02 to $3.00 per gallon, and the Bloomberg gold spot price advanced $12.45 to $1,528.15 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.6% higher at 75.06.

A division of the US Dept. of Transportation has ordered Exxon Mobil Corp. (XOM $82) to rebury its Silvertip pipeline that is at the heart of a leak that has dumped as much as 1,000 barrels of oil into the Yellowstone River. As a result of the spill, the oil company shut down the pipeline and its Billings, Montana refinery is running at minimum capacity as it tries to “put its arms around” the scope of the leak, according to XOM’s president of ExxonMobil Pipeline Co. US regulators have also demanded that XOM conduct a risk assessment on the pipeline where it may cross other waterways. XOM traded modestly lower.

Shares of News Corp. (NWS $18) finished lower after UK Prime Minister Cameron announced that the nation will launch more independent inquires into alleged phone hacking incidents by the company’s British tabloid, News of the World, and any failures by police to investigate the matters. The latest request for a probe comes after British media published allegations that a private detective working for the newspaper deleted messages from the voicemail of a school girl murdered in 2002, while the company is already battling charges that it hacked the cell phones of celebrities, government officials and sports personalities. NWS Chairman and CEO Rupert Murdoch released a statement saying that the allegations were “deplorable and unacceptable” and that the company will cooperate fully in all investigations, adding it has “taken a number of important steps to prevent them from happening again.”

Service sector activity slips slightly, mortgage applications fall

The ISM Non-Manufacturing Index  fell more than expected in June to 53.3 from 54.6 in May, while the forecast was for a reading of 53.7. A reading of 50 separates expansion from contraction. The report is generally considered a measure of economic strength in the service sector and is the companion to the ISM Manufacturing Index, which posted an unexpected increase to 55.3 in June from 53.5. The two indexes have not always moved in tandem, as manufacturing is more cyclical, falling dramatically during the recession and bouncing back sharply during the recovery, and manufacturing was more impacted by supply chain disruptions from the disasters in Japan. Positively, both indexes posted gains in the employment component, up 0.1 points to 54.1 in today’s report, as well as declines in prices paid, down 8.7 points to 60.9 in the services index. However, unlike the manufacturing index, services orders fell 3.2 points to 53.6, and business activity fell slightly to 53.4.

Elsewhere, the MBA Mortgage Application Index declined 5.2% last week, after the index that can be quite volatile on a week-to-week basis, fell by 2.7% in the previous week. The decrease came as a 9.2% drop in the Refinance Index was accompanied by a 4.8% decline in the Purchase Index. Elsewhere, the average 30-year mortgage rate rose by 23 basis points (bps) to 4.69%.

Treasuries were mostly higher, as the yield on the 2-year note was flat at 0.42%, the yield on the 10-year note fell 2 bps to 3.10%, while the 30-year bond rate declined 2 bps to 4.36%.

Moody’s downgrades Portugal debt, China raises interest rates

The European debt crisis reintroduced a new round of uncertainty after Moody’s Investors Service slashed Portugal’s long-term debt rating by four notches to Ba2, considered junk status, while also lowering its short-term debt to “not-prime” from “prime-2.” The downgrade comes just two months after the troubled peripheral eurozone nation received 78 billion euros ($112 billion) in bailout funds from the European Union (EU) and International Monetary Fund (IMF). As part of receiving that aid package, Portugal’s new government, sworn in last month, is required to implement tough austerity measures to bring its budget deficit to 5.9% of gross domestic product (GDP) this year from the 9.1% of GDP last year. In commenting on the downgrade, Portugal’s Finance Ministry said in an emailed statement that the rating change ignores an extraordinary income-tax charge announced last week, and the “broad political consensus” of the measures agreed to with the EU and IMF.

The debt situation in Europe had taken somewhat of a back seat last week amid a rally in most global markets following the approval of Greece’s austerity plan to possibly avoid a sovereign default. However, that reprieve was short-lived, as Standard & Poor’s rattled investors on Monday by warning that any rollover of Greek debt could create a credit event and likely put the country in “selective default,” and Moody’s saying yesterday that banks rolling over Greek debt will likely need to take impairment charges. Yields on longer-term Portuguese debt soared after the downgrade, and at an auction today, the country’s 3-month bills priced to yield 4.93%, above the 4.86% at an auction three weeks ago, while the latest events also fueled speculation of further contagion in the region, particularly among Italy and Spain, with Spanish bonds falling for a third straight day, according to Bloomberg, while the yield on Italy’s 10-year note jumped to its highest level since November 2008.

The debt crisis overshadowed some mostly positive economic news in the region, with a report showing factory orders in Germany—Europe’s largest economy—unexpectedly rose on a month-over-month (m/m) basis during May, where economists were anticipating a decline, and housing prices in the UK increased, above the flat reading expected, while the previous month’s figure was favorably revised. However, industrial output in Spain slipped year-over-year (y/y), below the unchanged reading forecasted.

After trading closed in Asia, the People’s Bank of China raised its benchmark interest rates for the third time this year in an effort to combat inflation as consumer prices, reported in mid-June, rose 5.5% m/m, and its fastest pace since July 2008. The central bank raised the one-year deposit rate by 25 bps to 3.5%, and one-year lending rate by 25 bps as well to 6.56%. The move fueled concerns of a slowdown in the world’s second largest economy that has been the main driver of the economy recovery, while yesterday’s drop in the nation’s service PMIs and Moody’s Investors Service report indicating that Chinese banks may be holding more problem loans than initially thought, exacerbated the sentiment.

The headline release on tomorrow’s US economic calendar will be the ADP Employment Change Report, which is expected to show that private sector payrolls rose by 70,000 jobs in June, after increasing by 38,000 jobs in May. The release does not include government hiring and firing. Additionally, weekly initial jobless claims will be announced, with expectations of a decline to 420,000 from 428,000 last week.

On the international front, reports will include France’s trade balance, UK industrial and manufacturing production, German industrial production, Australia’s unemployment rate, Brazil’s IBGE inflation rate, Canada’s new housing price index, Taiwan’s trade balance and Japanese machine orders. Additionally, the Bank of England (BoE) will conclude its monetary policy meeting, with expectations of the target rate remaining at 0.5%.