Evening Market Update

Equities Suffer Amid Italy, US Debt Concerns

The recent rally in the US equity markets continues to be pared as Friday’s disappointing labor report and hotter-than-anticipated inflation figures out of China over the weekend are draining optimism about the global economy. However, the bulk of the woes for the bulls comes amid the uncertainty regarding the US debt ceiling, exacerbated by fears of a debt crisis contagion in the eurozone with Italy taking the brunt of the blows. Treasuries are higher amid the declines in stocks as there are no major US economic reports scheduled for today, but some key data later in the week and tonight’s unofficial start to 2Q earnings season loom on the horizon. Meanwhile, M&A news is controlling the equity front as Peabody Energy Corp and ArcelorMittal announced they have jointly submitted a proposal to acquire Australia’s Macarthur Coal Ltd for about $5.0 billion. Also, Lonza Group AG announced that it has reached an agreement to acquire Arch Chemicals for about $1.4 billion in cash, while UK regulators are questioning the proposed acquisition of British Sky Broadcasting Group Plc by News Corp. Overseas, financials found heavy pressure on the aforementioned Italian debt concerns, sending European stocks solidly lower.

The Dow Jones Industrial Average fell 151 points (1.2%) to 12,506, the S&P 500 Index lost 24 points (1.8%) to 1,319, while the Nasdaq Composite tumbled 57 points (2.0%) to 2,803. In moderate volume, 829 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.05 to $95.15 per barrel, wholesale gasoline lost $0.02 to $3.07 per gallon, and the Bloomberg gold spot price rose $11.03 to $1,555.18 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 1.0% higher at 76.04.

After the closing bell, 2Q earnings season unofficially began after Dow member Alcoa Inc (AA $16) reported 2Q EPS $0.32, a penny shy of the consensus estimate of analysts surveyed by Reuters, on revenues of $6.59 billion, which were above the $6.31 forecast of analysts.

However, it was M&A news that dominated the equity headlines today, with St. Louis-based Peabody Energy Corp. (BTU $58) and Luxembourg’s ArcelorMittal SA (MT $33) announcing that they have jointly submitted a proposal to acquire Australia’s Macarthur Coal Ltd. (MACDY $32) for A$15.50 ($16.57) per share in cash. Under the proposal, the company would be 60% owned by BTU and 40% by MT, and the proposed price implies a value for the equity in MACDY of about A$4.7 billion ($5.0 billion). MACDY confirmed it has received the offer and it will seek to engage BTU and MT in relation to price and terms. BTU was under pressure and MT was solidly lower in European trading. MACDY fell in Australian trading as a government announced a carbon tax, but the offer sent its stock sharply higher in US trading of its foreign shares.

Elsewhere, Swiss-based pharmaceutical supplier Lonza Group AG (LZAGY $8) announced that it has reached an agreement to acquire US-based biocides firm Arch Chemicals (ARJ $47) for $47.20 per share in cash, or about $1.4 billion. Lonza said the acquisition would significantly strengthen its life science portfolio and it expects “substantial cost synergies” in the second year after the deal closes, with accretion to EPS forecasted in year one. ARJ was sharply higher, and LZAGY was higher in overseas action.

Finally, shares of News Corp. (NWSA $16) finished solidly lower amid continued fallout from last week’s phone-hacking allegations at one of its newspapers, News of the World, which closed down as a result. The scandal is casting doubt about NWSA’s bid to acquire UK satellite pay-TV company British Sky Broadcasting Group Plc. (BSYBY $45), as UK Culture Secretary Hunt said he will seek further advice from regulators on the proposed takeover offer in light of the scandal. Also, UK Deputy Prime Minister Clegg said NWSA Chairman Rupert Murdoch should “do the decent and sensible thing” and reconsider his company’s bid, per Dow Jones Newswires. Shares of BSYBY moved steeply to the downside in European trading.

Economic week begins with tomorrow’s look inside the Fed’s meeting

Treasuries finished higher as the equity markets came under pressure amid concerns about the debt crises in the US and Europe. The yield on the 2-year note was down 4 bps to 0.36%, the yield on the 10-year note fell 11 bps to 2.92%, and the 30-year bond rate was 8 bps lower at 4.21%. 

Although there are no major US economic releases scheduled for today, a week full of data kicks into gear midday tomorrow with the release of the minutes from the June Federal Open Market Committee (FOMC) meeting. The Fed downgraded its assessment of the economy at the last meeting, citing some temporary factors, but in the press conference following the meeting, Fed Chair Bernanke said some of the headwinds such as weakness in the financial sector and housing market “may be stronger and more persistent than we thought.” The meeting was the last before the end of QE2 and Bernanke quelled ideas about a potential QE3 by saying that differences from last fall included improvement in the job market and the mitigated risk of deflation.

Other items on the US economic calendar include: the trade balance, forecasted to widen to a deficit of $44.1 billion in May from $43.7 billion in April, and the NFIB Small Business Optimism Index.

Eurozone contagion fears, China data pressure sentiment overseas

Financials led European markets lower as worries about the debt crisis spreading to Italy hampered sentiment across the pond. Italian bond yields moved steeply higher and the nation’s banking stocks came under pressure as European Union finance officials were set to meet today to continue talks about solving Greece’s debt crisis, while possibly discussing the threat of contagion to Italy. Meanwhile, before the meeting, heads of the European Council, European Central Bank (ECB), and the eurozone finance ministers all held talks, along with other officials in the region, but Reuters cited one official as saying the preliminary discussion was aimed at “coordination, not a crisis meeting.” Italian equity and bond markets fell sharply on Friday on growing concerns about the eurozone’s third-largest economy, per Reuters, prompting Italian market regulators to approve new temporary disclosure requirements on short sale positions.

The focus on the debt situation in the region overshadowed economic news in the region, with data out of France showing stronger-than-forecasted industrial and manufacturing production for May.

Sentiment in Asia also suffered as Friday’s disappointing US labor report, the festering debt crisis in the eurozone, and debt ceiling uncertainty in the US teamed up with economic data out of China to stymie stocks in the region. Inflation reports in the Asian nation came in hotter than anticipated, as consumer prices rose 6.4% year-over-year (y/y) in June, after increasing 5.5% in May, versus the 6.2% gain that economists expected, while producer prices rose 7.1% y/y, after increasing 6.8% in May, compared to the 6.9% rate that was anticipated. Moreover, a separate report showed Chinese exports rose 17.9% y/y in June, from 19.4% in May, and the 18.6% forecast, while imports increased 19.3%, following the 28.4% gain in May, versus the 25.3% rate that was projected. Elsewhere, Australia’s government unveiled a carbon tax for polluting companies over the weekend.

Tomorrow’s international economic calendar includes: CPI figures from France, the UK and Germany, while the UK will also report retail sales, mortgage payments and its trade balance. In Asia, Japan will release its Tertiary Index, the Bank of Japan will conclude its monetary policy meeting with no change to rates expected, and India will report industrial production.