Evening Market Update

Same Ol’ Song and Dance

US equities came under pressure in the face of familiar foes, as European debt contagion fears and Washington’s wrangling over the debt ceiling continued to stymie sentiment. Financials paced the declines in the equity markets as the anxiety was being exacerbated by traders’ caution ahead of some key 2Q earnings reports out of the sector later this week. In equity news, Hasbro beat top-line results, but fell short on the bottom-line, WebMD Health suffered after it lowered its full-year revenue outlook, while Halliburton beat the Street. As well, IBM bested analysts’ expectations, reporting results after the close. Treasuries finished lower amid caution over global debt worries and 2Q earnings season, as even an improvement, albeit modest, in homebuilder sentiment had little impact. Elsewhere, the US dollar moved higher to the detriment of oil prices.

The Dow Jones Industrial Average lost 95 points (0.8%) to 12,385, the S&P 500 Index fell 11 points (0.8%) to 1,305, and the Nasdaq Composite declined 25 points (0.9%) to 2,765. In moderate volume, 874 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.31 to $95.93 per barrel, wholesale gasoline slipped $0.03 to $3.10 per gallon, and the Bloomberg gold spot price rose $12.95 to $1,606.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.3% at 75.36.

Dow component International Business Machines Corp. (IBM $175) released 2Q results after the closing bell, reporting a profit during the quarter of $3.09 per share, above the $3.03 forecast by analysts, as revenues rose to $26.67 billion, also ahead of the $25.35 billion expected.

Hasbro Inc. (HAS $39) reported 2Q profits ex-items of $0.33 per share, below the $0.39 consensus estimate of analysts surveyed by Reuters, but revenues rose 23% year-over-year (y/y) to $909 million, above the $855 million that the Street had forecasted. The toy and game maker said its revenues benefitted from “strong gains” in its Transformers brand, as well as continued double-digit growth in its international segment. HAS finished lower.

However, Halliburton Co. (HAL $53) reported 2Q EPS ex-items of $0.81, exceeding the $0.74 that the Street had forecasted, with revenues increasing 35% y/y to $5.9 billion, topping the $5.7 billion that analysts had anticipated. The oilfield services company said its results were driven by “strong growth” in North American revenue and profitability, driven by improved pricing and equipment utilization in the US, while its international profits recovered modestly. Shares gave up early gains and were lower as the drop in oil prices weighed on the sector.

Meanwhile, WebMD Health Corp. (WBMD $32) was down nearly 30% after the health information company reduced its full-year revenue outlook from a range of $610-640 million to $580-600 million, while analysts had forecasted the company to post revenues of $631 million. The company said its reduced guidance reflects longer delays in the launch of consumer and professional sponsorship programs and unexpected delays and cancelations of new consumer programs.

Finally, financials were under pressure to pace the broad-based declines in the equity markets amid the global debt uneasiness, and some jockeying for position ahead of some key earnings reports due out of the sector this week. Tomorrow, we will get 2Q results from Dow member Bank of America (BAC $10), along with Goldman Sachs Group Inc. (GS $129), with BAC forecasted to post a loss of $0.90 per share, while GS is projected to report EPS of $2.39. Mortgage-related costs are likely to be the focus of BAC’s release, while investment banking and trading revenues should be the components that garner the most attention in GS’ report. Morgan Stanley (MS $21), Wells Fargo & Co. (WFC $27), and Dow component American Express Co. (AXP $51) headline a long list of reports from the sector that are due out later in the week.

Homebuilder sentiment improves more than expected with housing in focus this week

The NAHB Housing Market Index, a gauge of homebuilder sentiment, improved more than expected in July, increasing from 13 in June to 15, compared to the rise to 14 that economists surveyed by Bloomberg had expected. The National Association of Home Builders (NAHB) said, “While builders continue to confront serious challenges with regard to competition from foreclosed properties that are priced below replacement cost, inaccurate appraisals of new homes, and a very restrictive lending environment for new home construction, select markets are showing gradual improvement as consumers begin to take advantage of very favorable buying conditions.” However, any reading below 50 indicates more respondents feel conditions are poor, and the NAHB said the sales expectations—over the next six months—component of the report, which rose 7 points to 22, marks a return to trend of bouncing along the bottom.

Treasuries finished lower, with the yield on the 2-year note up 1 bp to 0.37%, the yield on the 10-year note also 1 bp higher at 2.92% and the 30-year bond rate increased 6 bps to 4.30%.

Today’s report begins a plethora of housing-related data scheduled for the US  economic front this week, continuing with tomorrow’s release of housing starts and building permits, with starts expected to rise 2.7% month-over-month (m/m) in June to an annual rate of 575,000 units, while permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, are forecasted to fall 2.3% m/m to 595,000 units. Also, along with the weekly MBA Mortgage Applications Index, Wednesday brings existing home sales, forecasted to rise 1.9% m/m to an annual rate of 4.90 million units in June.

Oversea markets remain subject to debt concerns

Concerns about contagion of the eurozone debt crisis spreading to the key countries of Italy and Spain continued to pressure sentiment across the pond. Friday’s late-day release of the European Banking Authority’s (EBA) results of its second round of stress tests of the banking sector, which showed 8 institutions failed out of 91, did little to ease concerns about the sovereign debt crisis. The tests, once again, were met by criticism that the scenarios used were not stringent enough to give a clear picture of the capital strength of the banking sector, which continues to face the possibility of a default by Greece and the aforementioned growing contagion concerns. Meanwhile, the US debt ceiling issue exacerbated the uneasiness as the August 2 deadline is approaching and lawmakers appear to be far from reaching an agreement.

Economic news in Europe was very minimal, with only a read on UK home prices showing a drop during the month of July the lone report out of the region.

Action in the Asia/Pacific region was light with the Japanese markets closed for a holiday, but the debt issues in the US and Europe continued to shape sentiment, with most markets finishing lower. The only item on the economic docket in the area was from New Zealand, with a report showing consumer prices rose more than expected in 2Q, boosting interest rate hike concerns.

Tomorrow’s international economic calendar will remain light, as the only item of note overseas will be the unemployment rate out of Hong Kong. Meanwhile, back in the Americas, Canada will release its leading economic indicator and the Bank of Canada will conclude its monetary policy meeting with no change to its overnight rate expected.