Evening Market Update

A Deal…from a No Deal?

US equities rallied, taking their early cue from the US economic and earnings fronts, and accelerating late after the announcement of a possible debt plan emerging from the Senate. The initial boost came amid better-than-expected 2Q earnings from Dow members IBM and Coca-Cola, coupled with stronger-than-expected reads on housing starts and building permits. Meanwhile, a previous deficit-reduction plan, once thought to be defunct, was dusted off by the “Gang of Six” within the Senate, and gained a surprising amount of bipartisan support, including that from President Obama, amplifying the market’s move upward. Elsewhere on the earnings front, a number of quarterly results out of the financial sector offered more of a mixed picture, with Dow member Bank of America swinging to an expected loss and Wells Fargo & Co reporting earnings that beat the Street, while Goldman Sachs Group fell short of the Street’s estimates. Rounding out a busy day on the earnings front, Dow component Johnson & Johnson bested the Street’s forecast, but offered up a cautious outlook, while Yahoo! reported results after the close that were mixed. Treasuries finished higher despite the equity and economic events, moving higher following the announcement of possible traction toward a debt deal. 

The Dow Jones Industrial Average soared 202 points (1.6%) to 12,587, the S&P 500 Index rose 21 points (1.6%) to 1,327, and the Nasdaq Composite jumped 61 points (2.2%) to 2,827. In moderate volume, 871 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil gained $1.57 to $97.50 per barrel, wholesale gasoline inched $0.01 higher to $3.11 per gallon, and the Bloomberg gold spot price fell $18.05 to $1,586.74 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.2% lower at 75.21.

After the ringing of the closing bell, Yahoo! Inc. (YHOO $15) posted earnings of $0.19 per share for the 2Q, a penny ahead of expectations, on revenues of $1.07 billion, which were slightly below what the Street was looking for.

Dow member Bank of America Corp. (BAC $10) announced a 2Q net loss of $0.90 per share, inline with the consensus estimate of analysts surveyed by Reuters, with revenues of $13.2 billion exceeding the $12.3 billion that the Street had estimated. BAC said the results were driven by charges related to the recently announced agreement to resolve nearly all of the legacy mortgage-backed securities issues pertaining to its acquisition of Countrywide, along with other mortgage-related costs.

However, the company said it intends to continue its efforts to “put the mortgage uncertainty behind us,” and build capital. Moreover, BAC said credit costs continue to decrease, its capital ratios are above prior guidance, and liquidity levels “remain strong.” Also, the company’s global banking and markets unit posted record investment banking fees and its wealth & investment management segment achieved record asset management fees. Shares were lower.

Goldman Sachs Group Inc. (GS $128) achieved 2Q profits of $1.85 per share, compared to the $2.39 that the Street had projected, with revenues decreasing 17.6% year-over-year (y/y) to $7.3 billion, below the $8.2 billion that analysts had expected. The company said its investment banking revenues jumped 54% y/y, aided by an increase in industry-wide completed mergers and acquisitions. However, GS’ revenues in its fixed income, currency and commodities unit fell 53% y/y, reflecting “significantly lower” results in mortgages, commodities and interest rate products. The company said during 2Q, the operating environment was more difficult given global macro-economic concerns, and some of its businesses had disappointing results as it reduced its market risk. Shares finished lower.

Wells Fargo & Co. (WFC $28) announced 2Q EPS of $0.70, two cents above what analysts were looking for, but revenues declined 4.7% y/y to $20.4 billion, compared to the $20.5 billion that the Street had estimated. The company said loans and deposits increased y/y, while its capital position and credit quality improved. Shares ended higher.

International Business Machines Corp. (IBM $185) reported 2Q EPS ex-items of $3.09, exceeding the $3.03 that analysts had projected, with revenues increasing 12% y/y to $26.7 billion, above the $25.3 billion that the Street had anticipated. The Dow member said its software and systems & technology units posted revenue growth of 17%, while its services segment saw sales rise by 10%. IBM raised its full-year EPS outlook, and shares traded nicely to the upside.

Dow component Coca-Cola Co. (KO $69) posted 2Q earnings ex-items of $1.17 per share, slightly above the $1.16 that analysts forecasted, with revenues jumping 47% y/y to $12.7 billion, topping the $12.4 billion that the Street expected. The company said it saw “strong worldwide volume growth,” led by its Coca-Cola brand, with its international and North American units showing expansion. Shares were solidly higher.

Fellow Dow member Johnson & Johnson (JNJ $67) announced 2Q EPS ex-items of $1.28, compared to the $1.24 that analysts had estimated, with revenues of $16.6 billion, versus the $16.2 billion that the Street had anticipated. JNJ said its recently launched pharmaceutical products continued to achieve “strong growth” while its sales in the US over-the-counter medicines were “significantly impacted” by the suspension of manufacturing at its McNeil Consumer Healthcare facility. However, shares came under some pressure as the company expressed some caution in a conference call with analysts. JNJ noted that headwinds from its health-care markets and the sluggish economy “are proving to be stronger and more persistent than we would have hoped, and we’re feeling their effects,” per Dow Jones Newswires.

Housing starts and building permits top expectations

Housing starts for June jumped 14.6% month-over-month (m/m) from a downwardly revised 549,000 annual rate of units in May, to a rate of 629,000 units, and compared to expectations of economists surveyed by Bloomberg, which called for starts to come in at 575,000. Also, building permits unexpectedly increased, gaining 2.5% m/m in June to an annual rate of 624,000, after May’s downward revision to a 609,000 rate. The expectation was for permits to come in at 595,000 units. While the data was driven by growth in multi-family, single-family starts also increased 9.4% and single-family permits rose 0.2%. After disappointing for several months, the better starts figure may be a catch-up after severe spring weather delayed construction of homes for permits which were previously issued.

Along with the release of the MBA Mortgage Applications Index, the housing data continues tomorrow, with the release of existing home sales, forecasted to gain 1.9% m/m to an annual rate of 4.90 million units in June, after falling to 4.81 million units in May. Existing home sales represent the largest portion of the total market and reflect closings from contracts entered one to two months earlier.

Treasuries finished higher despite the favorable data, accelerating to the upside following the announcement of a possible debt deal. The yield on the 2-year was flat at 0.37%, the yield on the 10-year note fell 6 bps to 2.87%, and the 30-year bond rate declined by 14 bps to 4.19%.

Earnings reports aid Europe

Equity markets in Europe finished higher after mostly positive earnings reports across the globe helped to improve the mood and shift focus away from the eurozone debt issue somewhat ahead of Thursday’s meeting of euro-area leaders to discuss the crisis and a plan to help debt-laden Greece. However, German Chancellor Angela Merkel tempered expectations for a resolution of the crisis at the meeting, cautioning that Europe’s sovereign debt woes cannot be fixed “in one step,” per Bloomberg. Elsewhere, Spain, which is in the contagion crosshairs, conducted a debt auction which roughly raised its target capital amount, but yields that the nation had to pay increased.

Economic news across the pond was light, but was also overshadowed by the earnings excitement, with the German ZEW Survey of investor confidence the only item of note, showing a decline that was more than what economists had forecasted.

The attitude in Asia, on the other hand, was less than positive as the continued wrangling over the US debt ceiling and the growing eurozone debt contagion uneasiness dampened sentiment. Economic news in the region was non-existent, with only the minutes from the Reserve Bank of Australia’s (RBA) July policy meeting of note, which showed that the Central Bank may be holding off on resuming its rate-hike campaign longer than some expected. The RBA’s report noted that, “The flow of recent information suggested both that there was more time to assess the likely strength in inflationary pressures in Australia and that it would be prudent to use that time.”

In economic news out of the US’ neighbor to the north, the Bank of Canada (BoC) left its benchmark interest rate unchanged at 1.00%, as expected, while lowering its 2011 economic growth outlook. Also, the BoC suggested it may be moving closer to tightening monetary policy, saying that, “To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn, consistent with achieving the 2% inflation target.” This was a change from its May statement, when the BoC said stimulus measures would be withdrawn “eventually.” The Canadian dollar moved to session highs compared to the greenback following the announcement. Elsewhere, Canada’s leading indicator rose 0.2% m/m for June, well short of the 0.8% increase expected by economists and slowing from the revised 0.8% gain seen in May.

Tomorrow’s international economic calendar will be a little more robust than today’s docket, as a few more reports will be released, including PPI from Germany, industrial sales and orders from Italy, and Japan will provide its leading index. Meanwhile, the minutes from the Bank of England’s July 6-7 monetary policy meeting will also be released.