Evening Market Update

Stocks Sizzle as Debt Deal Talks In Europe and the US Heat Up

The US equity markets finished solidly higher today, as investors welcomed reports of a new plan to rescue debt-laden Greece, while keeping a watchful eye for progress on the debt ceiling issues on the homefront. Sentiment also received a boost from better-than-expected reads on the Philly Fed Manufacturing Index and the Index of Leading Economic Indicators, which overshadowed a larger-than-forecasted increase in US weekly initial jobless claims and some weak manufacturing reads from Europe and China. Corporate earnings continued to pour in, highlighted by solid reports from Dow members American Express and AT&T, while fellow Dow component Intel Corp beat expectations but gave a disappointing outlook. Additionally, Morgan Stanley and Qualcomm both beat the Street’s forecasts, Dow member Travelers Companies missed expectations, and Whirlpool Corp lowered its outlook for appliance demand. Outside of earnings, US pharmacy-benefit managers Express Scripts Inc and Medco Health Solutions Inc said they have reached a definitive agreement to merge in a cash and stock deal worth about $29.1 billion. Treasuries finished lower, while the US dollar lost ground to the euro on the debt news from across the pond.

The Dow Jones Industrial Average rose 153 points (1.2%) to 12,724, the S&P 500 Index advanced 18 points (1.4%) to 1,344, and the Nasdaq Composite gained 20 points (0.7%) to 2,834. In moderate volume, 969 million shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.83 to $99.23 per barrel, wholesale gasoline fell $0.04 to $3.10 per gallon, and the Bloomberg gold spot price decreased $9.90 to $1,590.50 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.7% lower at 74.13.

Dow member Intel Corp. (INTC $23) reported 2Q EPS ex-items of $0.59, above the $0.51 consensus estimate of analysts surveyed by Reuters, with revenues increasing 22% year-over-year (y/y) to $13.1 billion, exceeding the $12.8 billion that the Street had expected. The chipmaker said strong corporate demand for its most advanced technology, the surge of mobile devices and internet traffic fueling data center growth, and the rapid rise of computing in emerging markets drove its revenue growth. INTC issued 3Q revenue guidance that topped analysts’ forecasts, but shares of INTC traded lower.

Morgan Stanley (MS $24) announced that it recorded a 2Q net loss of $0.38 per share, smaller than the $0.63 loss that analysts had expected, with revenues increasing 3.8% y/y to $9.3 billion, above the $8.0 billion that the Street was anticipating. The financial firm said it had its highest reported fixed income underwriting and the best results in its M&A and equity sales & trading unit since the financial crisis, while its other business achieved “solid performances.” MS was nicely higher.

American Express Co. (AXP $53) posted 2Q earnings of $1.07 per share, topping the $0.99 that the Street was anticipating, with revenues increasing 12% y/y to $7.6 billion, north of the $7.4 billion that analysts had projected. The Dow member said cardmember spending was at an all-time high, increasing 18%, based on strength across the consumer, small business and corporate sectors globally. AXP moved higher.

AT&T Inc. (T $30) reported 2Q EPS of $0.60, one penny above the Street’s forecast, with revenues increasing 2.2% y/y to $31.5 billion, exceeding the $31.3 billion that analysts had anticipated. The Dow component said it posted “strong wireless gains, record mobile broadband sales and continued strength in U-verse and strategic services.” T traded higher.

Dow member Travelers Companies Inc. (TRV $58) announced a 2Q net loss of $0.91 per share, wider than the $0.64 shortfall that the Street had projected, with revenues increasing 2% y/y to $5.8 billion, compared to the $5.9 billion that analysts expected. The insurer said the larger-than-expected loss was due to the “extraordinary tornadoes and hail storms that caused devastation across significant portions of the United States.” Shares were modestly higher.

PepsiCo Inc. (PEP $66) reported 2Q EPS of $1.21, roughly inline with the expectations of analysts, while revenue of $16.83 billion was higher than the $16.4 billion forecast. The company was helped by strong snack and beverage sales in emerging markets, but lowered its guidance due to challenging conditions in developed markets and higher commodity costs. Shares of PEP finished lower.

QUALCOMM Inc. (QCOM $57) posted 3Q EPS of $0.73, two cents above the Street’s forecast, but shares of the semiconductor company traded lower on concerns about the company’s licensing revenue and guidance for chip shipments in the fourth quarter. Shares of QCOM moved lower.

Whirlpool Corp. (WHR $73) was under pressure after the appliance maker lowered its full-year outlook for industry shipments in North America and Europe and Asia. However, the company reaffirmed its full-year EPS guidance, and posted better-than-expected adjusted earnings for the second quarter, along with revenues that were roughly inline with expectations.

In M&A news, US pharmacy-benefit managers Express Scripts Inc. (ESRX $55) and Medco Health Solutions Inc. (MHS $64) announced that they have reached a definitive agreement to merge in a cash and stock deal worth about $29.1 billion. Under the terms of the deal, MHS shareholders will receive a total of $71.36 for each share they own, broken down as $28.80 per share in cash and 0.81 shares of ESRX. Shares of both companies traded higher.

Jobless claims rise, but Philly Fed Manufacturing Index and LEI gain more than forecasts

Weekly initial jobless claims increased by 10,000 to 418,000, versus last week's figure which was upwardly revised by 3,000 to 408,000, and compared to the 410,000 level that economists surveyed by Bloomberg had expected. However, the four-week moving average, considered a smoother look at the trend in claims, declined by 2,750 to 421,250, while continuing claims fell by 50,000 to 3,698,000, below the forecast of economists, which called for continuing claims to come in at 3,705,000.

However, the Philly Fed Manufacturing Index rose more than expected to climb back into expansion territory, increasing from -7.7 in June to 3.2 in July. Economists had expected the index to increase to 2.0, with a reading of zero the separating point between expansion and contraction. The index rose as new orders improved by 7.7 points to 0.1, shipments ticked higher to 4.3 from 4.0, and inventories jumped 9.9 points to 1.4. Also, employment posted a solid 4.8 point gain from the weakest reading since October to 8.9, while the prices paid component dipped 1.7 points to 25.1.

Elsewhere, the Conference Board’s Index of Leading Economic Indicators (LEI) for June rose 0.3% month-over-month (m/m), compared to the 0.2% increase that economists expected, and following May’s unrevised 0.8% increase. The index was led by increases in the components pertaining to money supply, the yield curve, consumer goods orders, building permits, and pace of deliveries. These offset declines in the stock prices, average workweek, nondefense capital goods orders, and consumer expectations components of the data.

Treasuries were lower, as the yield on the 2-year note rose 2 bps to 0.40%, the yield on the 10-year note was 8 bps higher at 3.01%, and the 30-year bond rate gained 6 bps to 4.31%.

Euro-debt crisis progress offsets manufacturing pessimism in Europe and China

The European markets were buoyed by optimism that today’s meeting by European leaders will result in progress toward containing the threat of contagion of the eurozone debt crisis. The upbeat sentiment heading into the meeting was fostered by reports that Germany, France, and the European Central Bank (ECB) have come to a preliminary agreement to help bailout debt-laden Greece and stem the threat of contagion, in a plan that will be presented to the other eurozone members. According to reports, the ECB has loosened its stance on allowing a “selective default” by Greece, as the new plan involves extending maturities and lowering interest rates on loans already received through the current 440 billion euro bailout fund, known as the European Financial Stability Facility (EFSF), which will also be applied to loans received by Ireland and Portugal. Moreover, the plan involves broadening the scope of the EFSF, by allowing the fund to purchase bonds in the secondary market and preemptive lending to states to help recapitalize the banking sector. Finally, a previous proposal by France to tax the banking sector to help pay for the eurozone bailout efforts was dropped, but there has not been any clarity regarding the involvement of private bondholders.

The debt contagion news helped to offset some disappointing data that showed larger-than-forecasted slowing of eurozone manufacturing activity. The Manufacturing PMI Indices in Germany—Europe’s largest economy—and France decelerated in July more than economists expected, resulting in the broad eurozone Manufacturing PMI declining to 50.8, from 53.3 in June, compared to the 52.6 reading that was anticipated, with a reading above 50 denoting expansion. In other economic news across the pond, UK consumer confidence deteriorated by a smaller amount than expected, UK retail sales rose more than forecasted, while UK public sector net borrowing increased more than projected.
 

Back in the Americas, Mexico’s unemployment rate increased to a seasonally adjusted rate of 5.74% in June from a revised 5.58% in May, which was above the level expected by economists and the highest rate in nearly two years.

After a busy week of economic data, there are no major releases on the US economic calendar tomorrow.

Reports from the international front will include the German Ifo Business Climate Index, Italian retail sales, eurozone industrial new orders, and Canada’s CPI and retail sales.