Evening Market Update

 

Mixed Markets as Euro Debt Deal Down, US Yet to Come

Markets ended the week in a mixed mood, cheered by earnings that have generally beat expectations and a plan to address the sovereign debt woes in Europe, but suffering from trepidation with a lack of resolution on an agreement regarding the US debt ceiling. The Dow Jones Industrials Average was hit today by an earnings disappointment from Caterpillar, which was offset by solid earnings from General Electric Co and McDonald's Corp. Elsewhere, Dow members Microsoft Corp and Verizon Communications beat estimates, but had disappointing metrics within their reports. Treasuries and the US dollar were higher.

The Dow Jones Industrial Average lost 43 points (0.3%) to 12,681, while the S&P 500 Index rose 1 point (0.1%) to 1,345, and the Nasdaq Composite gained 24 points (0.9%) to 2,859. In moderate volume, 737 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.74 to $99.87 per barrel, wholesale gasoline added $0.03 to $3.09 per gallon, and the Bloomberg gold spot price advanced $10.95 to $1,601.50 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was 0.3% higher at 74.13. For the week, including dividends, the DJIA gained 1.6%, the S&P 500 Index added 2.2%, and the Nasdaq Composite advanced 2.5%.

Dow component Caterpillar Inc. (CAT $105) announced 2Q EPS ex-items of $1.72, below the $1.75 consensus estimate of analysts surveyed by Reuters, but revenues rose 37% year-over-year (y/y) to $14.2 billion, topping the $13.5 billion that the Street had expected. The construction equipment maker said "there are certainly cost pressures in our business," but it is seeing increased customer demand. The company raised its full-year guidance.

Meanwhile, CAT added that it is "seeing some softening of growth in China," but expectations for China "remain positive," as the nation is doing a good job of balancing growth and inflation. Moreover, the company noted that while it expects moderate US economic growth, it believes "a lack of confidence in the business climate is the major impediment to a stronger recovery and job creation." CAT pointed out that the "lack of clarity on a US deficit reduction plan, trade policy, regulation, much needed tax reform and the absence of a long-term plan to improve the country's deteriorating infrastructure do not create an environment that provides our customers with the confidence to invest." Shares were down sharply.

Fellow Dow member Microsoft Corp. (MSFT $28) reported fiscal 4Q earnings of $0.69 per share, above the $0.58 estimate of analysts, with revenues increasing 8% y/y to $17.4 billion, exceeding the $17.2 billion that the Street had forecasted. The Dow member benefitted from higher demand for its enterprise software, while its Windows unit revenue declined 1% y/y. MSFT traded slightly to the upside.

Dow component General Electric Co. (GE $19) posted 2Q EPS ex-items of $0.34, two pennies above the Street’s forecast, with revenues declining 4% y/y to $35.6 billion, but topping the $34.7 billion that analysts had projected. The company said it saw "strong" contributions from GE Capital, along with its healthcare, transportation, aviation, and oil & gas units, while its order backlog grew to a record. Shares traded modestly lower amid some profit taking following the company’s solid gain this week ahead of the report.

Verizon Communications Inc. (VZ $37) achieved 2Q profits of $0.57 per share, two cents north of the Street's expectations, with revenues increasing 2.8% y/y to $27.5 billion, slightly above the $27.4 billion that analysts anticipated. The Dow member also announced that the company's President and COO Lowell C. McAdam as its new CEO, effective August 1. However, shares were under pressure as the company’s average revenue per user-a key industry metric-rose 1.9%, which disappointed analysts. 

McDonald's Corp. (MCD $89) reported 2Q EPS of $1.35, well above the $1.28 that the Street was forecasting, as revenues rose 16% y/y to $6.9 billion, topping the $6.6 billion analyst estimate. The Dow component said its 2Q global same-store sales-sales at stores open at least thirteen months-gained 5.6% y/y, led by increases in sales and guest counts across all of its segments, "highlighted by June’s strong results." Shares were solidly higher. 

US economic data heats up next week, joining earnings action and debt ceiling focus

Treasuries rose and there were no major economic reports today, with the yield on the 2-year note down 1 bp to 0.39%, while the yields on the 10-year note and the 30-year bond fell 5 bps to 2.96% and 4.26%, respectively.

Markets will have a full calendar of US economic data next week to join the earnings parade and scrutiny on US policymakers to reach agreement on the debt ceiling. This week's housing data was mixed, and next week completes the monthly data, with Tuesday's S&P/CaseShiller Home Price Index forecasted to show prices flat m/m and a 4.55% decline y/y in May. Pricing data lags sales data by a month, while June's new home sales report out the same day is expected to show a 0.6% m/m gain in June to an annual rate of 321,000 units after falling 2.1% in May to 319,000. The new home sales report is considered a timely indicator of conditions in the housing market as it is based on signings, while existing home sales, which unexpectedly fell 0.8% m/m, uses closings.

Wednesday morning brings the volatile durable goods orders report, expected to gain 0.3% in June after gaining a strong 1.9% m/m in May, while ex-transportation, orders are forecasted to have risen 0.5% m/m after increasing 0.6% in May. Later in the day, the Federal Reserve Beige Book will be released, wherein Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for August 9. The Fed downgraded its assessment of the economy at the late June meeting, citing temporary factors, but also noting that some of the headwinds "may be stronger and more persistent than we thought."

The speed and health of the US economy is still a concern for markets, and Friday's first reading of 2Q gross domestic product (GDP) is expected to show another quarter of growth below the 2% level many consider potential "stall speed," the rate a which growth slows enough that it becomes self-reinforcing to the downside. The consensus of a Bloomberg survey of economists expects 2Q GDP to grow at a 1.8% quarter-over-quarter (q/q) annualized rate, after gaining 1.9% in 1Q. The largest component of GDP, personal consumption, is expected to slow to a 0.8% rate in 2Q, after advancing 2.2% in 1Q. With regard to inflation readings, the GDP Price Index is expected to rise 2.0%, and the core PCE Index, which excludes food and energy, is forecasted to increase 2.2%.

Other releases on the US economic calendar include Consumer Confidence, the Richmond Fed Manufacturing Index, the MBA Mortgage Applications Index, weekly initial jobless claims, pending home sales, the Chicago Purchasing Manager’s Index and the final University of Michigan Consumer Sentiment Index reading for July.

Greek debt plan overshadows mixed European data, Asia quiet

Traders digested a new eurozone debt crisis bailout plan aimed at containing the threat of contagion reaching key countries such as Italy and Spain. The plan’s broad outline was digested by markets yesterday but additional details were released today. The resolution consists of 109 billion euros ($157 billion) in new funds for Greece from the 440 billion euro European Financial Stability Facility (EFSF), with some of the funds earmarked for Greek infrastructure projects as the plan calls for a "comprehensive strategy for growth and investment in Greece." But some disappointment has been expressed regarding the size of the EFSF being left unchanged, as it is too small to support contagion spreading to the larger economies of Italy and Spain.

Moreover, Greece’s private creditors, mainly the region's financial institutions, agreed to a debt exchange for new bonds with lower interest rates and longer maturities. In response Fitch Ratings said it will declare Greece in a "restricted default" on its debt, but it will likely assign new ratings of a low speculative grade once the bond exchange is completed, per Reuters. Other aspects of the deal include: the European Central Bank (ECB) will continue to accept Greek debt as collateral for loans as euro-area countries agreed to offer guarantees of the debt and allow the EFSF to buy government bonds in the secondary market to help recapitalize banks, while Ireland and Portugal will get lower rates on the their loans received through the EFSF.

Meanwhile, European economic news was mixed, with the German Ifo Business Climate Index declining more than expected for July and French business confidence coming in below forecasts for July, while eurozone industrial new orders rose more than anticipated for May. In the Americas, Canada’s CPI came in less than expected, while retail sales were stronger than forecast. There were no major Asian economic releases.

International economic releases due out next week include Japan’s retail trade, jobless rate, CPI, industrial and vehicle production, as well as construction orders, Australia's PPI, CPI and leading index, South Korea and Singapore's industrial production, and China's leading index and year-to-date industrial profits. Releases from Europe will include euro-zone consumer confidence and the CPI estimate for July, Germany's consumer confidence, CPI, import prices, and employment, and UK home prices and consumer confidence. Back in the Americas, Canada releases GDP for May, as well as industrial and raw materials prices. New Zealand's central bank meets, where no change is expected.

Earnings and eased eurozone contagion concerns lift stocks

The US equity markets registered respectable gains despite growing uneasiness toward the US debt ceiling issue as the August 2 deadline draws near. Technology and financials paced the advance as 2Q earnings season continued to produce results that were mostly north of the Street's expectations, highlighted by favorable reports from Morgan Stanley (MS $24) and Apple Inc. (AAPL $395). Meanwhile, a sizeable portion of the support for the equity markets came from eased concerns about the eurozone debt crisis and the threat of contagion spreading to larger European economies such as Italy and Spain. European leaders moved toward a relatively more decisive plan to stem the crisis, announcing a new bailout package for Greece, while expanding the scope of the European Financial Stability Facility (EFSF) and gaining the participation from private-sector Greek bondholders. Elsewhere, M&A news continued to pour in, with US pharmacy-benefit managers Express Scripts Inc. (ESRX $57) and Medco Health Solutions Inc. (MHS $66) announcing a $29.1 billion merger agreement. Also, we received some upbeat US economic data, as housing starts and building permits grew more than expected, the Philly Fed Manufacturing Index moved back to a level depicting expansion, and the Index of Leading Economic Indicators gained more than economists had anticipated.

The slew of positive data that provided some sustenance for the bulls overshadowed some disappointing global manufacturing data, with the Chinese PMI Index depicting contraction for the first time in a year and the eurozone PMI Index decelerating more than forecasted, led by output in France and Germany. Finally, a larger-than-anticipated increase in US weekly initial jobless claims and an unexpected drop in existing US home sales appeared to be drowned out by the aforementioned optimism out of Europe and the US corporate front.