Evening Market Update

 

Debt Ceiling Debate Strikes Again

Equity markets finished solidly lower as lawmakers in Washington again failed to make any notable progress towards reaching an agreement to raise the debt ceiling. Adding to the markets’ woes, durable goods orders fell as did mortgage applications, while the Fed’s Beige Book noted a moderated pace of expansion for the US economy. Dampened sentiment did not provide its usual boost to Treasuries, which finished lower, as the debt ceiling debate continues to exacerbate concerns of a potential default. News on the equity front was far more positive, as Amazon, Dow Chemical, General Dynamics and Dow member Boeing all posted better earnings than analysts were expecting. However, Juniper Networks earnings disappointed.

The Dow Jones Industrial Average lost 199 points (1.6%) to 12,302, the S&P 500 Index fell 27 points (2.0%) to 1,305, and the Nasdaq Composite shed 75 points (2.7%) to 2,765. In heavy volume, 1.1 billion shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil fell $2.27 to $97.32 per barrel, wholesale gasoline dropped $0.01 to $3.15 per gallon, and the Bloomberg gold spot price retreated $5.17 to $1,614.13 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.7% higher at 74.07.

Dow member Boeing Co. (BA $71) reported 2Q EPS of $1.25, well above the $0.97 consensus estimate of analysts surveyed by Reuters, with revenues increasing 6% year-over-year (y/y) to $16.5 billion, matching what the Street had expected. BA said its order backlog is over four times its current annual revenue projection, and it has made progress toward the delivery of its 787 Dreamliner and its 747-8 aircrafts. The company increased its full-year EPS guidance, saying that “our outlook for the year has strengthened,” and shares finished higher

Amazon.com Inc. (AMZN $223) announced 2Q profits of $0.41 per share, above the $0.35 that the Street was expecting, with revenues jumping 51% y/y to $9.9 billion, topping the $9.4 billion forecast of analysts. The online retailer said sales of its Kindle e-reader devices accelerated in 2Q, while sales in its North American and international units grew solidly. AMZN was solidly higher on the day.

Dow Chemical Co. (DOW $35) achieved 2Q EPS ex-items of $0.85, four cents above the forecast of analysts, as revenues rose 28% y/y to $16 billion, well above the $14.7 billion that the Street was anticipating. The company said sales at its emerging geographies and Asia Pacific regions reached new quarterly records, while double-digit volume growth was seen in its health and agricultural sciences and plastics segments. Looking ahead, DOW said it sees developed markets continuing to gain traction, “albeit at a somewhat uneven and jagged pace,” while in its emerging markets the rapid expansion of the middle class continues to support results. Shares were lower..

General Dynamics Corp (GD $69) reported 2Q EPS of $1.79, beating the Street’s estimate of $1.72. However, shares finished lower as investors focused on a surprising drop in revenue from lower sales coming from the majority of its business units.

Electronic Arts Inc. (ERTS $23) posted a smaller-than-forecasted adjusted fiscal 1Q loss of $0.37 per share, compared to the $0.39 shortfall that analysts had projected, while although revenues declined 2.8% y/y to $524 million, they exceeded the $512 million that the Street had estimated. Shares have given up early gains and are lower.

Juniper Networks Inc. (JNPR $25) was sharply lower after the network infrastructure company reported 2Q EPS ex-items of $0.31, three cents below the forecast of analysts, and revenues of $1.1 billion, that came in below the $1.2 billion Street expectation. Also, the company issued 3Q revenue guidance that missed estimates, reflecting “some near-term market weakness.”

Durable goods fall, mortgage applications decline, Fed releases Beige Book

Durable goods orders —goods intended to last at least three years—unexpectedly fell, dropping 2.1% month-over-month (m/m) in June, compared to the 0.3% increase that was expected by economists surveyed by Bloomberg, but May’s figure was unrevised at a 1.9% increase. Meanwhile, ex-transportation, orders inched 0.1% higher in June, compared to the expectation of a 0.5% rise, while May’s figure was adjusted favorably to a 0.7% increase. Elsewhere, orders for  non-defense capital goods excluding aircraft, considered a good proxy for business spending, fell by 0.4% in June, compared to the 1.0% increase that was anticipated, after rising by a positively revised 1.7% in May.

A sharp decrease in nondefense aircraft & parts, and defense capital goods orders paced the decline in the headline figure. Also, orders for motor vehicles and parts declined, possibly reflecting the impact of the production and supply-chain disruptions from the Japanese earthquake. However, orders for communications equipment jumped 15.2% compared to May, offsetting a decline in computers and related products.

In other economic news, the MBA Mortgage Application Index fell 5.0% last week, after the index that can be quite volatile on a week-to-week basis, jumped by 15.5% in the previous week. The decline came as the Refinance Index and the Purchase Index decreased, while the average 30-year mortgage rate moved higher by 3 basis points (bp) to 4.57%.

The Federal Reserve Beige Book was released mid-day, 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 report noted that economic activity across the nation continued to expand since the early-June report, but “the pace has moderated in many Districts.” Meanwhile, the report showed consumer spending increased overall, as falling gasoline prices may have contributed to higher consumption. However, price pressures were noted in food, energy, cotton and other supplier inputs, which weighed on margins. Moreover, manufacturing activity “expanded overall,” with two Districts growing at a somewhat faster rate since the last report, and the outlook for the sector remained “generally optimistic,” but capital spending plans were “somewhat more cautious.”

Furthermore, housing remained weak although construction and activity in the residential rental market continued to improve. Also, the release showed that overall loan volumes grew in three Districts, but remained flat with mixed trends in most areas, while credit quality was steady or improving. In the agriculture sector, drought conditions and severe flooding “adversely affected large portions.” On the labor front, employment conditions were categorized as remaining “soft” in most districts, while wage pressures continued to be “subdued.” Finally, on inflation, the report noted that price pressures “seemed to have moderated somewhat,” although some firms reported being able to pass along some rising costs.

Treasuries were lower despite the data as traders grappled with the US debt ceiling uncertainty, as the yield on the 2-year note increased 5 bps to 0.43%, the yield on the 10-year note rose 2 bps to 2.98%, and the 30-year bond rate was flat at 4.28%.

International sentiment hampered by European banks and Aussie inflation

Sentiment across the pond was weakened by broad-based losses in the European financial sector as a result of disappointing earnings reports and Goldman Sachs downgrading its outlook for the region’s banking sector. Banco Santander SA (STD $10) added to the pressure, after Spain’s largest bank, per Bloomberg, reported a sharp drop in earnings. German Finance Minister Schaeuble warned against giving carte blanche to the euro-area’s rescue fund to buy bonds in the secondary market, per Reuters, while Standard & Poor’s cut its rating on Greece in late-day trading. In economic news, German consumer prices came in hotter than economists forecasted for July, while Italian business confidence deteriorated more than estimated.

In Asia-Pacific economic news, South Korea’s 2Q GDP expanded at a rate that was inline with forecasts compared to 1Q and Taiwan’s leading index increased 0.2% in June, matching the increase from May. Elsewhere in the region, Australian consumer prices came in hotter than expected in 2Q, fostering some concern about a potential return to a rate-hike campaign by the Reserve Bank of Australia.

Tomorrow’s US economic calendar will includes pending home sales, which are expected to decline by 2.0% in June, after increasing 8.2% in May. Weekly initial jobless claims will also be reported tomorrow and are expected to come in at 415,000, slightly better than last week’s 418,000.

International economic releases scheduled for tomorrow include the German unemployment report, euro-zone consumer confidence, Brazil’s July inflation rate, and Hong Kong’s trade balance for June. Additionally, the next couple of days should see the release of China’s leading index.