Morning Market Update

Bulls Hope to Add to Last Week’s Gains

US equities have pared early gains and are slightly lower in early action, as traders return from the long holiday weekend hoping to add to the best week in two years. However, the mood is being tempered somewhat following a Moody’s Investors Services report surrounding Chinese banks, and after service sector activity in Europe showed some deceleration. Treasuries are higher amid a lack of any major economic news with only factory orders set to be released later this morning. Equity news is also light, with Energy Transfer Equity LP upping it bid to acquire Southern Union Co in an attempt to wrest it away from Williams Co., while Microsoft has secured some English-language sourcing for Chinese search engine Baidu Inc. Overseas, Asian stocks finished mixed, after moving above and below the flatline throughout the trading day following Moody’s report, while European markets are mostly flat.

As of 8:50 a.m. ET, the September S&P 500 Index Globex future is 2 points below fair value, the Nasdaq 100 Index is 1 point below fair value, and the DJIA is 1 point below fair value. WTI crude oil is $1.07 higher at $96.01 per barrel, and the Bloomberg gold spot price is up $12.03 at $1,508.23 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is 0.3% higher at 74.49.

Chinese search engine Baidu Inc. (BIDU $143) will begin sourcing some of its English-language searches from Microsoft Corp’s (MSFT $26) Bing search facility, the companies reported yesterday. The move comes as BIDU is looking to solidify its lead over Google Inc. (GOOG $521) in the Asian nation, and to expand its presence overseas, while MSFT too is hoping to expand its reach in China. The deal adds to a revenue-sharing agreement between the two companies, and a BIDU spokesperson said it is “always open” to further cooperation between the two firms.

In M&A news, Energy Transfer Equity LP (ETE $45) sweetened its bid to acquire Southern Union Co. (SUG $40) to $8.9 billion, substantially topping Williams Cos.’ (WMB $31) $5 billion offer it made for SUG on June 23. Under the terms of the deal, SUG shareholders will receive $40 per share in cash or 0.903 shares of ETE for each share owned, and would create the largest natural gas pipeline operator in the world. SUG Chairman and CEO said the combination would be highly complementary, provide a broader range of services and market access, and deliver superior value to shareholders.

Slow start to employment-driven economic week

Treasuries are higher in early action on a day void of any major economic data, with the yields on the 2-year and 10-year notes down 4 bps at 0.45% and 3.15%, respectively, while the yield on the 30-year bond is 2 bps lower at 4.37%.

Later this morning, factory orders will be released, forecasted to rise 1.0% in May following a 1.2% decline in April.

The latter part of the week will provide the meat of this week’s economic calendar, with tomorrow’s ISM Non-Manufacturing Index getting the ball rolling, anticipated to fall to 53.6 during June from 54.6 in May. However, jobs will be the focus for the holiday-shortened week, with the employment component within the services ISM report, as well as both the ADP Employment Change and initial jobless claims set to be released. The week concludes with the Labor Department’s nonfarm payrolls on Friday, expected to grow 100,000 in June after adding a mere 54,000 in May, and the unemployment rate is estimated to remain at 9.1% after rising in May from April’s 8.9% rate.

Other releases on the US economic calendar include MBA Mortgage Applications, wholesale inventories, consumer credit, and retailers will be reporting same-store sales for June.

Europe flat amid lackluster economic data

The equity markets in Europe are little changed in afternoon trading, following its best streak since September, as the mood is being tempered somewhat following lackluster manufacturing reports out of the region and after the Moody’s report on Chinese banks. The eurozone composite services PMI came in slightly lower than economists’ forecasts, as reports from France, Germany, and the UK showing some deceleration in activity, while Italy’s reading fell further into contractionary territory denoted by a reading below 50. As well, Moody’s Investors Service said that banks rolling over Greek debt will likely need to take impairment charges, adding another wrinkle to the debt-laden nation’s hopes in avoiding a default, and Standard & Poor’s rattled investors Monday by saying that any rollover of Greek debt could create a credit event and likely put the country in “selective default.” In other economic news, retail sales in the eurozone fell 1.1% month-over-moth during the month of May, slightly lower than the 1.0% decline expected by economists surveyed by Bloomberg, while on a year-over-year basis, sales fell more than triple forecasts.

The UK FTSE 100 Index is 0.1% higher, France’s CAC-40 Index is down 0.6%, Germany’s DAX Index is flat, Italy’s FTSE MIB Index is declining 0.7%, while Greece’s Athex Composite Index is 1.0% lower.

Asia mixed following banking report

Stocks in Asia finished nearly flat after swinging between gains and losses throughout the day. Banking stocks turned in a lackluster performance after a report from Moody’s Investors Service indicating that Chinese banks may be holding more problem loans than initially thought. The report disclosed that loans to local governments by lenders in the Asian nation are about 3.5 trillion yuan ($540 billion) more than the national auditors’ forecast, which could result in a downgrade in the nation’s credit outlook. The Hong Kong Hang Seng Index slipped a modest 0.1% with shares of Industrial & Commercial Bank of China Ltd falling 0.5%, while the Shanghai Composite Index rose 0.1%. In other news, the Reserve Bank of Australia left its benchmark interest rate unchanged at 4.75%, as expected, but central bank Governor Stevens said that “growth through 2011 is now unlikely to be as strong as earlier forecast,“ sending shares lower, as the S&P/ASX 200 Index lost 0.3%. Elsewhere, Japan’s Nikkei 225 Index notched its sixth-straight day of gains, posting a 0.1% rise, with shares of Tokyo Electric Power Co (TKECY $6) climbing 5.1% percent after the utility company said a self-contained cooling system at its nuclear plant crippled by the March earthquake and tsunami is now running properly. In other regional action, South Korea’s Kospi Index rose 0.8%, Taiwan’s Taiex Index eked out a 0.1% gain, while India’s BSE Sensex 30 Index was 0.4% lower.