Morning Market Update

Familiar Foe Rears its Head Again

US equities are lower in early action, after Moody’s Investors Service’s four-notch downgrade of Portugal brought the euro-area debt crisis back to the forefront of traders’ minds. Exacerbating the negative sentiment, China’s central bank upped its benchmark interest rates for the third time this year, further fueling concerns of a hard landing for the Asian nation that has led the economic recovery. Treasuries are higher amid the dour mood, showing little reaction to a decline in mortgage applications and ahead of a highly-anticipated read on the US service sector. Equity news is light and is second fiddle to the debt concerns, with Exxon Mobil being ordered by US regulators to rebury a pipeline at the center of an oil leak in the Yellowstone River. Overseas, Asian stocks finished mixed as Japan was able to buck the negative trend, while European markets are lower following the debt downgrade.

As of 8:50 a.m. ET, the September S&P 500 Index Globex future is 3 points below fair value, the Nasdaq 100 Index is also 3 points below fair value, and the DJIA is 65 point below fair value. WTI crude oil is $0.47 lower at $96.42 per barrel, and the Bloomberg gold spot price is up $6.68 at $1,522.38 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is 0.5% higher at 75.05.

A division of the US Dept. of Transportation has ordered Exxon Mobil Corp. (XOM $82) to rebury its Silvertip pipeline that is at the heart of a leak that has dumped as much as 1,000 barrels of oil into the Yellowstone River. As a result of the spill, the oil company shut down the pipeline and its Billings, Montana refinery is running at minimum capacity as it tries to “put its arms around” the scope of the leak, according to XOM’s president of ExxonMobil Pipeline Co. US regulators have also demanded that XOM conduct a risk assessment on the pipeline where it may cross other waterways.

Mortgage applications fall; US service sector activity on tap

The MBA Mortgage Application Index declined 5.2% last week, after the index that can be quite volatile on a week-to-week basis, fell by 2.7% in the previous week. The decrease came as a 9.2% drop in the Refinance Index was accompanied by a 4.8% decline in the Purchase Index. Elsewhere, the average 30-year mortgage rate rose by 23 basis points (bps) to 4.69%.

Later this morning, the economic calendar will yield the release of the ISM Non-Manufacturing Index, anticipated to fall to 53.7 in June from 54.6 in May. A reading of 50 separates expansion from contraction.

Treasuries are higher in early action following the housing data and ahead of the read on the service sector, with the yields on the 2-year and 10-year notes as well as the 30-year bond down 2 bps at 0.42%, 3.10%, and 4.35%, respectively.

European debt crisis back in the headlines

Equity markets across the pond are lower in afternoon action as the European debt crisis reintroduced a new round of uncertainty after Moody’s Investors Service slashed Portugal’s long-term debt rating by four notches to Ba2, considered junk status, while also lowering its short-term debt to “not-prime” from “prime-2.” The downgrade comes just two months after the troubled peripheral eurozone nation received 78 billion euros ($112 billion) in bailout funds from the European Union (EU) and International Monetary Fund (IMF). As part of receiving that aid package, Portugal’s new government, sworn in last month, is required to implement tough austerity measures to bring its budget deficit to 5.9% of gross domestic product (GDP) this year from the 9.1% of GDP last year. In commenting on the downgrade, Portugal’s Finance Ministry said in an emailed statement that the rating change ignores an extraordinary income-tax charge announced last week, and the “broad political consensus” of the measures agreed to with the EU and IMF. Yields on Portuguese debt rose after the downgrade, with the country’s 3-month bills priced to yield 4.93% at an auction today, above the 4.86% at an auction three weeks ago.

The debt situation in Europe had taken somewhat of a back seat last week amid a rally in most global markets following the approval of Greece’s austerity plan to possibly avoid a sovereign default. However, that reprieve was short-lived, as Standard & Poor’s rattled investors on Monday by warning that any rollover of Greek debt could create a credit event and likely put the country in “selective default,” and Moody’s saying yesterday that banks rolling over Greek debt will likely need to take impairment charges.

The debt crisis is overshadowing some mostly positive economic news in the region, with a report showing factory orders in Germany—Europe’s largest economy—unexpectedly rose on a month-over-month (m/m) basis during May, where economists were anticipating a decline, and housing prices in the UK increased, above the flat reading expected, while the previous month’s figure was favorably revised. However, industrial output in Spain slipped year-over-year (y/y), below the unchanged reading forecasted.

The UK FTSE 100 Index is down 0.8%, France’s CAC-40 Index is 0.6% lower, Germany’s DAX Index is declining 0.4%, Greece’s Athex Composite Index is 1.2% lower, and Portugal’s PSI 20 Index is falling 2.7%. Elsewhere, Italy’s FTSE MIB Index is tumbling 2.2% and Spain’s IBEX 35 Index is down 1.7%.

Asia mixed following Moody’s downgrade

Stocks in Asia finished mixed following Moody’s downgrade of Portugal with financials leading to the downside, exacerbated by Singapore’s state-owned investment company Temasek Holdings selling stakes in two of China’s largest banks, China Construction Bank Corp and Bank of China Ltd over concerns of the banks’ ability to absorb losses should property values drop. The Shanghai Composite Index slipped 0.2%, while the Hong Kong Hang Seng Index dropped 1.1%. Meanwhile, after trading closed in Asia, the People’s Bank of China raised its benchmark interest rates for the third time this year in its efforts to combat inflation as consumer prices, reported in mid-June, rose 5.5% m/m, and its fastest pace since July 2008. The central bank raised the one-year deposit rate by 25 bps to 3.5%, and one-year lending rate by 25 bps as well to 6.56%.

The move fueled concerns of a slowdown in the world’s second largest economy that has been the main driver of the economy recovery, while yesterday’s drop in the nation’s service PMIs and Moody’s Investors Service report indicating that Chinese banks may be holding more problem loans than initially thought, exacerbated the sentiment. 

In other news in the region, Japan’s leading index ticked slightly higher and inline with what economists were expecting, while consumer confidence in India rose. The Nikkei 225 Index was up 1.1%, the BSE Sensex 30 Index slipped 0.1%, while Australia’s S&P/ASX 200 Index added 0.2%.