Morning Market Update

Debt Concerns Remain But Early Losses Have Been Erased

After posting solid losses in early action, the US equity markets have battled back and are threatening a move into positive territory, showing some resiliency to continued uncertainty regarding the debt ceiling issue in the US and the exacerbated eurozone debt contagion fears. Treasuries have pared morning gains and are mixed as some of the debt concerns in Europe have been relatively soothed by a successful debt auction in Italy and reports that the European Central Bank may be buying Spanish and Italian debt in the secondary market. The euro has stemmed its losses and the US dollar has come off of its highs. Meanwhile, economic releases are having little impact, as traders showed a muted reaction to an unexpected dip in a read on small business optimism and a larger-than-anticipated expansion in the US trade deficit. Later today, the Federal Reserve will release the minutes from its June monetary policy meeting. In equity news, Dow member Alcoa Inc posted mixed 2Q quarterly results, while NCR Corp announced that it reached an agreement to acquire Radiant Systems Inc for $1.2 billion in cash. Overseas, Asian markets finished solidly lower, while European stocks are under pressure for a third session, but are well off the worst levels of the day.

As of 8:49 a.m. ET, the September S&P 500 Index Globex future is 1 point above fair value, the Nasdaq 100 Index is 7 points above fair value, and the DJIA is 38 points above fair value. WTI crude oil is $0.58 lower at $94.57 per barrel, and the Bloomberg gold spot price is down $2.00 at $1,551.48 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is 0.1% higher at 76.05.

Dow member Alcoa Inc. (AA $16) unofficially kicked off 2Q earnings season by posting profits ex-items of $0.32 per share, one cent short of the consensus estimate of analysts surveyed by Reuters. But the aluminum producer reported revenues, which grew 27% year-over-year (y/y) to $6.6 billion, topping the $6.3 billion that the Street was looking for. The company said, “Although the economic recovery is uneven, the overall outlook for Alcoa—and for aluminum—remains positive,” with demand for aluminum continuing to rise along with growth in its major markets. AA added that these factors support its projection that aluminum demand will grow 12% this year and will double by 2020.

In M&A news, NCR Corp. (NCR $19) announced that it has reached a definitive agreement to acquire Radiant Systems Inc. (RADS $21) for $28.00 per share in cash, with an equity purchase price of $1.2 billion. NCR said the deal, which is expected to close in 3Q, is anticipated to be accretive to its earnings in 2012.

Small business confidence wanes, trade deficit widens, Fed report slated for the afternoon

The NFIB Small Business Optimism Index surprisingly slipped in June, dipping from 90.9 in May to 90.8, compared to the expectation of economists surveyed by Bloomberg, which called for the index to increase to 91.2. The unexpected dip came as the number of firms reporting expectations of higher sales and a better economy deteriorated, offsetting plans to increase capital spending and hiring, while forecasts for increased inventory came in unchanged.

Elsewhere, the trade deficit expanded more than expected, widening to $50.2 billion in May from a modestly favorable revision of $43.6 billion in April, versus the estimate of economists, which called for the deficit to widen to $44.1 billion.

Treasuries are mixed after paring early gains, with the yield on the 2-year note up 2 bps to 0.37%, while the yield on the 10-year note is 1 bp lower at 2.91%, and the 30-year bond yield is declining 3 bps to 4.18%.

However, the headlining economic report for the day will come in the form of the afternoon release of the minutes from the June Federal Open Market Committee (FOMC) meeting. The Fed downgraded its assessment of the economy at the last meeting, citing some temporary factors, but in the press conference following the meeting, Fed Chair Bernanke said some of the headwinds such as weakness in the financial sector and housing market “may be stronger and more persistent than we thought.” The meeting was the last before the end of QE2 and Bernanke quelled ideas about a potential QE3 by saying that differences from last fall included improvement in the job market and the mitigated risk of deflation.

The Fed should be considering moving toward a normal monetary policy, but its asset purchases have not stopped as it continues to reinvest money received from securities maturing in order to maintain the size of its balance sheet. Stopping this process would be a likely first step in the long road to more normal policy and there will be close scrutiny of the meeting’s minutes for signs of a discussion on this topic among policymakers. However, at the Fed’s April meeting, although the topic of returning to normal policy conditions was part of the Central Bank’s discussions, they appeared far from reaching any consensus on an appropriate action plan, and it will be interesting to see if the downgraded economic assessment the Fed gave following last month’s meeting stemmed further discussions of this topic. 

Europe continues to slide as debt contagion concerns remain

The equity markets in Europe are under pressure for a third-straight session as concerns that the eurozone sovereign debt crisis may spread to larger European economies continue to hamper sentiment. The uneasiness is focused on the possibility that the debt crisis, which has forced bailouts of smaller peripheral eurozone nations of Greece, Ireland, and Portugal, could reach the larger nations of Spain and Italy, which have debt levels that far exceed the aforementioned peripheral nations. Meanwhile, European finance ministers continue to hold talks today on constructing a new financial rescue package for Greece and a consensus agreement among officials appears elusive as key eurozone players continue to be at odds on the best way to help the debt-laden nation get its debt obligations under control. However, stocks across the pond are well off of the worst levels of the day as Italy conducted a debt auction, which raised its target capital amount in one-year bills, but yields the nation will have to pay rose. Also, reports that the European Central Bank (ECB) stepped in the secondary markets to buy debt of Italy and Spain are helping pare losses in afternoon action. The euro has pared a majority of early losses to help the afternoon resiliency.

Elsewhere, the debt concerns in the region are putting economic data on the back burner, as reports that showed UK inflation came in cooler than economists had projected, while German and French consumer prices were inline with expectations, are having little impact. In other economic news, the UK trade deficit unexpectedly widened in May and June home prices in the UK improved by a smaller amount than anticipated.

The UK FTSE 100 Index is down 0.9%, France’s CAC-40 Index is falling 1.1%, Germany’s DAX Index is dropping 1.0%, while Italy’s FTSE MIB Index is advancing 0.6%, Spain’s IBEX 35 Index is decreasing 0.1%, and Greece’s Athex Composite Index is 1.1% lower.

Asia falls on global debt concerns and Chinese corporate governance worries

Stocks in Asia were solidly lower amid growing uncertainty regarding the US debt ceiling and as sovereign debt contagion fears in the eurozone continued to unnerve sentiment. Japan’s Nikkei 225 Index fell 1.4% on the debt concerns and a subsequent rise in the yen, which overshadowed the Bank of Japan’s (BoJ) monetary policy meeting, in which it kept its benchmark interest rate unchanged near zero but said, “Japan’s economy is picking up as supply constraints for the earthquake ease.” However, the BoJ warned that downside risks to its economic outlook are tied to the developments in the US and Europe, and emerging nations face a difficult task of controlling inflation and sustaining economic growth. Elsewhere, South Korea’s Kospi Index dropped 2.2% and Australia’s S&P/ASX 200 Index declined 1.9% amid the global debt uneasiness. But losses in Australia were limited by a sharp jump in shares of Macarthur Coal Ltd. (MACDY $32) after the company received a joint takeover proposal from US-based Peabody Energy Corp. (BTU $58) and Luxembourg’s ArcelorMittal SA (MT $33) for about $5.0 billion.

Meanwhile, stocks in China also came under solid pressure on the debt concerns, while a report yesterday from Moody’s Investors Service warning about accounting and corporate governance risks in several Chinese companies exacerbated the downside moves. The Hong Kong Hang Seng Index tumbled 3.1% and the Shanghai Composite Index fell 1.7%, with the soured sentiment overshadowing a report that showed new yuan loans in China rose more than economists had expected. Finally, India’s BSE Sensex 30 Index dropped 1.7% on the heels of a report that showed that nation’s industrial production unexpectedly slowed in May and as shares of Infosys Ltd. (INFY $65) moved solidly lower after the country’s second-largest software exporter, per Bloomberg, issued a disappointing sales outlook.