Morning Market Update

Earnings and M&A Helping Overshadow Debt and Data Worries

The US equity markets are higher in early action, as stocks are finding support from some favorable earnings releases and major M&A announcements, which are more than offsetting continued global debt concerns and some lackluster economic data. Citigroup Inc and Google Inc both posted 2Q results that exceeded analysts’ expectations, while BHP Billiton Ltd reached an agreement to acquire Petrohawk Energy Corp for about $12.1 billion and Carl Icahn announced he has offered to acquire Clorox Co for about $10.2 billion. However, US consumer prices came in hotter-than-expected on the core level and a read on manufacturing activity in New York for July unexpectedly remained at a level depicting contraction. Treasuries are mostly lower following the data, ahead of reads on industrial production and consumer sentiment. Meanwhile, the US debt ceiling issues remains in focus after Standard & Poor’s followed Moody’s in warning that if a deal is not reached to raise the debt limit, a downgrade was possible. Overseas, Asia finished mixed, while European equities are under some pressure ahead of an austerity vote in Italy and the release of the eurozone banking stress test results.

As of 8:51 a.m. ET, the September S&P 500 Index Globex future is 6 points above fair value, the Nasdaq 100 Index is 26 points above fair value, and the DJIA is 18 points above fair value. WTI crude oil is $0.42 higher at $96.11 per barrel, and the Bloomberg gold spot price is down $4.33 at $1,582.90 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.2% at 75.32.

Citigroup Inc. (C $39) posted 2Q EPS of $1.09, topping the $0.96 consensus estimate of analysts surveyed by Reuters, with revenues, although falling 7% year-over-year (y/y) to $20.6 billion, exceeding the $19.9 billion that the Street had projected. The company said it produced growth in both loans and deposits and improved its financial strength.

Google Inc. (GOOG $529) reported 2Q earnings ex-items of $8.74 per share, above the $7.85 that the Street had anticipated, with revenues excluding traffic acquisition costs (TAC) of $6.92 billion, compared to the $6.55 billion that analysts had forecasted. The world’s largest internet search engine said its Google-owned site revenues jumped 39% y/y, while its partner sites generated revenue growth of 20%.

In M&A news, BHP Billiton Ltd. (BHP $92) announced that it has reached a definitive agreement to acquire US-based gas producer Petrohawk Energy Corp. (HK $23) for $38.75 per share in cash, or about $12.1 billion. BHP said the deal is expected to provide it with greater exposure to the world’s largest energy market.

Elsewhere, activist investor Carl Icahn announced that his company has offered to acquire consumer products maker Clorox Co. (CLX $68) for $76.50 per share, valued at about $10.2 billion. CLX confirmed it has received an unsolicited proposal from Icahn Enterprises LP, which already has more than a 9% stake in the company, and will review the offer in due course.

CPI mixed, NY manufacturing contracts, sentiment and manufacturing data on deck

The Consumer Price Index showed prices at the consumer level were down 0.2% month-over-month (m/m) in June, a larger drop than the forecasts of economists surveyed by Bloomberg, calling for a 0.1% decrease, with May’s 0.2% increase unrevised. However, the core rate, which strips out food and energy, was 0.3% higher m/m in June, exceeding estimates of a 0.2% increase, with May’s 0.3% increase unadjusted. On a y/y basis, consumer prices were 3.6% higher in June, matching the level seen in May and economists’ forecasts, and the core CPI was 1.6% higher y/y, as expected, after rising by 1.5% in May.

The Empire Manufacturing Index, a measure of manufacturing in the New York region, continued to show contraction in July, as it remained in negative territory after modestly rising to -3.76 from June’s level of -7.79, compared to the estimates of economists, which called for an improvement to 5.00. A reading below zero denotes a contraction in activity. The report is the first major piece of data looking at manufacturing conditions in July.

Later this morning, the US economic calendar will yield the release of industrial production and capacity utilization, with production expected to rise 0.3% m/m in June and utilization to increase slightly from 76.7% in May to 76.9% in June. Also, we will get a look the preliminary University of Michigan’s Consumer Sentiment Index, projected to improve modestly from 71.5 in June to 72.0 for July.

Treasuries are mostly lower in morning action following the data, with the yield on the 2-year note unchanged at 0.37%, the yield on the 10-year note up 1 bp to 2.96%, and the 30-year bond rate 4 bps higher at 4.29%.

Europe in the red again ahead of Italy vote and banking stress test results

The equity markets in Europe are mostly lower in afternoon action as eurozone debt concerns and growing uncertainty regarding the debt ceiling issues in the US continue to hamper sentiment. Italy remains in focus as the government’s austerity plan, which has been expedited to try to calm the recent flare-up in contagion fears, faces a final confidence vote in the lower house Chamber of Deputies later today, which will pave the way for final passage of the plan. Yesterday the nation’s Senate casted a confidence vote for the measure. Meanwhile, cautiousness among traders is also limiting conviction, ahead of the evening release of the results of the European Banking Authority’s (EBA) stress tests of 91 European Banks. According to Bloomberg, to pass the test, banks will need to maintain tier-1 capital ratios of more than 5% under a scenario including a 0.5% economic contraction in the eurozone this year, a 15% drop in European equity markets, and trading losses on sovereign debt not held to maturity. However, there is skepticism regarding the strictness of the EBA’s tests, notably the proper level of exposure to sovereign debt, as its testing of the sector last year drew high scrutiny for being too soft.

In equity news, shares of BHP Billiton is under pressure to weigh on the equity markets on the heels of its announcement that it has reached an agreement to acquire US-based gas producer Petrohawk Energy Corp for more than $12 billion. Elsewhere, shares of Temenos Group AG (TMNSF $27) are sharply lower after the banking software provider cut its full-year license revenue outlook. However, shares of Hugo Boss AG (HUGSF $88) are nicely to the upside after the apparel maker offered an upbeat full-year outlook. In economic news, the eurozone trade deficit unexpectedly narrowed in May.

The UK FTSE 100 Index is flat, France’s CAC-40 Index is declining 0.5%, Germany’s DAX Index is nearly unchanged, and Italy’s FTSE MIB Index is trading 0.6% lower.

Asia mixed amid bargain hunting and debt concerns

Stocks in Asia finished mixed as traders sought out shares of recently pressured companies, while continuing to grapple with the global debt crisis that is focused on issues in the US and Europe. Japan’s Nikkei 225 Index moved 0.4% higher and South Korea’s Kospi Index advanced 0.7%. However, Australian stocks finished lower, with the S&P/ASX 200 Index declining 0.4%, as mining firm BHP Billiton came under some pressure after its $12.1 billion agreement to acquire Petrohawk Energy Corp. Elsewhere, stocks in China were mixed with the Shanghai Composite Index rising 0.4% despite the announcement from the government that it will deploy further measures to try to contain real-estate prices. Property developers came under pressure on the announcement, sending the Hong Kong Hang Seng Index down 0.3%.