Morning Market Update

Eased Euro Debt Concerns and Earnings Boost Stocks

The US equity markets are higher in early action, overcoming global economic concerns that came from some disappointing manufacturing data out of China and Europe, along with a rise in US jobless claims. A slew of upbeat earnings reports in the US and optimism toward a resolution for the bailout of debt-laden Greece, which is stemming eurozone contagion fears, are providing the sustenance for the bulls. In US earnings news, Morgan Stanley, along with Dow members American Express Co and AT&T Inc, all reported results that exceeded expectations, while Dow components Intel Corp and Travelers Companies Inc are under pressure following their results. Meanwhile, in a major M&A announcement, US pharmacy-benefit managers Express Scripts Inc and Medco Health Solutions Inc said they have reached a definitive agreement to merge in a cash and stock deal worth about $29.1 billion. Treasuries are lower despite the lackluster employment data, ahead of reports on Mid-Atlantic manufacturing activity and the Index of Leading Economic Indicators. Overseas, Asia was mixed as traders grappled with the Chinese data and optimism toward the euro-area debt crisis, which is boosting European stocks.

As of 8:55 a.m. ET, the September S&P 500 Index Globex future is 9 points above fair value, the Nasdaq 100 Index is 9 points above fair value, and the DJIA is 72 points above fair value. WTI crude oil is $0.19 higher at $98.59 per barrel, and the Bloomberg gold spot price is down $0.90 at $1,599.50 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.4% at 74.51.

Dow member Intel Corp. (INTC $23) reported 2Q EPS ex-items of $0.59, above the $0.51 consensus estimate of analysts surveyed by Reuters, with revenues increasing 22% year-over-year (y/y) to $13.1 billion, exceeding the $12.8 billion that the Street had expected. The chipmaker said strong corporate demand for its most advanced technology, the surge of mobile devices and internet traffic fueling data center growth, and the rapid rise of computing in emerging markets drove its revenue growth. INTC issued 3Q revenue guidance that topped analysts’ forecasts, but the company’s CEO said the PC-unit forecast was “down a bit,” projecting PC growth of between 8-10%, down from its previous guidance of low double-digit growth.

Morgan Stanley (MS $22) announced that it recorded a 2Q net loss of $0.38 per share, smaller than the $0.63 loss that analysts had expected, with revenues increasing 3.8% y/y to $9.3 billion, above the $8.0 billion that the Street was anticipating. The financial firm said it had its highest reported fixed income underwriting and the best results in its M&A and equity sales & trading unit since the financial crisis, while its other business achieved “solid performances.” Also, MS said its Tier-1 capital ratio—a key industry metric—increased by 290 basis points (bps) to 14.6%, “an industry leading level.”

American Express Co. (AXP $52) posted 2Q earnings of $1.07 per share, topping the $0.99 that the Street was anticipating, with revenues increasing 12% y/y to $7.6 billion, north of the $7.4 billion that analysts had projected. The Dow member said cardmember spending was at an all-time high, increasing 18%, based on strength across the consumer, small business and corporate sectors globally.

AT&T Inc. (T $30) reported 2Q EPS of $0.60, one penny above the Street’s forecast, with revenues increasing 2.2% y/y to $31.5 billion, exceeding the $31.3 billion that analysts had anticipated. The Dow component said it posted “strong wireless gains, record mobile broadband sales and continued strength in U-verse and strategic services.”

Dow member Travelers Companies Inc. (TRV $57) announced a 2Q net loss of $0.91per share, wider than the $0.64 shortfall that the Street had projected, with revenues increasing 2% y/y to $5.8 billion, compared to the $5.9 billion that analysts expected. The insurer said the larger-than-expected loss was due to the “extraordinary tornadoes and hail storms that caused devastation across significant portions of the United States.”

In M&A news, US pharmacy-benefit managers Express Scripts Inc. (ESRX $53) and Medco Health Solutions Inc. (MHS $56) announced that they have reached a definitive agreement to merge in a cash and stock deal worth about $29.1 billion. Under the terms of the deal, MHS shareholders will receive a total of $71.36 for each share they own, broken down as $28.80 per share in cash and 0.81 shares of ESRX.

Jobless claims rise, Philly Fed Manufacturing Index and LEI on the morning’s horizon

Weekly initial jobless claims increased by 10,000 to 418,000, versus last week's figure which was upwardly revised by 3,000 to 408,000, and compared to the 410,000 level that economists surveyed by Bloomberg had expected. However, the four-week moving average, considered a smoother look at the trend in claims, declined by 2,750 to 421,250, while continuing claims fell by 50,000 to 3,698,000, below the forecast of economists, which called for continuing claims to come in at 3,705,000.

Treasuries are lower in early action despite the data as the optimism toward the eurozone debt crisis is boosting sentiment, with the yield on the 2-year note flat 0.38%, while the yield on the 10-year note is 4 bps higher to 2.97%, and the 30-year bond rate is gaining 5 bps to 4.30%.

Later this morning, we will get the releases of the Philly Fed Manufacturing Index, forecasted to improve to 2.0 in July from -7.7 in June, with a reading above zero denoting expansion, and the Index of Leading Economic Indicators, expected to rise 0.2% month-over-month (m/m) in June after increasing 0.8% in May. 

Debt crisis progress offsetting manufacturing pessimism

The equity markets in Europe are higher in afternoon action as stocks are being supported by optimism that today’s meeting by European leaders will result in progress toward containing the threat of contagion of the eurozone debt crisis. The upbeat sentiment heading into the meeting is being fostered by reports that Germany and France have come to a preliminary bailout agreement for debt-laden Greece, which they will present to the other eurozone members. Also, reports that the European Central Bank (ECB) changed its stance on allowing some sort of debt restructuring of Greece is easing eurozone contagion sentiment and boosting stocks. However, basic materials and industrials stocks are lagging behind as global economic concerns that followed a read on Chinese manufacturing activity suggesting a contraction was exacerbated by data that showed larger-than-forecasted slowing of eurozone manufacturing activity. The Manufacturing PMI Indices in Germany—Europe’s largest economy—and France decelerated in July more than economists expected, resulting in the broad eurozone Manufacturing PMI declining to 50.8, from 53.3 in June, compared to the 52.6 reading that was anticipated, with a reading above 50 denoting expansion.

Meanwhile, technology issues are under pressure to hamstring stocks, following disappointing outlooks from Dow member Intel Corp and Korea’s Hynix Semiconductor, while mobile telecommunications company Ericsson (ERIC $14) is sharply lower after posting worse-than-expected 2Q profits.

In other economic news across the pond, UK consumer confidence deteriorated by a smaller amount than expected, UK retail sales rose more than forecasted, while UK public sector net borrowing increased more than projected.

The UK FTSE 100 Index is up 0.4%, France’s CAC-40 Index is 1.3% higher, Germany’s DAX Index is gaining 0.7%, Italy’s FTSE MIB Index is up 2.0%, Spain’s IBEX 35 Index is rising 2.1%, and Greece’s Athex Composite Index is advancing 1.8%.

Asia mixed on China data and Greek bailout optimism

Stocks in Asia finished mixed as traders grappled with a lackluster read on manufacturing activity in China and enthusiasm that the eurozone contagion threat may be pared by reports that Germany and France agreed to terms of a bailout for debt-laden Greece. China’s Shanghai Composite Index fell 1.0% and the Hong Kong Hang Seng Index dipped 0.1%, following a preliminary read on Chinese manufacturing activity, as the HSBC Flash Manufacturing PMI Index declined from 50.1 in June to 48.9 in July, with a reading below 50 depicting contraction. This was the first time the index fell below 50 in a year, led by weakness in output and new orders, resuscitating concerns about a hard landing in the world’s second-largest economy. 

Elsewhere, Japan’s Nikkei 225 Index finished flat and Australia’s S&P/ASX 200 Index rose 0.1% as the eased concerns toward the euro-area debt crisis offset the disappointing Chinese manufacturing data. Finally, South Korea’s Kospi Index declined 0.5% as the Chinese report and a solid drop in shares of Hyundai Heavy Industries Co Ltd (HYHZF $391) after the shipbuilder posted disappointing quarterly results, offset the optimism out of Europe. Also, technology issues traded lower to pressure Korean equities, on the heels of a weak outlook and solid drop in quarterly profit from Hynix Semiconductor.