Morning Market Update

Earnings and Debt Remain in Focus, But Stocks are Flat

The US equity markets are nearly unchanged in early action, following yesterday’s strong gains despite another slate of favorable earnings reports and as traders digest the eurozone’s plan to contain its debt crisis. Treasuries are higher in morning trading as there are no major economic reports due out today. Meanwhile, Dow members are dominating the earnings front, with General Electric Co, Verizon Communications Inc, and McDonald’s Corp all exceeding the Street’s expectations. However, Microsoft Corp saw its Windows revenue decline and Caterpillar Inc missed analysts’ earnings expectations to apply some pressure to stocks. Overseas, Asia moved broadly higher amid calmed concerns about the contagion of the eurozone debt crisis, which is also boosting European stocks, along with favorable earnings.

As of 8:52 a.m. ET, the September S&P 500 Index Globex future is 1 point above fair value, the Nasdaq 100 Index is 2 points below fair value, and the DJIA is 5 points below fair value. WTI crude oil is $0.16 lower at $98.97 per barrel, and the Bloomberg gold spot price is up $11.13 at $1,601.68 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.2% at 74.16.

Microsoft Corp. (MSFT $27) reported fiscal 4Q earnings of $0.69 per share, above the $0.58 consensus estimate of analysts surveyed by Reuters, with revenues increasing 8% year-over-year (y/y) to $17.4 billion, exceeding the $17.2 billion that the Street had forecasted. The Dow member benefitted from higher demand for its enterprise software, while its Windows unit revenue declined 1% y/y.

Dow component General Electric Co. (GE $19) posted 2Q EPS ex-items of $0.34, two pennies above the Street’s forecast, with revenues declining 4% y/y to $35.6 billion, but topping the $34.7 billion that analysts had projected. The company said it saw “strong” contributions from GE Capital, along with its healthcare, transportation, aviation, and oil & gas units, while its order backlog grew to a record.

Verizon Communications Inc. (VZ $38) achieved 2Q profits of $0.57 per share, two cents north of the Street’s expectations, with revenues increasing 2.8% y/y to $27.5 billion, slightly above the $27.4 billion that analysts anticipated. The Dow member also announced that the company’s President and COO Lowell C. McAdam as its new CEO, effective August 1.

McDonald’s Corp. (MCD $87) reported 2Q EPS of $1.35, well above the $1.28 that the Street was forecasting, as revenues rose 16% y/y to $6.9 billion, topping the $6.6 billion analyst estimate. The Dow component said its 2Q global same-store sales—sales at stores open at least thirteen months—gained 5.6% y/y.

Dow component Caterpillar Inc. (CAT $112) announced 2Q EPS ex-items of $1.72, below the $1.75 that analysts projected, but revenues rose 37% y/y to $14.2 billion, topping the $13.5 billion that the Street had expected.

No major economic data set for today, but earnings and global debt will carry the load

Treasuries are higher in early action as there are no major economic reports scheduled for release today, with the yield on the 2-year note down 2 bps to 0.38%, while the yields on the 10-year note and the 30-year bond are declining 3 bps to 2.98% and 4.28%, respectively.

Europe extending gains on debt relief and earnings reports

The equity markets are higher in afternoon action, following yesterday’s solid gains in the region as concerns about debt contagion reaching key countries such as Italy and Spain, continue to be soothed by the announcement from European leaders of a new plan to try to tackle the eurozone debt crisis. Following a meeting yesterday, European leaders agreed to a new aid package for the troubled peripheral nation of Greece, consisting of 109 billion euros ($157 billion) in new funds from the European Financial Stability Facility (EFSF), while the region’s financial institutions agreed to a Greek debt exchange, for new bonds with lower interest rates and longer maturities. In response Fitch Ratings said it will declare Greece in a “restricted default” on its debt, but it will likely assign new ratings of a low speculative grade once the bond exchange is completed, per Reuters. Other aspects of the deal include: the European Central Bank (ECB) to accept Greek debt as collateral for loans and allowing the EFSF to buy government bonds in the secondary market to help recapitalize banks. More details on the plan are set to come out later today.

Meanwhile, some equity news is helping boost stocks, with Volvo AB (VOLVF $16) and Vodafone Group Plc. (VOD $26) moving nicely higher after their reports, while shares of easyJet Plc. (ESYJY $20) are sharply higher on the heels of the discount aircarrier’s favorable outlook.

Finally, economic news across the pond is mixed, with the German Ifo Business Climate Index declining more than expected for July and French business confidence coming in below forecasts for July, and eurozone industrial new orders rising more than anticipated for May.

The UK FTSE 100 Index and France’s CAC-40 Index are gaining 0.5%, Germany’s DAX Index and Italy’s FTSE MIB Index are rising 0.2%, while Spain’s IBEX 35 Index increasing 0.9% and Greece’s Athex Composite Index is rallying 4.9%.

Eurozone debt optimism lifts Asian markets

Stocks in Asia finished broadly higher to close out the week, aided by relief toward the eurozone debt crisis, with contagion fears being calmed by yesterday’s announcement that Greece will receive further aid and eased terms on its current debt obligations, while the scope of the European financial rescue fund will be broadened. Also, sentiment was boosted by yesterday’s mostly better-than-expected earnings and economic data out of the US. Japan’s Nikkei 225 Index and South Korea’s Kospi Index both rose 1.2%, Australia’s S&P/ASX 200 Index gained 1.0%, while the Hong Kong Hang Seng Index jumped 2.1% to lead the way. However, China’s Shanghai Composite Index inched 0.2% higher as the optimism was tempered by yesterday’s economic report that showed a larger-than-forecasted deceleration in manufacturing activity in July, which fell to a level depicting contraction for the first time in a year, led by weakness in output and news orders.