Morning Market Update

Debt Uneasiness Lassos the Bulls

The US equity markets are under pressure in morning trading as global debt concerns are hamstringing sentiment, with US lawmakers yet to strike a deal on the debt ceiling, while Moody’s Investors Service slashed its credit rating of Greece. However, Treasuries are lower despite the declines in the equity markets, as there are no major economic reports due out today, but beginning tomorrow, the data will heat up. In equity news, E*Trade Financial Corp announced that it has retained Morgan Stanley to review strategic alternatives in response to a letter by the company’s largest shareholder, while Research in Motion Ltd reported that it will reduce its global workforce by approximately 2,000 employees. Overseas, Asian stocks finished broadly lower, while the European markets are finding pressure from the global debt concerns.

As of 8:48 a.m. ET, the September S&P 500 Index Globex future is 10 points below fair value, the Nasdaq 100 Index is 12 points below fair value, and the DJIA is 76 points below fair value. WTI crude oil is $0.85 lower at $99.02 per barrel, and the Bloomberg gold spot price is up $16.22 at $1,617.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.2% at 74.12.

E*Trade Financial Corp. (ETFC $16) announced that it has formed a special committee of its Board, comprised entirely of independent directors, which has directed the company to retain Morgan Stanley (MS $24) to “conduct another broad review of strategic alternatives.” The announcement comes in response to a letter sent last week by privately-held investment firm Citadel LLC, which is the online brokerage firm’s largest stakeholder, urging the company to hold a special investor meeting to discuss plans to boost performance, including a possible sale, and the removal of two ETFC Board members.

ETFC said it believes it has already addressed the substance of Citadel’s proposals and that “it is not in the best interests of shareholders to call a special meeting at this time.” Moreover, ETFC said it completed a strategic review in 4Q 2010, determining that the continued execution of the company’s business plan was the best alternative for increasing shareholder value. The company concluded that Citadel’s proposal to remove two highly qualified independent Directors is “inappropriate, and contrary to Delaware law.”

Research in Motion Ltd. (RIMM $28) announced that as part of its cost optimization program, the maker of the BlackBerry smartphone is reducing its global workforce by approximately 2,000 employees. RIMM said the size of this workforce reduction is in line with the preliminary estimate that was factored into its full-year financial guidance it gave on June 16, 2011.

Full slate of data from the economic front this week

Treasuries are lower in early action despite the declines in the equity markets and as there are no major US economic reports due out today, with the yield on the 2-year note up 2 bps to 0.41%, the yield on the 10-year note 6 bps higher at 3.02%, and the 30-year bond rate advancing 7 bps to 4.33%.

Meanwhile, we will get a look at regional manufacturing activity after today’s opening bell, with the release of the Dallas Fed Manufacturing Index, forecasted to improve from -17.5 in June to -5.2 in July, with a reading below zero depicting contraction.

However, as the week matures, the economic calendar will heat up week to join the earnings parade and scrutiny on US policymakers to reach agreement on the debt ceiling. This week will complete the monthly data on the housing front, with tomorrow’s S&P/CaseShiller Home Price Index forecasted to show prices flat month-over-month (m/m) and down 4.55% year-over-year (y/y) in May. Pricing data lags sales data by a month, while June’s new home sales report out the same day is expected to show a 0.8% m/m gain in June to an annual rate of 322,000 units after falling 2.1% in May to 319,000. The new home sales report is considered a timely indicator of conditions in the housing market as it is based on signings, while existing home sales, which unexpectedly fell 0.8% m/m, uses closings.

Wednesday morning brings the volatile durable goods orders report, expected to gain 0.3% in June after gaining a strong 1.9% m/m in May, while ex-transportation, orders are forecasted to have risen 0.5% m/m after increasing 0.6% in May. Later in the day, the Federal Reserve Beige Book will be released, wherein Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for August 9. The Fed downgraded its assessment of the economy at the late June meeting, citing temporary factors, but also noting that some of the headwinds “may be stronger and more persistent than we thought. “

The speed and health of the US economy is still a concern for markets, and Friday’s first reading of 2Q gross domestic product (GDP) is expected to show another quarter of growth below the 2% level many consider potential “stall speed,” the rate a which growth slows enough that it becomes self-reinforcing to the downside. The consensus of a Bloomberg survey of economists expects 2Q GDP to grow at a 1.8% quarter-over-quarter (q/q) annualized rate, after gaining 1.9% in 1Q. The largest component of GDP, personal consumption, is expected to slow to a 0.8% rate in 2Q, after advancing 2.2% in 1Q. With regard to inflation readings, the GDP Price Index is expected to rise 2.0%, and the core PCE Index, which excludes food and energy, is forecasted to increase 2.3% q/q.

Other releases on this week’s US economic calendar include: Consumer Confidence, the Richmond Fed Manufacturing Index, the MBA Mortgage Applications Index, weekly initial jobless claims, pending home sales, the 2Q Employment Cost Index, the Chicago Purchasing Manager’s Index and the final University of Michigan Consumer Sentiment Index reading for July.

Europe being stymied by global debt issues

Although the major equity markets in Europe are nearly unchanged in afternoon trading, the peripheral euro-area stock indices are broadly lower as financials are under solid pressure as the weekend concluded without a US debt ceiling deal, while Moody’s Investors Service cut the sovereign credit rating of Greece. Moody’s cut its Greek debt rating by three notches to a level just above default, which is the lowest rating of any country in the world covered by Moody’s. Per Reuters, the ratings agency said last week’s new bailout plan set a negative precedent for creditors of other debt-burdened countries. The action by Moody’s is resuscitating some debt contagion fears and the equity markets in Italy and Spain, two key eurozone nations that are feared to be at the most risk of the region’s debt crisis spreading, are solidly lower.

In equity news across the pond, shares of Ryanair Holdings Plc. (RYAAY $28) are nicely higher after the discount airline posted profits that missed analysts’ forecasts, while shares of Bank of Ireland (IRE $1) are sharply higher after the Irish government agreed to sell a 1.1 billion-euro ($1.6 billion) stake in the financial firm.

In economic news in the region, a UK housing survey declined in July, Italian consumer confidence deteriorated more than economists’ forecasted, and a French read on business demand declined in July.

The UK FTSE 100 Index is down 0.2%, France’s CAC-40 Index is flat, and Germany’s DAX Index is gaining 0.1%. Meanwhile, Greece’s Athex Composite Index and Spain’s IBEX 35 Index are falling 1.0%, while Italy’s FTSE MIB Index is dropping 1.5%.

Asia comes under pressure as US debt ceiling uneasiness continues

Stocks in Asia finished broadly lower to begin the week as the failure for US lawmakers to come to an agreement on the debt ceiling pressured sentiment. Japan’s Nikkei 225 Index declined 0.8%, while Australia’s S&P/ASX 200 Index dropped 1.6% and South Korea’s Kospi Index fell 1.0%. However, the region’s largest drop occurred in Chinese stocks, with the Shanghai Composite Index tumbling 3.0% as the US debt ceiling uneasiness was exacerbated by a deadly train wreck over the weekend in China, which sent shares of railway stocks sharply lower. China ordered a two-month inspection of rail safety, per Bloomberg. Elsewhere, the Hong Kong Hang Seng Index decreased 0.7%, while India’s BSE Sensex 30 Index managed to overcome the broad-based weakness in the region, gaining 0.8%, amid easing concerns about the political landscape. In economic news in the region, Australia’s 2Q Producer Price Index rose inline with economists’ forecasts. Finally, after the closing bell in Japan, Canon Inc. (CAJ $48) reported a steep drop in quarterly operating earnings, due to the impact on production and the supply of parts of the March earthquake, but the company offered an upbeat outlook.