Evening Market Update

Selloff Resumes As Focus Turns Back Overseas

US stocks took another fear-fueled tumble today, wiping away a majority of yesterday’s gains, as rumors that France could be the next country on the credit rating chopping block exacerbated eurozone debt concerns. News from the domestic economic front of a rise in mortgage applications and wholesale inventories had little impact on the markets, and Treasuries continued their move to the upside, along with the price of gold. In equity news, Dow member Walt Disney Co. reported better-than-expected 3Q earnings and revenue, while Macy’s and Polo Ralph Lauren also managed to beat the Street’s profit expectations. In M&A news, Capital One Financial agreed to purchase the US credit-card business of HSBC Holdings Plc. Finally, Dow component Cisco Systems posted better-than-expected 4Q earnings after the closing bell.

The Dow Jones Industrial Average plunged 520 points (4.6%) to 10,720, the S&P 500 Index fell 52 points (4.4%) to 1,121, and the Nasdaq Composite declined 101 points (4.1%) to 2,381. In heavy volume, 2.1 billion shares were traded on the NYSE and 3.4 billion shares changed hands on the Nasdaq. WTI crude oil rose $2.37 to $81.67 per barrel, wholesale gasoline gained $0.09 to $2.76 per gallon, and the Bloomberg gold spot price increased $50.95 to $1,791.90 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 1.1% higher at 74.76.

Dow member Walt Disney Co. (DIS $32) reported fiscal 3Q EPS ex-items of $0.78, five cents above the consensus estimate of analysts surveyed by Reuters, with revenues rising 7% year-over-year (y/y) to $10.7 billion, exceeding the $10.5 billion that the Street had forecasted. The company said its results demonstrate the continued strength of its media networks segment, including ESPN, as well as its parks and resorts and consumer products businesses. However, DIS’ revenues out of its studio entertainment unit declined slightly compared to the same period a year ago. Shares were sharply lower.

After the close, Dow member Cisco Systems (CSCO $14) reported 4Q EPS of $0.40, which exceeded the $0.38 estimate of analysts, while revenues of $11.2 billion also beat the Street’s forecast of $10.9 billion. CSCO CEO John Chambers said the company has made “significant progress on our comprehensive action plan to position ourselves for the next stage of growth and profitability.”

Macy’s Inc. (M $25) announced 2Q earnings of $0.55 per share, above the $0.50 that analysts were anticipating, as revenues rose 7.3% y/y to $5.9 billion, roughly inline with what the Street was looking for. The department store’s 2Q same-store sales—sales at stores open at least a year—increased 6.4% y/y. M’s CEO noted, “As we continue to closely monitor developments in the economy and financial markets, we are cautious but optimistic about this fall and are staying focused on those factors that we can control.” Shares finished lower, despite the company raising its full-year outlook.

Polo Ralph Lauren Corp. (RL $125) was solidly higher after the apparel company posted fiscal 1Q profits of $1.90 per share, well above the $1.46 Street estimate, with revenues rising 32% y/y to $1.5 billion, exceeding the $1.4 billion that analysts had forecasted. The company said it achieved “exceptional profit flow through” on better-than-expected sales, particularly at its retail segment and in international markets. RL raised its full-year revenue guidance despite saying it enters the fall and holiday selling seasons “concerned about macroeconomic uncertainty and cost of goods inflation,” as it is confident navigating through these near-term challenges.

In M&A news, Capital One Financial Corp. (COF $41) announced that it has reached an agreement to purchase the US credit-card and retail services business of HSBC Holdings Plc. (HBC $42) for a post-tax premium of about $2.4 billion. The gross value of the assets was $30.4 billion as of the end of June, including $29.6 billion of customer loan balances. COF traded higher.

Mortgage applications jump, wholesale inventories rise, Treasuries higher again

The MBA Mortgage Application Index surged 21.7% last week, after the index that can be quite volatile on a week-to-week basis, increased by 7.1% in the previous week. The steep advance came as a 30.4% jump in the Refinance Index more than offset a 0.9% decline in the Purchase Index. The flood of refinancing activity accompanied an 8 basis point (bp) drop in the average 30-year mortgage rate to 4.37%, the lowest rate since November, per Bloomberg.

Meanwhile, wholesale inventories rose 0.6% month-over-month (m/m) in June, compared to the 1.0% increase that was forecasted by economists surveyed by Bloomberg, and May’s 1.8% gain was revised to a 1.7% increase. Durable goods inventories increased 1.3% m/m, while inventories of nondurable goods were down 0.4%. Meanwhile, sales rose 0.6%, as durable goods sales gained 1.6% m/m, while nondurable goods declined 0.2%. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—remained at 1.16.

Treasuries moved higher amid the sharp drop in the equity markets, as the yield on the 2-year note fell 2 bps to 0.18%, the yield on the 10-year note was 16 bps lower at 2.09%, and the 30-year bond lost 13 bps to 3.48%. Yields have moved heavily to the downside amid the recent volatility in the equity markets and following yesterday’s monetary policy statement by the Federal Reserve, in which it noted that economic growth so far this year has been “considerably slower” than expected, while also saying it anticipates “exceptionally low levels for the fed funds rate at least through mid-2013.” 

French banks are the concern du jour in European debt crisis

Concerns in Europe shifted to France’s banking sector, as worries that the country’s triple-A credit rating could be headed for a downgrade rattled the markets overseas. However, all three major credit rating agencies have reaffirmed their triple-A rating on France. Also, Italian banking shares came under pressure amid heighted sovereign debt concerns despite the nation’s successful bond auction that showed a decline in yields that it will have to pay, due to the recent bond purchases by the European Central Bank. In central bank news, the Swiss National Bank announced that it will “significantly increase” the supply of liquidity to the financial markets, per Bloomberg, to try to combat a “massive overvaluation” of its currency, which has surged recently amid the volatility in the global markets, culminating with yesterday’s sharp advance after the Fed’s statement. Moreover, Bank of England (BoE) Governor King noted that headwinds facing the UK economy are becoming stronger “by the day” and officials can expand stimulus if the outlook for growth deteriorates further, per Bloomberg. The comments came as the BoE released its quarterly inflation report that showed inflationary pressures could ease “around the turn of the year.”

In other European economic news, Germany’s consumer prices were left unrevised at a 0.4% m/m increase for July, and a 2.4% gain compared to last year. Finally, French industrial and manufacturing production both showed larger-than-expected declines m/m in June.

In Asia/Pacific, China’s trade surplus expanded by a larger amount than forecasted, with exports and imports both rising more than economists estimated.

Tomorrow’s US economic calendar will include weekly initial jobless claims, forecasted to increase to 405,000 from 400,000. Additionally, the US trade deficit will be released, expected to contract to $48.0 billion in June from $50.2 billion in May.

The international front will be on the quiet side tomorrow, with releases including the German wholesale price index, Japanese machine orders, Brazilian retail sales, and Australia’s unemployment rate.