Evening Market Update

Market Oscillation Continues, To The Upside This Time

Keeping with the recent trend of wild market swings, US stocks finished sharply higher in another day of heavy volume, leaving traders and investors wondering what to expect next. European debt concerns were alleviated somewhat on news of a meeting next week between Germany and France, while the broad-based rebound was also boosted by an unexpected drop in weekly initial jobless claims below the key 400,000 mark here on the homefront. Treasuries moved mostly lower on the strength in stocks and after a weak 30-year bond auction, while the only other report on the US economic calendar was a surprising expansion in the US trade deficit. After a sharp run-up in recent days, gold prices retreated today, while the US dollar also lost ground. Corporate earnings were mostly positive, headlined by a solid report from Dow member Cisco Systems, while News Corp and Advance Auto Parts also beat the Street’s profit expectations. Finally, Sara Lee’s 4Q earnings were slightly above estimates, but volumes fell on a rise in commodity prices.

The Dow Jones Industrial Average surged 423 points (3.9%) to 11,143, the S&P 500 Index rose 52 points (4.6%) to 1,173, and the Nasdaq Composite advanced 112 points (4.7%) to 2,493. In heavy volume, 1.9 billion shares were traded on the NYSE and 3.1 billion shares changed hands on the Nasdaq. WTI crude oil rose $2.83 to $85.72 per barrel, wholesale gasoline gained $0.05 to $2.83 per gallon, and the Bloomberg gold spot price decreased $38.07 to $1,755.20 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.3% lower at 74.63.

Dow member Cisco Systems Inc. (CSCO $16) reported fiscal 4Q earnings ex-items of $0.40 per share, two cents above the consensus estimate of analysts surveyed by Reuters, with revenues increasing 3.3% year-over-year (y/y) to $11.2 billion, exceeding the $11.0 billion that the Street had forecasted. The networking equipment maker said it has made “significant progress” on its plan to position the company for its “next stage of growth and profitability.” Shares traded sharply higher.

News Corp. (NWSA $16) announced fiscal 4Q EPS ex-items of $0.35, five cents north of analysts’ projections, with revenues increasing 10.5% y/y to $9.0 billion, topping the $8.5 billion that the Street had estimated. The company said its results were driven by improved contributions from all segments, led by growth at its television unit. Separately, the media company raised its dividend by 27%, to a total annual payout of $0.17 per share. NWSA moved steeply to the upside.

Advance Auto Parts Inc. (AAP $54) finished sharply higher after the auto parts retailer posted 2Q profits of $1.46 per share, above the $1.38 that analysts were anticipating, with revenues increasing 4.4% y/y to $1.5 billion, roughly inline with analysts’ expectations. 2Q same-store sales—sales at stores open at least a year—increased 2.5% y/y, led by double-digit growth in its commercial business.

Sara Lee Corp (SLE $17) posted fiscal 4Q EPS ex-items of $0.20, one penny above the expectation of analysts, while revenue of $2.3 billion was mostly inline with estimates. The company saw a 6.6% decline in unit volume during the quarter, as prices rose an average of 10.5% across its portfolio. SLE is in the process of separating into an international coffee and tea business and a North American business that will include Jimmy Dean and Hillshire Farms brands. Shares of the company traded lower.

Jobless claims unexpectedly fall, while trade deficit surprisingly widens

Weekly initial jobless claims fell by 7,000 to 395,000, versus last week's figure which was upwardly revised by 2,000 to 402,000, and compared to the 405,000 level that economists surveyed by Bloomberg had expected. Also, the four-week moving average, considered a smoother look at the trend in claims, declined by 3,250 to 405,000, while continuing claims dropped by 60,000 to 3,688,000, below the forecast of economists, which called for continuing claims to come in at 3,725,000.

Meanwhile, the  trade deficit unexpectedly widened, expanding to $53.1 billion in June from a negatively revised $50.8 billion in May, versus the estimate of economists, which called for the deficit to narrow to $48.0 billion. The increase in the trade deficit came as exports fell 2.3% m/m to $170.9 billion, outpacing the 0.8% decline in imports to $223.9 billion. The drop in exports was led by declines in industrial supplies and materials, as well as capital goods, while the decrease in imports came mostly from a drop in industrial supplies and materials. Elsewhere, the price of crude oil imported declined from $108.70 per barrel to $106.00 per barrel, but the quantity of oil imported rose 7.8% m/m to 296.7 million barrels, resulting in a total price tag of $31.4 billion —the most since August 2008, per Dow Jones Newswires—compared to $29.9 billion in May. Finally, the US trade deficit with China widened 6.8% m/m to $26.7 billion.

Treasuries were sharply lower on the long-end of the curve, after poor results from a Treasury auction of $16 billion in 30-year bonds that fetched a higher-than-expected yield, indicating weak demand. The yield on the 2-year note was flat at 0.18%, while the yield on the 10-year note gained 19 bps to 2.33% and the 30-year bond rate increased 27 bps to 3.78%.

European debt concerns cool somewhat, Australia’s unemployment rises

The European markets rebounded from yesterday’s sharp sell-off, aided by reports that Germany and France are expected to meet on Tuesday to discuss the exacerbated contagion concerns that have rattled the French and Italian banking sectors. Also, reports of bans on short-selling in French and Italian stocks helped alleviate the pressure on the equity markets. Although the ratings agencies quickly denied they were looking at downgrading France, it appears confidence is so tenuous that investors are selling first and asking questions later. The downgrade of the credit rating for the US has been a complicating factor for Europe in our opinion, as France has maintained its AAA-credit rating, which some view as inconsistent with the US rating and may be unsustainable given the possible implied liability of funding bailouts for other European sovereigns.

Additionally, the current bailout fund for the region, the European Financial Stability Facility (EFSF), is likely dependent on the AAA-rating for Germany and France to access capital, which in turn is used to provide aid to the weaker countries. Just as Italy and Spain are likely too big to bailout given the current structure of the EFSF, it is destabilizing when doubts begin to creep up about the stability of France. We believe France will make whatever necessary adjustments needed to calm markets, and will be more proactive than other nations so far, as they've demonstrated a leadership role during recent weeks. Of course an upcoming election and unpopular decisions don't usually mix well, so nothing is guaranteed. Meanwhile, the rolling crisis of confidence appears to continue to infect European banks and trading in Europe this week has seen rumors and worries about capital issues hitting the stocks of French and Italian banks.

In light economic news across the pond, German wholesale prices fell 0.6% month-over-month (m/m) in July, matching the decline in June, while compared to the same period last year, prices decelerated from 8.5% to 8.2%.

In Asia/Pacific economic news, South Korea expectedly kept its benchmark interest rate unchanged at 3.25%, while Australia’s employment change unexpectedly dipped and the nation’s unemployment rate surprisingly rose to 5.1% in July from 4.9% in June. Moreover, Australia’s consumer inflation expectation for August decelerated, while Japanese machine orders rose much more than expected in June.

Advance retail sales on tap to close out the week

Tomorrow, the US economic calendar will yield the release of advance retail sales, forecasted to increase 0.5% m/m in July, after increasing 0.1% in June. Meanwhile, sales less autos are expected to increase 0.3% for July, following a flat reading in June, and excluding autos & gas, sales are projected to grow 0.2%, matching the rise seen in the previous month. July same-stores sales results were solidly higher, led by an 8.0% y/y gain in luxury department stores, while discount retailers also posted growth of 4.1%. The bulls could use some good news from the consumer spending front after last month’s first reading of 2Q GDP showed personal consumption decelerated sharply to lead to a disappointing 1.3% annualized rate of output, which helped fuel recent concerns about a double-dip recession for the US economy, contributing to the recent sell-off in the equity markets.

Other releases on the domestic economic front will include the preliminary University of Michigan Consumer Sentiment Index reading for August, which economists are expecting to decline to 62.5 from a previous reading of 63.7. Additionally, business inventories will be released, with forecasts calling for a 0.5% increase in June, down from a 1.0% advance in May.

The international economic calendar will yield France’s CPI, non-farm payrolls, and the preliminary reading of 2Q GDP, Italy’s CPI, eurozone industrial production, Japan’s industrial production and capacity utilization, and Hong Kong’s 2Q GDP.