Morning Market Update

European Financial Fears Continue to Tax Sentiment

The US equity markets have given up early gains and are extending yesterday’s sharp sell-off as concerns about the crisis in the eurozone continue to crush confidence and pressure stocks, overshadowing a drop in US jobless claims back below the key 400,000 level. Treasuries are nearly unchanged amid the economic data, which also included an unexpected widening of the trade deficit. Moreover, the exacerbated sentiment is more than offsetting better-than-expected earnings reports from Dow member Cisco Systems Inc and News Corp. Elsewhere, gold prices are under some pressure as an increase in margin requirements is snapping the precious metals’ recent rally, while the US dollar is gaining ground. Overseas, Asia finished mixed after paring losses as the US markets appeared to be stabilizing, while European stocks are solidly lower, with financials leading the downward slide.

As of 8:50 a.m. ET, the September S&P 500 Index Globex future is 6 points below fair value, the Nasdaq 100 Index is 2 points above fair value, and the DJIA is 21 points below fair value. WTI crude oil is $1.17 lower at $81.72 per barrel, and the Bloomberg gold spot price is down $12.91 at $1,780.36 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.3% at 75.03.

Dow member Cisco Systems Inc. (CSCO $14) 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.”

News Corp. (NWSA $14) 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.

Jobless claims 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.

European banks continue to be under siege

The equity markets in Europe are solidly lower in afternoon action after erasing an early advance, with financials leading the downside reversal amid exacerbated concerns about the health of the French financial sector, which led to yesterday’s sharp sell-offs on both sides of the Atlantic Ocean.  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. 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. 

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%.

The FTSE 100 Index is 0.9% lower, France’s CAC-40 Index is dropping 2.6%, Germany’s DAX Index is falling 1.6%, and Italy’s FTSE MIB Index is declining 2.7%.

Asia comes well off of the lows to finish mixed

Stocks in Asia showed some relative resiliency to close mixed as early losses were pared as the US futures markets stabilized in after hours trading following yesterday’s sharp sell-off, while some upbeat reports from the corporate front also supported sentiment. Australia’s Telstra Corp. Ltd. (TTRAF $3) posted a solid gain after the telephone company reported second-half profits that exceeded analysts’ expectations, while Japan’s Nikon Corp. (NINOY $216) rose sharply after the camera and chip equipment maker raised its full-year outlook, due to a smaller-than-estimated impact from the March earthquake and tsunami. Elsewhere, South Korea’s LG Electronics Inc. moved nicely higher amid reports that it has settled a patent-infringement lawsuit with Sony Corp. (SNE $21). In economic news in the region, 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.

Japan’s Nikkei 225 Index declined 0.6%, the Hong Kong Hang Seng Index fell 1.0%, and Australia’s S&P/ASX 200 Index finished flat, while South Korea’s Kospi Index rose 0.6% and China’s Shanghai Composite Index increased 1.3%.