Morning Market Update

Eurozone Data Dampens Sentiment in Morning Action

The US equity markets are under pressure in early trading, as the three-day winning streak is in jeopardy, courtesy of some disappointing eurozone GDP data, ahead of the conclusion of the debt contagion crisis meeting between Germany and France. Meanwhile, Treasuries are higher amid the declines in stocks, and following reports that showed US housing starts and building permits came in mixed, and despite a hotter-than-forecasted read on import prices. Later this morning, we will get a look at industrial production and capacity utilization. Elsewhere, US equity news is helping limit losses, with Dow members Wal-Mart Stores Inc and Home Depot Inc posting 2Q results that topped analysts’ forecasts. Overseas, Asian stocks finished mixed following the lackluster eurozone GDP figures, which are also weighing on the European equity markets.

As of 8:45 a.m. ET, the September S&P 500 Index Globex future is 19 points below fair value, the Nasdaq 100 Index is 33 points below fair value, and the DJIA is 151 points below fair value. WTI crude oil is $2.00 lower at $85.88 per barrel, and the Bloomberg gold spot price is up $13.00 at $1,779.03 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.3% at 74.06.

Dow member Wal-Mart Stores Inc. (WMT $50) reported 2Q earnings ex-items of $1.12 per share, above the $1.08 that analysts surveyed by Reuters had projected, with revenues growing 5.5% year-over-year (y/y) to $108.6 billion, exceeding the $108.2 billion that the Street anticipated. 2Q US same-store sales—sales at stores open at least a year—were flat y/y, excluding fuel sales, with a 5.0% increase at Sam’s Club offsetting a 0.9% decline in Walmart US sales.

The world’s largest retailer said its grocery and health and wellness business—representing two-thirds of its sales—continued to deliver positive sales, while its “hardlines and apparel businesses are improving.” WMT raised its full-year EPS, reflecting “our confidence in the business for the back half of the year,” but it said it remains “concerned” about the economic pressure on its customers and the uncertain impact it can have on their shopping behavior.

Meanwhile, fellow Dow component Home Depot Inc. (HD $31) announced 2Q profits of $0.86 per share, three cents above the Street’s expectations, with revenues increasing 4.2% y/y to $20.2 billion, topping the $20.0 billion that analysts had estimated. Same-store sales for the quarter increased 4.3% y/y, with US sales rising 3.5%. The world’s largest home improvement retailer said its 2Q results were driven by a rebound in its seasonal business, storm-related repairs, and strength in its core categories. HD raised its full-year EPS guidance

Import prices rise, home construction activity mixed, industrial production on deck

The Import Price Index unexpectedly increased, rising 0.3% month-over-month (m/m) for July, compared to the expectation of economists surveyed by Bloomberg, which called for the index to decrease by 0.1%. The surprising increase follows the 0.6% decline seen in June, which was revised from an initially reported 0.5% drop. Year-over-year, import prices are higher by 14.0%, versus the 13.4% forecast of economists, and the upwardly revised 13.7% gain that was posted in June.

Housing starts for July declined by a smaller rate than expected, falling 1.5% m/m from a downwardly revised 613,000 annual rate of units in June, to a rate of 604,000 units, and compared to expectations of economists, which called for starts to come in at 600,000. However, building permits fell more than forecasted, dropping 3.2% m/m in July to an annual rate of 597,000, after June’s downward revision to a 617,000 rate. The expectation was for permits to come in at 605,000 units.

Treasuries remain higher following the data and the downward pressure on stocks, with the yield on the 2-year note unchanged at 0.19%, while the yields on the 10-year note and the 30-year bond are declining 4 bps to 2.27% and 3.73%, respectively.

Later this morning, the US economic calendar will yield the release of industrial production and capacity utilization, with production forecasted to rise 0.5% m/m in July, while utilization is expected to improve slightly from 76.7% in June to 77.0% in July.

Europe under pressure following disappointing eurozone growth reports

The European equity markets are solidly lower in afternoon action, with industrials and basic materials leading to the downside, on the heels of reports that showed eurozone 2Q GDP expanded at a smaller-than-forecasted rate, led by Germany—the eurozone’s largest economy. 2Q GDP in the eurozone grew by 0.2% quarter-over-quarter (q/q), down from the 0.8% expansion seen in 1Q, and compared to the 0.3% increase that economists forecasted. Year-over-year, eurozone output gained 1.7%, decelerating from the 2.5% growth seen in 1Q, and below the 1.8% expectation. The disappointing eurozone GDP figure came as the German economy showed a 0.1% q/q rate of growth, well below the 0.5% increase that was projected, and a sharp deceleration from the downwardly revised 1.3% gain posted in 1Q. Meanwhile, traders are treading with some caution ahead of the press conference later today from Germany and France, concluding their meeting on the eurozone debt contagion crisis. Focus will be paid to any new announcements concerning the size of the region’s bailout facility, known as the European Financial Stability Facility (EFSF), or any mention of the possibility of the inception of Eurobonds, to help combat the threat of contagion, which concerns about have recently ravaged the markets in key nations of Italy and France.

Sizable actions by banks and policymakers could result in a rebound in European stocks. However, we believe it would be short in nature and continue to have concerns about stocks and the economy in Europe over the intermediate term. One reason is that if banks face a cash crunch, as deposits leave and capital needs to be raised to replace losses on government debt, they can begin to raise rates charged for loans and/or pull back from lending, the lifeblood of economic growth. Additionally, austerity measures and already weak growth threatened by a global economic slowdown means a recession in Europe is not out of the question. 

In other economic news, UK consumer prices came in slightly hotter than expected for July, while a separate report showed UK retail prices fell inline with forecasts m/m for July.

The UK FTSE 100 Index is declining 1.2%, France’s CAC-40 Index is dropping 1.9%, Germany’s DAX Index is falling 2.5%, and Italy’s FTSE MIB Index decreasing 2.9%.

Asia mixed on strength in technology and concerns about eurozone growth

Stocks in Asia finished mixed, with technology stocks showing some strength on a major M&A announcement in the US yesterday, while equity markets that remained open after Germany’s lackluster GDP report found pressure. South Korea’s Kospi Index led the way, rallying 4.8% after being closed yesterday for a holiday and following the strong advance in the US on Monday. Technology issues found support from Google Inc’s (GOOG $557) $12.5 billion agreement to acquire Motorola Mobility Holdings Inc. (MMI $38), with South Korean smartphone software maker Samsung Electronics Co. Ltd. (SSNLF $800) gaining over 6% to help pace the advance. Also, Japan’s Nikkei 225 Index finished higher, gaining 0.2% to extend yesterday’s gains that came from its smaller-than-forecasted contraction in 2Q GDP. Elsewhere, GOOG’s announcement helped shares of Foxconn International Holdings Ltd. (FXCNF $0.40) surge over 12% as the Hong Kong-based company is a key supplier to Motorola Mobility. However, the rally in Foxconn shares were unable to lift the Hang Seng Index into positive territory, as it declined 0.2%, giving up an early advance after the disappointing read on German GDP. Meanwhile, stocks in mainland China moved lower, with the Shanghai Composite Index declining 0.7%, despite a report showing China’s Leading Index accelerated m/m in June.

In other economic news, India’s wholesale prices, although decelerating in July from June, came in slightly hotter than expected, fostering some uneasiness regarding further monetary policy tightening, and the BSE Sensex 30 Index fell 0.7%. Finally, Australian stocks moved lower, with the S&P/ASX 200 Index dropping 0.8%, after the release of the Reserve Bank of Australia’s (RBA) minutes from its early August policy meeting. The RBA noted that the “case against tightening at this meeting was that downside risks to demand had probably increased, as a result of the acute uncertainty in global financial markets.” Also weighing on the Australian markets, shares of Westpac Banking Corp. (WEBNF $22) fell solidly after the nation’s second-largest lender, per Bloomberg, reported a drop in earnings as lending declined.