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Thursday, August 18, 2011

Morning Market Update

European Concerns and Data Dampen Sentiment

Last week’s volatility appears to be returning in morning action, with US stocks trading solidly lower as European banking concerns are resurfacing, while the first dose of heavy US economic data is doing little to support sentiment. Treasuries are higher amid the declines in the equity markets, exacerbated by reports that showed US jobless claims and consumer prices rose. Meanwhile, we will get reads on US existing home sales, regional manufacturing, and leading economic indicators later this morning. In equity news, NetApp Inc posted inline earnings and guidance, and Sears Holdings Corp reported a larger-than-expected loss, while Limited Brands Inc topped analysts’ forecasts. Overseas, Asian markets came under broad-based pressure, while European equities are sharply lower, led by the region’s banks.

As of 8:49 a.m. ET, the September S&P 500 Index Globex future is 28 points below fair value, the Nasdaq 100 Index is 51 points below fair value, and the DJIA is 221 points below fair value. WTI crude oil is $2.48 lower at $85.10 per barrel, and the Bloomberg gold spot price is up $25.35 at $1,816.60 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.4% at 74.03.

NetApp Inc.
(NTAP $42) reported fiscal 1Q EPS ex-items of $0.55, inline with the consensus estimate of analysts surveyed by Reuters, with revenues growing 26% year-over-year (y/y) to $1.46 billion, compared to the $1.51 billion that the Street had anticipated. The storage and data management solutions firm said a “challenging macroeconomic environment” modestly impacted its revenue growth but its gross margin improved by nearly 22% y/y. NTAP issued 2Q guidance that matched expectations.

Limited Brands Inc.
(LTD $34) announced 2Q adjusted earnings of $0.48 per share, two cents above the Street’s expectations, as revenues rose 9.6% y/y to $2.5 billion, above the $2.4 billion that analysts had projected. 2Q same-store sales—sales at stores open at least a year—gained 9% y/y. The specialty retailer said its focus on “managing inventory and expenses conservatively” yielded more full-priced selling and record results. LTD raised its August same-store sales and full-year EPS guidance.

Sears Holdings Corp.
(SHLD $60) posted a 2Q adjusted net loss of $1.13 per share, wider than the $0.64 shortfall that analysts were expecting, while revenues, which declined 1.2% y/y to $10.3 billion, exceeded the $10.1 billion that the Street was anticipating. 2Q domestic same-store sales declined 0.7% y/y. The retailer said the decreases in sales were primarily driven by consumer electronics.

Consumer prices and jobless claims rise, while data continues later this morning

Consumer Price Index  showed prices at the consumer level were up 0.5% month-over-month (m/m) in July, more than the forecasts of economists surveyed by Bloomberg, which called for a 0.2% increase, with June’s 0.2% decline unrevised. Meanwhile, the core rate, which strips out food and energy, was 0.2% higher m/m in July, matching estimates, with June’s 0.3% increase unadjusted. On a y/y basis, consumer prices remained up 3.6% in July, above economists’ forecasts of a 3.3% increase, and the core CPI was 1.8% higher y/y, versus the 1.7% that was expected.

Weekly initial jobless claims
increased by 9,000 to 408,000, versus last week's figure which was upwardly revised by 4,000 to 399,000, and compared to the 400,000 level that economists had expected. However, the four-week moving average, considered a smoother look at the trend in claims, declined by 3,500 to 402,500, while continuing claims rose by 7,000 to 3,702,000, above the forecast of economists, which called for continuing claims to come in at 3,700,000.

Treasuries remain higher in early action following the data and the flare-up in concerns toward European banks, with the yield on the 2-year note down 1 bp to 0.18%, the yield on the 10-year note 7 bps lower to 2.09%, and the 30-year bond rate losing 8 bps to 3.48%.

Later this morning, the US economic data continues to pour in, with the releases of
existing homes sales, expected to increase 2.7% m/m to an annual rate of 4.9 million units in July, the Philly Fed Manufacturing Index, forecasted to decline from 3.2 in July to 2.0 in August, with a reading above zero denoting expansion, and the Conference Board’s Index of Leading Economic Indicators, with economists anticipating a 0.2% uptick for July.

European banking concerns return to pressure stocks in the eurozone

The equity markets in Europe are sharply lower in afternoon action, led by a steep decline in financials as concerns toward the health of the European financial system are resurfacing, with European banks finding the heaviest pressure.

Meanwhile in European equity news, shares of
Holcim Ltd. (HCMLY $12) are sharply lower after the world’s second-largest cement maker, per Bloomberg, posted earnings that missed analysts’ forecasts. On the economic front across the pond, UK retail sales came in below expectations for July, while construction output in the eurozone dropped in June.

The UK FTSE 100 Index is down 2.7%, France’s CAC-40 Index is declining 3.0%, Germany’s DAX Index is falling 3.9%, Italy’s FTSE MIB Index is tumbling 4.1%, and Spain’s IBEX 35 Index is dropping 3.4%.

Asia falls amid data and weakness in technology issues

Stocks in Asia finished solidly lower, with technology stocks finding pressure following
Dell Inc’s (DELL $14) lackluster outlook yesterday and as traders digested some economic data ahead of the flood of reports due out in the US today. Japan’s Nikkei 225 Index dropped 1.3% as reports showed foreign investments in Japanese stocks fell solidly last week and the nation’s department store sales declined in July. Also, strength in the yen exacerbated the pressure on Japanese stocks, along with a separate report showing the nation’s exports fell more than expected in July. Elsewhere, Australia’s S&P/ASX 200 Index declined 1.2%, South Korea’s Kospi Index dropped 1.7%, while China’s Shanghai Composite Index fell 1.6% and Hong Kong’s Hang Seng Index decreased 1.3%. In economic news after the closing bell in Asia, Taiwan’s 2Q GDP was revised higher to a y/y growth rate of 5.02%, after growing 6.16% in 1Q, while Hong Kong’s unemployment rate moved lower from 3.5% to 3.4% for July.

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