Morning Market Update

 

 

Bears Continue to Roar in Late-Week Action

Yesterday’s global sell-off is continuing on Friday, with the US equity markets lower in early trading and European stocks under broad-based pressure as concerns toward the eurozone financial sector and growing recession worries continue to apply pressure on sentiment. However, Treasuries are modestly lower despite the continued downward volatility in the equity markets, as there are no major US economic reports due out today. In equity news, Dow member Hewlett-Packard Co announced that it has reached an agreement to acquire U.K. data-analytics firm Autonomy Corp for nearly $10.3 billion, while fellow Dow component Bank of America Corp is reportedly cutting 3,500 jobs. In earnings news, Marvell Technology Group and Gap Inc both exceeded analysts’ 2Q expectations. Elsewhere overseas, Asian markets fell victim to the sharp declines seen in the US and Europe yesterday.

As of 8:51 a.m. ET, the September S&P 500 Index Globex future is 10 points below fair value, the Nasdaq 100 Index is 13 points below fair value, and the DJIA is 93 points below fair value. WTI crude oil is $0.75 lower at $81.63 per barrel, and the Bloomberg gold spot price is up $29.75 at $1,853.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.4% at 73.93.

Dow member Hewlett-Packard Co. (HPQ $30) announced that it has reached an agreement to acquire U.K. data-analytics firm Autonomy Corp. (AUTNY $38) for nearly $10.3 billion. Under the terms of the deal, AUTNY shareholders will receive 25.50 British pounds ($42.11) per share in cash, a 64% premium to Wednesday’s closing price, the last trading day before discussions of the deal was announced. The agreement comes after HPQ and AUTNY confirmed talks of a deal late yesterday, when HPQ announced fiscal 3Q results that were roughly inline with expectations, while lowering its 4Q and full-year guidance. Also, HPQ announced that it is exploring of strategic alternatives for its PC business, which could include either a “full divesture or partial separation.” Additionally, the company announced that it will discontinue operations for its webOS devices, including the TouchPad and webOS phones.

Meanwhile, the Wall Street Journal is reporting that fellow Dow component Bank of America Corp. (BAC $7) is cutting 3,500 jobs, expected to be completed by the end of September, according to people familiar with the matter. BAC has not commented on the report.

In earnings news, Marvell Technology Group (MRVL $12) reported 2Q EPS ex-items of $0.38, one penny above the consensus estimate of analysts surveyed by Reuters, with revenues growing 12% quarter-over-quarter (q/q) to $898 million, exceeding the $889 million that the Street had projected.

Finally, Gap Inc. (GPS $16) announced 2Q earnings of $0.35 per share, two cents above the Street’s forecast, as revenues rose 2% year-over-year (y/y) to $3.4 billion, above the $3.3 billion that analysts had estimated. However, 2Q same-store sales—sales at stores open at least a year—declined 2% y/y, while online activity had a positive impact of two percentage points. GPS reaffirmed its full-year EPS guidance.

Treasury yields rise modestly following yesterday’s solid declines

Treasuries are modestly lower in early trading as there are no major US reports scheduled for today’s economic calendar, with the yield on the 2-year note unchanged at 0.19%, while the yield on the 10-year note is 3 bps higher at 2.09%, and the 30-year bond rate is rising 1 bp to 3.43%.

Bond yields are rebounding somewhat from yesterday’s decline amid growing global economic concerns, fueled by a plethora of disappointing data, and as worries about the eurozone financial crisis resurfaced. The mere possibility of a problem—something that could be possible, even if it is not probable—becomes a target. European banks are highly reliant on short-term funding, which is only exacerbating the situation in our view. It seems unfathomable that European policymakers have not learned the lessons of past crises, but in our opinion, they seem to be in denial about the role of confidence in financial systems. Instead of taking the opportunity to calm nerves in their "emergency meeting" this week, German Chancellor Angela Merkel and French President Nicolas Sarkozy likely only added to uncertainties by raising the possibility of a new financial transactions tax, while downplaying the need to expand the European Financial Stability Facility (EFSF) that the market seems to be calling for and pushing off the possibility of common Eurobonds until sometime in the future.

Pressure continues in Europe

The equity markets in Europe are under solid pressure after yesterday’s sharp sell-off as concerns regarding the health of the eurozone’s financial sector and festering debt crisis continues. Banking shares are among the biggest decliners amid growing fears about liquidity problems in the sector.

Also, increasing uneasiness regarding the potential for a return to recession for Europe and the US are exacerbating sentiment in the global markets, and European automakers are pacing today’s downward move, along with basic resource stocks. However, stocks are off of the worst levels of the day, with technology issues gaining solid ground as shares of Autonomy Corp are surging over 70% on the heels of the announcement that is has agreed to be acquired by Dow member Hewlett-Packard Co over $10 billion. In economic news in Europe, German producer prices came in hotter than expected for July, while UK public sector net borrowing unexpectedly fell in July.

The UK FTSE 100 Index is 1.8% lower, France’s CAC-40 Index is declining 2.0%, Germany’s DAX Index is falling 3.1%, Italy’s FTSE MIB Index is dropping 2.6%, and Spain’s IBEX 35 Index is 2.2% lower.

Selling pressure spills over to Asia

Stocks in Asia finished broadly to the downside as the growing recession concerns in the US and Europe, along with the exacerbated worries toward the euro-area’s debt crisis pummeled sentiment to weigh on the equity markets in the region. South Korea’s Kospi Index took the hardest hit, tumbling 6.2% on heavy selling of export issues, while Australia’s S&P/ASX 200 Index fell 3.5%, led by weakness in financials and mining stocks. Elsewhere, stocks in China finished solidly lower, with the Hong Kong Hang Seng Index dropping 3.1% and the Shanghai Composite Index declining 1.0%. Rounding out the sell-off, Japan’s Nikkei 225 Index fell 2.5%. Amid the deep downward moves in Asia, several nations offered comments aimed at calming sentiment, with Japan’s Finance Minister Noda saying the G-7 group of world finance ministers and central bank governors needs “very close cooperation in coming weeks,” per Bloomberg.