Weekend Market Update

Late-Day Retreat to End the Week

After hovering around the unchanged mark for most of Friday, stocks moved solidly lower in late-day action as trepidation regarding eurozone debt issues and a slowing global economy took hold. News from the corporate world offered little reprieve as the Wall Street Journal reported that Bank of America is planning a significant reduction in its workforce and weak guidance from Hewlett-Packard overshadowed any positives from the IT giant's M&A activity. In a day devoid of major economic releases, Treasuries were mostly flat. While on the earnings front, Marvell and Gap both topped analysts' expectations.

The Dow Jones Industrial Average dropped 173 points (1.6%) to 10,818, the S&P 500 Index fell 17 points (1.5%) to 1,124, and the Nasdaq Composite gave up 39 points (1.6%) to 2,342. In heavy volume, 1.5 billion shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.31 to $82.69 per barrel, wholesale gasoline picked up $0.08 to $2.87 per gallon, and the Bloomberg gold spot price added $24.25 to $1,848.15 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was down 0.4% falling to 73.94. For the week, including dividends, the DJIA lost 4.0%, the S&P 500 Index shed 4.7%, and the Nasdaq Composite was down 6.6%.

Dow member Hewlett-Packard Co. (HPQ $24) announced that it has reached an agreement to acquire U.K. data-analytics firm Autonomy Corp. (AUTNY $42) 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 were 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. HPQ finished down over 20% and AUTNY rallied in European trading.

Meanwhile, the Wall Street Journal is reporting that fellow Dow component Bank of America Corp. (BAC $7) is cutting 3,500 jobs in the current quarter, expected to be completed by the end of September, according to people familiar with the matter, with one person noting that at least 10,000 positions could be eliminated. BAC has not commented on the report. Shares finished lower.

In earnings news,  Marvell Technology Group (MRVL $13) 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. The chipmaker said its mobile and wireless business grew 18% q/q and it believes the headwinds that faced its mobile and wireless end market in the prior quarters "are mostly behind us," per Dow Jones Newswires. Shares ended the day sharply higher. 

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. Shares finished higher.

Treasuries mostly lower following yesterday’s solid advance

Treasuries finished Friday mostly unchanged, with the yield on the 2-year note remaining at 0.19% and the yield on the 10-year note also staying put at 2.07%, while the 30-year bond rate fell 3 bps to 3.39%.

Bond yields fell again Thursday 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.

Eurozone debt crisis and recession fears continue to plague markets overseas

It was a light day for economic news in Europe where German producer prices came in hotter than expected for July and UK public sector net borrowing unexpectedly fell. Equity markets rebounded from session lows, but stocks ultimately extended yesterday’s sharp sell-off on concerns regarding the health of the eurozone's financial sector and sovereign debt issuers.  There needs to be large amounts of capital made available to give markets confidence that any potential problem can be addressed, regardless if it's a problem with a bank or a country in the eurozone. Similar to former US Treasury Secretary Hank Paulson's "bazooka," we believe the eurozone’s EFSF needs to be expanded multiple times over, and likely needs to come with the guarantee that private-sector investors will not face losses on their debt investments in banks. This may give investors the confidence that's now likely sorely lacking, to lend to banks and enable banks to raise their capital ratios.

Stocks in Asia finished broadly to the downside as the growing recession concerns in the US and Europe, along with continuing worries regarding the eurozone debt crisis, pummeled sentiment. Amid the 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 need "very close cooperation in coming weeks."

Soft data and lingering debt concerns fuel another volatile week

The US equity markets began the week extending the rally from the latter-half of last week, erasing the losses that accompanied the US credit rating downgrade. M&A activity, highlighted by Google Inc's (GOOG $495) agreement to acquire Motorola Mobility Holdings Inc. (MMI $38) for about $12.5 billion, aided sentiment, along with better-than-expected earnings from Dow members Wal-Mart Stores Inc. (WMT $52) and Home Depot Inc. (HD $32), as well as Target Corp. (TGT $50). However, as the week matured, the bulls’ work was undone as eurozone debt crisis concerns reared their ugly head, and fears of a recession in the eurozone and the US grew louder, resulting in a solid decline for the major equity markets this week. The uneasiness across the pond came as France and Germany held a meeting, which failed to evoke confidence of a timely and decisive action plan to solve the festering problems facing the region, while worries about liquidity problems in the European banking sector resurfaced to exacerbate sentiment.

Meanwhile, the global economic pessimism came as eurozone 2Q GDP showed smaller-than-forecasted growth, led by nearly flat expansion in Germany, the region’s largest economy. Elsewhere, a plethora of US data amplified the bears’ roar as the US economic calendar yielded disappointing reports showing jobless claims rose, inflation came in hotter than forecasted, housing remained lackluster. But the heaviest hit to the economy’s outlook came from a sharp drop in the Philly Fed Manufacturing Index to the lowest level since March 2009. The recessionary tone drowned out some favorable reports on industrial production and the Conference Board’s Index of Leading Economic Indicators.

Jackson Hole speeches by Bernanke and Trichet will be closely watched

The economic calendar will likely focus on preliminary August PMI readings overseas early in the week, as the US schedule starts slow, with Tuesday's new home sales report expected to show sales flat m/m in July at an annual rate of 312,000 units after falling 1.0% in June. The new home sales report is considered a timely indicator of conditions in the housing market as it is based on signings, while existing home sales, which unexpectedly fell 3.5% m/m, uses closings. Wednesday morning brings the volatile durable goods orders report, expected to gain 2.1% in July after falling by the same amount in June, while ex-transportation, orders are forecasted to have fallen 0.5% m/m after increasing 0.1% in June.

After the very disappointing first reading, traders may look to see the extent of revisions in the second reading of 2Q gross domestic product (GDP), due out on Friday. The consensus of a Bloomberg survey of economists expects 2Q GDP to be revised lower to 1.1% from 1.3%, after inching ahead by 0.4% in 1Q. The largest component of GDP, personal consumption, is expected to be revised higher to 0.2% from the initially reported 0.1%, after advancing 2.1% in 1Q. The inflation readings are expected to be unrevised at a 2.3% rise for the GDP Price Index, and 2.1% for the core PCE Index, which excludes food and energy.

However, the main focus for the market is likely to be on Friday's speeches at the Federal Reserve's annual gathering in Jackson Hole, beginning with Fed Chair Bernanke at 10:00 am EST, followed by European Central Bank President Trichet at 12:25 pm EST. Bernanke first hinted at QE2 at last year's meeting, and investors may be wondering if central banks will pursue more accommodative policies with market volatility, weak economic data and a continued crisis of confidence in Europe potentially threatening economic growth.

Other releases on the US economic calendar include the Richmond Fed Manufacturing Index, the MBA Mortgage Applications Index, weekly initial jobless claims, and the final University of Michigan Consumer Sentiment Index reading for August.

International economic releases due out next week include Japan's machine tool orders and CPI, Australia’s leading index, and China’s preliminary August PMI from HSBC, leading index and year-to-date industrial profits. Releases from Europe will include euro-zone preliminary services and manufacturing PMIs for August, consumer confidence, and industrial new orders, Germany's ZEW Survey of Economic Sentiment Index, Ifo Business Climate Index, consumer confidence, import prices, and retail sales, and UK home prices and consumer confidence. Back in the Americas, Canada releases retail sales, while Mexico announces retail sales, the trade balance and the unemployment rate, and Mexico’s central bank meets.