Morning Update

Labor Report Provides Support

Stocks have overcome early sluggishness and are higher in morning action after the labor report showed less jobs were shed from nonfarm payrolls than expected and the unemployment rate unexpectedly declined. Treasuries have come under heavy pressure on the report and the favorable data helped Europe overcome early losses that stemmed from disappointing reports in the financial sector and weakness in metals prices. In equity news, AIG is up solidly after trouncing its profit forecast, while Fannie Mae reported a larger-than-expected loss. Elsewhere, Asian markets were mixed as China came under pressure from bank lending concerns.

As of 8:51 a.m. ET, the September S&P 500 Index Globex futures contract is 8 points above fair value, the Nasdaq 100 Index is 19 points above fair value, and the DJIA is 78 points above fair value. Crude oil is down $0.20 at $71.74 per barrel, and gold is down $7.28 at $955.98 per ounce.

American International Group (AIG $23) reported adjusted 2Q EPS of $2.57, much more than the Reuters estimate of $1.33, and net premiums earned by the maligned insurance firm—majority owned by the US government—fell 17% to $8 billion. The company's CEO Edward Liddy—who will retire on Monday—said its results reflect stabilization in certain businesses, with the primary drivers of its positive 2Q results including reductions in net realized capital losses and continued reductions in the risk profile of its financial products portfolio. AIG added that while its insurance companies' operating results remain challenged, largely driven by weak economic conditions and the lingering effect of negative AIG events earlier in the year, performance trends stabilized from 1Q. Shares are solidly higher.

Federal National Mortgage Association (FNM $0.80), also known as Fannie Mae, reported a 2Q net loss of $2.67 per share, wider than the Street's forecast of a $2.14 per share. The mortgage financer said delinquencies continued to surge, and it said it will be required to obtain an additional $10.7 billion in funding from the Treasury, as part of the $200 billion package extended to FNM.

Labor report surprises on the upside

Nonfarm payrolls fell 247,000 in July, much less than the Bloomberg estimate that called for a 325,000 decline. June was favorably revised to -443,000 from -467,000, and May was also revised from -322,000 to -303,000. The unemployment rate unexpectedly fell from 9.5% to 9.4%, versus the consensus forecast calling for the jobless rate to rise to 9.6%. Average hourly earnings rose 0.2%, versus the Street's forecast of 0.1%. Treasuries are solidly lower, after falling sharply following the labor data.

Later in afternoon trading, consumer credit will be reported and is forecast to show a decline of $5.0 billion in June, after posting a drop of $3.2 billion in May (economic calendar).

US labor data helping mitigate pressure of financials and materials on Europe

Stocks in Europe have erased early losses and are higher in afternoon action as the US jobs report is softening the blow from weakness in basic materials issues on lower prices for key metals in London, and pressure in the financial sector on disappointing earnings reports. Shares of the Royal Bank of Scotland (RBS $18) are sharply lower after the government-owned UK bank posted a first-half loss, as it set aside over 7 billion pounds to cover bad loans. Analysts surveyed by Bloomberg expected RBS to post a profit. The bank also said its results will be poor for another two years, exacerbating the pressure on its shares and the banking sector. News out of Germany—Europe's largest economy—is not helping sentiment across the pond, with Allianz (AZ $11) lower after the eurozone's largest insurer by market value announced disappointing results at its property and casualty insurance unit, which is offsetting its better-than-expected 2Q earnings report. Moreover, a report in Germany showed industrial production unexpectedly dropped, limiting some of the enthusiasm in European trading.

Asia mixed as China slides and Japan's Nikkei 225 ekes out a gain

Stocks in Asia were mixed as traders treaded cautiously ahead of today's release of the US labor report, and amid a plethora of news on the corporate front. The Nikkei 225 index gained 0.2% and the broader Topix Index was 0.1% lower as shares of Sanyo Electric (SANYY $11) posted a solid gain on a news report that it was planning to double its solar panel production to meet increased demand. Sanyo did not comment on the report. Elsewhere in Japan, Konica Minolta Holdings (KNCAY $102) was 10% lower after the maker of printers and office equipment reported a 98% drop in quarterly net income, and Kubota (KUB $42) came under pressure after Asia's largest tractor maker posted a 70% drop in 1Q operating profit. Meanwhile, China's Shanghai Composite Index fell 2.9% on concerns about bank lending, exacerbated by China Construction Bank's (CICHY $38) president telling Bloomberg that the bank would cut new lending by about 70% in the second half of the year to avoid bad loans. In related news, Chinese officials announced that they will scrutinize gains in stock prices without capping new lending, per Bloomberg News. Also, Hong Kong's Hang Seng Index fell 2.5%, pressured by shares of Orient Overseas International (OROVY $23), which fell almost 8% after the region's largest container line posted its first loss in 10 years.