Evening Market Update

Markets Reassert Themselves in Face of Goldman Trouble

Banks remained in focus in trading today as better-than-expected earnings from Citigroup Inc helped to alleviate some of the anxiety over the fraud charges brought against Goldman Sachs Group Inc by the Securities and Exchange Commission. Despite the uneasiness surrounding the sector, stocks finished mixed with the Dow Jones Industrials ending near the highs of the day. In other equity news, Eli Lilly & Co. reported 1Q earnings that beat the Street but revenues fell short of expectations, Toyota will pay the $16.4 million fine surrounding its accelerator pedal problems and it declared another recall, General Motors is reportedly set to announce the repayment of government loans, while airline stocks faltered in the wake of the effects on the industry from the volcanic eruption in Iceland. Treasuries were lower following a strong reading from the Index of Leading Economic Indicators.

The Dow Jones Industrial Average rose 73 points (0.7%) to close at 11,092, the S&P 500 Index gained 5 points (0.5%) to 1,198, while the Nasdaq Composite lost 1 point (0.05%) to 2,480. In moderate volume, 1.3 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil was $1.54 lower at $83.13 per barrel, wholesale gasoline was $0.03 lower at $2.25 per gallon, and the Bloomberg gold spot price fell $2.10 to $1,135.30 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.2% to 80.95.

Citigroup Inc. (C $5) reported 1Q EPS of $0.15, compared to the flat forecast of Wall Street analysts, with revenues declining 5.7% year-over-year (y/y) to $25.4 billion, above the $19.8 billion that the Street had expected. Citi said its performance was aided by stability in the capital markets and improvement in the global business climate and its securities and banking unit revenues more than doubled to $8 billion. The company said it suffered credit losses of $8.4 billion, but that was down 16% versus last quarter—the third-consecutive quarterly decline—and its total allowance for loan losses was $48.7 billion or 6.8% of total loans. In a conference call with analysts, the company’s Chief Financial Officer said, “We currently expect consumer net credit losses to continue to modestly improve.” Shares were higher.

Eli Lilly & Co. (LLY $37) reported 1Q EPS ex-items of $1.18, above the $1.11 that the Street had anticipated, including a $0.12 per share reduction due to the impact of US health care reform. Revenues rose 9% y/y to $5.5 billion, but came up short of the $5.6 billion that analysts had forecasted. The drug company said it benefitted from solid volume growth, but it lowered its full-year EPS guidance on the anticipation of a $0.35 per share reduction in earnings due to the impact of US health care reform. Shares ended the day higher.

Goldman Sachs Group Inc. (GS $163) remains in focus on Wall Street, following Friday’s announcement from the Securities Exchange Commission (SEC) that it charged the financial firm and one of its employees for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the US housing market was beginning to falter. UK Prime Minister Gordon Brown said over the weekend that he is seeking a special investigation by the Financial Services Authority into the actions of the financial firm, while Germany’s Chancellor Angela Merkel has asked the SEC for details. GS said on Friday that the charges are “completely unfounded in law and fact” and it will “vigorously” contest them and defend the firm and its reputation. Also, GS announced that along with its 1Q earnings release tomorrow, it will address the recent SEC complaint against the company. Analysts are expecting the financial firm to post EPS of $4.07, on revenues of $11 billion. Shares of GS finished higher.

Airline stocks continued to feel the effects of flight bans overseas as a result of the volcanic eruption in Iceland. US Airways (LCC $7) was 3.6% lower, both .Delta Air Lines (DAL $13) and Continental Airlines (CAL $22) were over 4.0% lower, while UAL Corp (UAUA $22), parent of United Airlines, suffered a loss of more than 5.0%.

In news out of the auto sector, Toyota Motor (TM $79) has agreed to pay the $16.4 million fine levied by the US Government for its failure to expediently recall 2.3 million automobiles involved in the faulty accelerator pedal problems the company was embroiled in earlier in the year. Separately, the Wall Street Journal is reporting that the embattled automaker will voluntarily recall 9,400 of its Lexus GX460 sport utility vehicles in order to update the onboard Vehicle Stability Control (VSC) software system which controls traction of the front and rear wheels during slippage. Shares were lower. Elsewhere, Bloomberg reported that General Motors Chief Executive Ed Whitacre is set to announce on Thursday that the US automaker has paid back the remaining $4.7 billion in loans from the US government and $1.1 billion to the Canadian government, citing a person with knowledge of the plans. GM did not comment on the report.

Leading Index kicks off the week’s economic calendar with growth streak intact

The Conference Board released the Index of Leading Economic Indicators (chart) for March, which rose 1.4% and February’s 0.1% increase was revised to a 0.4% gain. The index increased for the twelfth-consecutive month. The largest contributors to the index were the average workweek, pace of deliveries, and jobless claims. The Conference Board said improvements in financial and labor market indicators has led the advance, while payroll employment made its first substantial contribution to the accompanying Coincident Economic Index, “suggesting a recovery that is beginning to gain traction.” Treasuries were lower following the report with the yield on the 2-year note up 2 bps to 0.98%, the yield on the 10-year note gaining 3 bps to 3.80% and the 30-year bond yield increasing 5 bps to 4.69%.

China tightens speculation reins

According to Bloomberg News, the Chinese government told banks to stop loans for third-home purchases and to suspend lending to buyers that can not provide tax returns or proof of social security contributions, citing the China’s April 17th State Council statement. Meanwhile, Reuters reported that the State Council told banks they would be expected to raise mortgage rates and down payment requirements. The moves follow previous actions that were unsuccessful at cooling home prices, which surged 11.7% in March. On the economic front in the Asia/Pacific region, a report showed Japanese consumer confidence improved by an amount larger than economists had forecasted, rising from 39.8 in February to 40.9 in March and compared to the forecast, which called for the reading to increase to 40.5.

In Europe, several major airports remained hampered by massive flight cancelations due to the ash clouds from the volcano eruption in Iceland, which in turn negatively impacted sentiment across the pond. The International Air Transport Association warned on Friday that daily losses from the disruption in travel could top $200 million a day, per CNBC, and the limited operations in European airports have delayed the meeting between debt-ridden Greece and the European Central Bank, IMF, and the EU, which were expected to discuss the financial aid package that was agreed to if the Greek nation could not raise funds on its own in the open markets. However, later in the day, European air safety officials announced an agreement with EU authorities to relax some of the flight bans on Tuesday, but that the lightened clampdown would not be at the expense of passenger safety. In economic news in the region, a report showed UK house prices rose 6.0% y/y, while construction output fell 15.2% y/y for February.

While there are no US economic reports slated for release tomorrow, international reports will include German PPI and the Zew Survey, industrial orders in Italy, the current account balance in the euro-zone, UK CPI and retail price index, and employment figures in Hong Kong. Also, the Bank of Canada meets to discuss monetary policy.