Morning Market Update

Yesterday’s Momentum Stalls

Following yesterday’s strong gains on upbeat earnings and better-than-expected retail sales, stocks are under some pressure in morning action, despite a positive 1Q earnings pre-announcement from UPS, a favorable profit performance from Yum Brands, and more M&A news in the energy sector. A stronger-than-expected 1Q GDP in China was met with a tepid response, possibly on expectations that it may force more tightening from the Chinese government, which may be the source of some of the early sluggishness. An unexpected jump in weekly initial jobless claims did not seem to move markets as it was accompanied by a solid gain in a read on NY manufacturing activity. Treasuries are higher ahead of more manufacturing reports and a gauge of homebuilder sentiment. Overseas, Asia was mostly higher, while Europe gave up early gains in afternoon action and is mixed.

As of 8:52 a.m. ET, the June S&P 500 Index Globex future is 2 points below fair value, the Nasdaq 100 Index is 3 points below fair value, and the DJIA is 20 points below fair value. Crude oil is down $0.07 at $85.77 per barrel, and the Bloomberg gold spot price is down $2.58 at $1,152.78 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.5% to 80.61.

United Parcel Service Inc. (UPS $65 ¹) preannounced 1Q results, reporting that adjusted earnings totaled $0.71 per share, compared to the $0.57 per share that Wall Street analysts had expected. UPS said the results were powered by “a significant acceleration” in the international package and supply chain businesses and improved operating margins across all three segments. Also, the package delivery firm due to the strong results in 1Q, it increased its full-year adjusted EPS forecast to a range of $3.05-3.30, compared to the previous range of $2.70-3.05. The Street was expecting the company to report full-year EPS of $2.93.

Yum Brands (YUM $42) reported 1Q EPS ex-items of $0.59, above the Street’s forecast of $0.53, with revenues growing about 6% y/y to $2.3 billion, roughly inline with the expectations of analysts. The parent of Taco Bell, KFC, and Pizza Hut said it is particularly pleased with its business in China, which posted profit growth of 37%, while in the US, it has seen “significant sales improvement” since 4Q.

In M&A news, Apache Corp. (APA $108), which earlier this week bought the Gulf of Mexico assets of Devon Energy Corp. (DVN $67), announced that it has entered into a merger agreement with Mariner Energy Inc. (ME $18). Under the agreement, ME shareholders will receive, in aggregate, 0.17043 of a share of APA and $7.80 in cash for each share of ME they own, for a transaction value of about $2.7 billion.

Jobless claims unexpectedly jump, NY manufacturing activity solidly expands

Weekly initial jobless claims rose by 24,000 to 484,000, versus last week's figure which was an unrevised 460,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decline to 440,000. The four-week moving average, considered a smoother look at the trend in claims, rose by 7,500 to 457,750, and continuing claims increased by 73,000 to 4,639,000, compared to the 4,580,000 forecast.

The Empire Manufacturing Index, a measure of manufacturing in the New York region, rose in April to a level of 31.86, further above the level of zero that suggests conditions are neither contracting nor expanding. Economists surveyed by Bloomberg expected an increase to 24.00, following the previous month’s level of 22.86. The report is the first major piece of data looking at manufacturing conditions in April, and later today, the Philly Fed Manufacturing Index will be released, expected to increase from 18.9 in March to 20.0 in the current month, providing further insight into the health of the sector (economic calendar). Treasuries gave up early gains and moved lower following the employment and manufacturing report.

We will also get another look a the health of the manufacturing sector in morning trading, with the release of industrial production and capacity utilization, with production forecast to increase 0.7% for March and capacity to tick higher from 72.7% in February to 73.3% in March.

The final report today comes in the second-half of the trading session in the form of the NAHB Housing Market Index, and the gauge of homebuilder sentiment is expected to move from 15 in March to 16 in April.

Europe pares gains as materials slump to offset healthcare’s jump

Stocks in Europe have relinquished early gains and are mixed in afternoon action on weakness in materials issues, which is offsetting a solid rise in the healthcare group. The advance in the healthcare sector is being supported by a solid gain in shares of Roche Holding AG (RHHBY $41) after the world’s largest cancer drug maker posted 1Q sales that topped analysts’ expectations, led by sales of its cancer treatment Avastin and flu drug Tamiflu. The company also maintained its full-year guidance. Materials may be being pressured by results from Rio Tinto (RTP $246), which reported that 1Q production below expectations as weather and production issues hampered output, but the company said its full-year output will grow 7.8%, saying its long term outlook remains “very strong” and it is ramping up its growth projects.

Meanwhile, concerns in Greece remain, illustrated by the movements in the bond markets, with the 10-year Greek bond falling and the spread between German bonds known as bunds—a measure of risk of holding debt out of Greece—jumped above 400 basis points for the first time since the EU announced the 45 billion euro financial aid plan—with support from the IMF—which would be available to be tapped into if Greece could not raise funds in the open market.

In economic news, a measure of consumer confidence in the UK unexpectedly deteriorated in March, Spain’s consumer prices in March rose by an amount that matched the expectations of economists surveyed by Bloomberg, and Italy’s trade balance narrowed in February.

Britain’s FTSE 100 Index is 0.2% higher, France’s CAC-40 Index is flat, Germany’s DAX Index is down 0.1%, Spain’s IBEX 35 Index is down 0.7%, Italy’s FTSE MIB Index is declining 0.1%, and Greece’s Athex Composite Index is up 1.3%.

Asia shows modest reaction to US data and strong Chinese GDP

Stocks in Asia were mostly higher, led by a 0.6% gain in Japan’s Nikkei 225 Index on the heels of the upbeat earnings and retail sales data from the US and after a report showed China’s GDP grew more than forecast. The Chinese economy expanded 11.9% y/y in 1Q, compared to the 10.7% growth in 4Q and the expectations of economists surveyed by Bloomberg, which called for the nation’s output to increase by 11.7%. However, stocks in China moved modestly in reaction to the report, which accompanied separate reports that showed Chinese consumer and producer prices rose at a rate below forecasts, while industrial production and retail sales both increased at paces that were mostly inline with forecasts. The Shanghai Composite Index finished flat, while Hong Kong’s Hang Seng Index rose 0.2% as the larger-than-expected 1Q GDP growth and smaller-than-forecasted inflation data increased uncertainty as to whether the Chinese government will deploy further measures to cool down the economy or if the data will lead to an appreciation of the country’s yuan currency. In other economic news, Japan’s Industrial production was revised to a smaller-than-initially forecasted decline in February.

Elsewhere, Taiwan’s Taiex Index rose 0.9%, South Korea’s Kospi Index increased 0.5%, and Australia’s S&P/ASX 200 Index eked out a 0.1% advance, while India’s BSE Sensex 30 Index fell 1.0%. In equity news, the M&A saga in the Australian mining sector continued as MacArthur Coal (MACDF $14) rejected a sweetened cash takeover bid of A$14.50 per share of the company from New Hope Corp. (NHPEF $5), while after the close of trading, Peabody Energy Corp. (BTU $48) announced that it has raised takeover offer for MacArthur to A$16 per share, or A$4.1 billion. MacArthur said it will hold a meeting on Friday to consider the new proposal and urged shareholders to take no action on Peabody’s bid and has been informed that the sweetened offer will lapse if MacArthur holds a shareholder vote on its proposed takeover of Gloucester Coal Ltd. (GCRLF $11).