Morning Market Update

Profit Taking Distorts Reaction to Upbeat Earnings Reports

The major equity markets are under pressure in morning action, despite favorable reports from Dow members Bank of America and General Electric, as well as a better-than-expected release from the world’s largest internet search engine Google Inc. Traders are taking the opportunity to harvest some of the recent gains that have taken the major indices to multi-year highs recently, prompted by festering uncertainty regarding Greece and the announcement out of China aimed at cooling off property speculation. The subdued start on Wall Street also comes despite larger-than-forecasted increases in housing starts and building permits. Treasuries are higher ahead of a report on consumer sentiment. Overseas, Asia finished lower, while European markets are nearly unchanged after paring early losses.

As of 8:49 a.m. ET, the June S&P 500 Index Globex future is 3 points below fair value, the Nasdaq 100 Index is 8 points below fair value, and the DJIA is 14 points below fair value. Crude oil is down $1.07 at $84.44 per barrel, and the Bloomberg gold spot price is down $6.25 at $1,153.00 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.2% to 80.61.

Dow member Bank of America (BAC $19 ¹) reported 1Q EPS of $0.28, easily topping the $0.09 that Wall Street analysts had forecasted, with revenue declining 11% year-over-year (y/y) to $32.3 billion, compared to the $27.9 billion that was expected. The company said its provision for credit losses—the charge taken during the quarter to cover losses on loans the company does not expect to collect—fell by $3.6 billion y/y to $9.8 billion, reflecting “an improvement in credit quality.” Also, the company said strong capital markets activity, including record sales and trading driven by corporate and investment banking positions, helped drive results for its global banking and markets. BAC’s CEO said, “With each day that passes, the 2010 story appears to be one of continuing credit recovery, and our results reflect a gradually improving economy.” Shares are higher.

Fellow Dow component General Electric Co. (GE $20 ¹) announced 1Q EPS of $0.21, five cents above the Street’s forecast, with revenues down 5% y/y to $36.6 billion, compared to the $37.3 billion that analysts had forecasted. The company said the decline in revenues reflected the acceleration of downsizing at its GE Capital unit. GE’s Chairman and CEO said, “We saw encouraging economic signs, including increases in airline passenger miles and freight loadings, declines in receivables delinquencies, and growth in local advertising markets.” The company added that it is “very encouraged” by GE Capital’s performance, which earned $600 million in 1Q, and the unit’s losses “seem to have peaked.”

Google Inc. (GOOG $20) reported 1Q EPS ex-items of $6.76, compared to the $6.58 that analysts were expecting, with revenues of $5.06 billion, excluding traffic acquisition costs, versus the $4.9 billion that the Street had forecasted. The world’s number one internet search engine said it performed very well in 1Q, driven by strength across all major verticals and geographies. However, shares are under pressure, suggesting some had expected the company to exceed analysts’ expectations by a wider amount.

Housing starts rise more than expected, consumer sentiment report on the horizon

Housing starts for March were reported, showing starts rose 1.6% month-over-month (m/m) to an annual rate of 626,000 units, from an upwardly revised 616,000 last month, and compared to economists’ expectations, which called for starts to come in at 610,000. Also, building permits rose, increasing about 7.5% m/m to an annual rate of 685,000 from last month’s upwardly revised 637,000. The expectation was for permits to be 625,000 units. Treasuries remained higher after the housing data.

Later this morning, the economic calendar will yield the preliminary release of the University of Michigan’s Consumer Sentiment Index, forecast to improve from 73.6 in March to 75.0 in April.

Europe overcomes early pressure on some favorable earnings reports

Stocks in Europe are nearly unchanged in afternoon action, as strength in industrials and financials amid some upbeat earnings reports out of the US are helping alleviate early pressure in the euro-area. Today’s earnings data in the US is offsetting the negative reaction to Google’s profit report yesterday, which is weighing on the technology sector across the pond. Meanwhile, Europe is also benefiting from some positive corporate reports of their own as shares of Carrefour (CRERF $52) are higher after Europe’s largest retailer reported a more than 5% increase in 1Q sales—the first gain in 18 months—and announced a 1.6 billion euro stock repurchase plan. Also, the world’s largest maker of ball bearings, SKF (SKUFF $20), is up solidly after it posted 1Q earnings and sales that topped analysts’ forecasts, aided by the recovery in manufacturing and autos. However, European airline stocks are under pressure as the cloud of ash from the volcano eruption in Iceland continues to severely hamper the industry as several major airports in the region are shut down for a second-straight day.

Greece uncertainty is also limiting upward action in the euro-area as the debt ridden nation is set to meet with the EU, IMF, and European Central Bank next week to discuss its situation. Bloomberg News is reporting that Greece does not have an immediate plan to tap into the 45 billion euro financial aid package that European regulations had agreed to put in place if the Greek nation was unable to raise capital on its own in the open markets.

In other economic news, the euro-zone CPI rose 0.9% month-over-month (m/m) in March, matching economists’ expectations, while a separate report showed the euro-area posted a trade surplus of 2.6 billion euros for February, versus the expectation of a deficit of 500 million euros.

France’s CAC-40 and Germany’s DAX Indexes are up flat, while Britain’s FTSE100 Index is 0.1% lower.

Asia slumps on China measures and mixed global data

Stocks in Asia came under pressure as China announced measures to cool housing speculation, Greece uncertainty remains, and yesterday’s mixed economic data and negative reaction to Google’s earnings in the US. Japan’s Nikkei 225 Index fell 1.5% as the aforementioned issues induced a bout of profit taking in the region, exacerbated by strength in the yen versus the dollar and other major world currencies, which dampened the outlook for profits of Japanese export companies. Stocks in China were also solidly lower in reaction to the announcement from the Chinese government of measures to rein in property speculation and try to avoid the formation of asset bubbles. Per Bloomberg News, the Chinese State Council said in a statement that down payments for second homes must be at least 50%, up from 40%, and interest rates can’t be lower than 110% of benchmark rates. Also, it said that banks should also raise down payment ratios and rates for third homes “by a broad margin.” The Shanghai Composite Index declined 1.1% and Hong Kong’s Hang Seng Index finished 1.3% lower. Elsewhere, South Korea’s Kospi Index decreased 0.5% on the increased global economic concerns, and after a report showed that the nation’s department store sales rose 4.6% in March y/y, which was the slowest rate of growth in eight months.

Rounding out the day in Asia, Taiwan’s Taiex Index fell 0.7%, Australia’s S&P/ASX 200 Index declined 0.3%, and India’s BSE Sensex 30 index was 0.3% lower.