Morning Market Update

Goldman Cloud Continues to Stymie Sentiment

The equity markets are under pressure in morning action, as concerns about the impact of fraud charges against Goldman Sachs Group Inc. on the financial sector and the global economy are pressuring sentiment. The uneasiness in toward the group is overshadowing a better-than-expected profit report from Citigroup Inc. Treasuries are nearly unchanged in early trading ahead of a report on leading economic indicators. In other equity news, Eli Lilly & Co. reported 1Q earnings that exceeded analysts’ estimates but its revenues were lighter than the Street had forecasted. Overseas, Asia moved lower in reaction to the Goldman allegation and after China deployed further measures to rein in property speculation, while Europe is under pressure as the weakness in financials are being exacerbated by continued travel disruptions from the Icelandic volcano eruption.

As of 8:53 a.m. ET, the June S&P 500 Index Globex future is 4 points below fair value, the Nasdaq 100 Index is 6 points below fair value, and the DJIA is 26 points below fair value. Crude oil is down $1.97 at $81.27 per barrel, and the Bloomberg gold spot price is down $4.50 at $1,132.90 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.5% to 81.20.

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 was the third-consecutive quarterly decline, and its total allowance for loan losses was $48.7 billion or 6.8% of total loans.

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.

Goldman Sachs Group Inc. (GS $161) 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.

Leading Index set to kick off the week’s economic calendar

Treasuries are nearly unchanged in early action as there were no major economic reports released before the opening bell, but the Index of Leading Economic Indicators is set to be reported in morning trading, expected to rise 1.0% in March, after a 0.1% rise in February, which would mark the twelfth-straight monthly advance.

This week will be back-end loaded, beginning with Thursday’s release of the Producer Price Index (PPI), expected to show prices at the wholesale level were up 0.5% month-over-month (m/m) in March, on the heels of a 0.6% decline in February, while the core rate, which excludes food and energy, is expected to rise a mere 0.1% after increasing 0.1% the prior month. On a year-over-year basis, the PPI is expected to show a 6.0% increase on a headline basis, but only a 0.9% increase at the core level. The release comes after the Consumer Price Index (CPI) last week showed a modest 1.1% y/y increase on a core basis, indicating that inflation is not a current concern.

Also, housing data ramps up with Thursday’s release of existing-home sales, expected to have increased 5.6% m/m in March to an annual rate of 5.3 million units. Sales of existing homes reflect closings from contracts entered one to two months earlier, while new home sales, expected to show a 5.5% increase in March to an annual rate of 325,000 units when released on Friday, are a more timely indicator of conditions in the housing market, as they reflect contract signings.

Durable goods orders will also be reported on Friday, expected to have risen 0.2% m/m in March after increasing 0.5% in February, while ex-transportation, orders are forecasted to have grown 0.7% m/m, after advancing 0.9% in February. The durable goods data is volatile on a month-to-month basis as the large size of orders for items such as airplanes and military equipment can have a tendency to distort the data.

Other reports on this week’s US economic calendar include the MBA Mortgage Applications Index, and initial jobless claims.

Europe under pressure as financials fall

Stocks in Europe are under pressure, with financials pacing the decline on the fallout from Friday’s fraud charge against Goldman Sachs from the SEC, exacerbated by the possibility that the UK and Germany could launch their own probes in the US financial firm. Airlines are also under pressure to weigh on the equity markets across the pond as several major airports continue to be hampered by massive flight cancelations due to the ash clouds from the volcano eruption in Iceland. 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.

In equity news, shares of Philips Electronics (PHG $33) are solidly higher after the world’s largest lighting company and one of Europe’s largest consumer electronics firms posted 1Q profits that exceeded analysts’ forecasts, aided by cost cuts. In economic news, a report showed UK house prices rose 6.0% y/y, while construction output fell 15.2% y/y for February.

The UK’s FTSE 100 and France’s CAC-40 Indexes are down 0.7%, Germany’s DAX Index is off 0.4%, and Greece’s Athex Composite Index is declining 2.9%.

Asia falls in reaction to Goldman charge

Stocks in Asia were solidly lower, led by losses in the financial sector amid the negative reaction in the group to the charge against Goldman Sachs. Major equity markets in Japan, Australia, South Korea, and India were all down over 1%, while the weakness in the financial sector was exacerbated by further measures in China to rein in property speculation. The Shanghai Composite Index fell 4.8% and Hong Kong’s Hang Seng Index dropped 2.1% after the Chinese government told banks to stop loans for third-home purchases and suspend lending to buyers that can not provide tax returns or proof of social security contributions, per Bloomberg News, which cited the State Council’s April 17th statement. Meanwhile, Reuters reported that the State Council told banks they would be expected to raise mortgage rates and down payment requirements. Outside the financial sector, travel stocks moved lower to add to the broad-based decline on the impact of the disruption in air travel in Europe. On the economic front, the pressure from the financial sector overshadowed a report that 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.