Morning Market Update

Greece Aid Optimism Supports Sentiment

After yesterday’s solid losses on exacerbated debt fears in the euro-zone, the US equity markets are rebounding in early trading as speculation grows, through assurances from euro-area officials, that Greece could get funds from the EU/IMF bailout package as soon as today. Earnings reports continue to pour in, with Dow Chemical Co. and Comcast Corp. both exceeding analysts’ profit projections, aiding the morning backdrop, while Sprint Nextel Corp. posted a loss that was expected. Treasuries are under pressure after moving solidly higher amid yesterday’s uneasiness, but traders are looking toward the afternoon monetary policy decision from the Federal Reserve. In other economic news, mortgage applications declined last week. Overseas, Asia fell and Europe remains under some pressure but stocks in Greece are on the rebound amid the aforementioned optimism.

As of 8:51 a.m. ET, the June S&P 500 Index Globex future is 5 points above fair value, the Nasdaq 100 Index is 14 points above fair value, and the DJIA is 20 points above fair value. Crude oil is up $0.33 at $82.77 per barrel, and the Bloomberg gold spot price is down $5.68 at $1,162.18 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is flat at 82.15.

Dow Chemical Co. (DOW $30 ¹) reported 1Q EPS ex-items of $0.43, well above the $0.30 that Wall Street analysts were anticipating, with revenues jumping 48% year-over-year (y/y) to $13.4 billion, above the $13.0 billion that the Street was looking for. The company said its robust sales growth was driven by “significant” volume and price increases in all geographic areas, with notable improvements in North America and Europe.

Comcast Corp. (CMCSA $18) announced 1Q EPS of $0.31, one penny above analysts’ forecasts, as revenues rose 3.8% y/y to $9.2 billion, roughly inline with the Street’s estimates. The company said it added 590,000 net video, high-speed internet, and Comcast digital voice customers during the quarter. CMCSA added that its results were driven by “robust customer growth,” a rebound in advertising, momentum in business services and its continued focus on expense and capital management.

Sprint Nextel Corp. (S $4) posted an adjusted 1Q net loss of $0.17 per share, matching the consensus estimate of analysts, with revenues declining 1.5% to $8.1 billion, roughly inline with the Street’s forecast. The company said it lost a total of 75,000 net subscribers.
Mortgage applications decline, but Fed statement is on Street’s mind

The lone release on this morning’s economic calendar was the US MBA Mortgage Application Index, which declined 2.9% last week, after the index that can be quite volatile on a week-to-week basis, rose 13.6% in the previous week. The decrease came amid an 8.8% drop in the Refinance Index, offsetting a 7.4% gain in the Purchase Index. Moreover, the decline in the overall index came on a 4 basis-point increase in the average 30-year mortgage rate, which rose to 5.08%, remaining above the record low of 4.61% that was reached at the end of March 2009.

Treasuries are under pressure in morning trading following yesterday’s solid gains on flight-to-quality buying as some of the fears regarding Greece have relatively dissipated amid optimism about the debt-ridden nation’s ability to avoid at least a short-term default. However, traders are awaiting this afternoon’s statement following the conclusion of the Federal Open Market Committee’s (FOMC) two-day meeting for clues about the pace of tightening that the Fed’s is contemplating in the future, as well as the manner in which the Fed will remove excess liquidity from the banking system, while no changes are expected to interest rate policy at this meeting. It is unclear whether the Fed feels the economic recovery is strong and stable enough to compel the need to remove the “extended period” language as to the timing of keeping rates at an exceptionally low rate at this meeting, a move that would likely be met with markets pricing in an increased likelihood for rate hikes sooner than currently anticipated, or whether the Fed believes it can wait, with the next meeting scheduled for June 22-23.

With excess reserves at unprecedented levels, the risk is that an unleashing of this amount of liquidity could spark inflation pressures once the economy is firing on all cylinders, demand for credit returns and the money multiplier kicks in. While the near-term inflation outlook is benign, the Fed has already begun to remove emergency measures put in place during the crisis, and feels that reducing the quantity of reserves will improve the Fed’s control of financial conditions by leading to a tighter relationship between the interest rate paid on reserves and the effective fed funds rate.

In order to reduce these excess reserves, the Fed has discussed the possibility of raising the interest rate paid on funds deposited at the Fed, term deposits, which are analogous to certificates of deposit, as well as reverse repurchase agreements. Lastly, the timing of when the Fed would begin to sell assets, specifically mortgage-backed securities, from their balance sheet has been debated within the Fed, as reverse repos and term deposits only temporarily drain liquidity and would not permanently reduce the size of the Fed’s $2.5 trillion balance sheet. The debate concerns the risks to the economy if assets were sold too quickly, pressuring rates higher, while others believe letting mortgage assets decline naturally as they age would take too long.

The US dollar has strengthened relative to major currencies, as currency movements are relative, and economic growth in the US is likely to outpace the euro-zone, the UK and Japan. As a result, the Fed could be the first central bank in this group to tighten, and currency investors typically flock to rising interest rates, providing support for the US dollar. The euro is the biggest weight in the Dollar Index, at 58%, and the ability of the European Central Bank to raise rates is hampered by debt issues and fiscal concerns in Greece and other weak countries, and a rate hike would further slow recovery. However, as Liz Ann and Brad have been noting for some time, emergency rates in the US are no longer needed, and some normalization of rates would be beneficial. The stock market could view such action as confidence on the part of the Fed that things are improving, while savers could again start to earn more meaningful returns.

Europe remains in the red on continued debt dread

Stocks in Europe remain under pressure following yesterday’s steep losses that came from Standard & Poor’s downgrades of the sovereign credit ratings of Greece—to “junk status”—and Portugal. The downgrades exacerbated already elevated concerns of a possible default of Greek debt as EU and International Monetary Fund (IMF) officials continue to talk about granting Greece the approval to tap into the 45 billion euro financial rescue package in time to meet obligations that are maturing in mid-May. The approval seems to hinge on the decision from Germany—Europe’s largest economy—which has warned that Greece will have to make further austerity measures to combat its deficit problems and ensure long-term fiscal sustainability. Amplifying the situation, yields on Greek bonds are surging, with Bloomberg noting that the rate on its two-year note moved above 21% and the ten-year bond yield jumped to 800 basis points above the rate for a comparable German bond, known as a bund. The extremely high yields make it prohibitively costly for the nation the raise capital on its own in the open markets, which is also exacerbating the problem the Greek nation faces. However, stocks in Greece are higher and euro-zone stocks are off the lows amid growing speculation that the nation could receive funds today, while the intense pressure facing Greece has spread to other euro-area nations who have high debt levels, such as Portugal and Spain.

Meanwhile, there is some other news across the pond that deserve a mention, headlined by the earnings front, with Royal Dutch Shell (RDS/B $59) and GlaxoSmithKline (GSK $38) both moving higher after posting better-than-expected 1Q profits, while SAP AG (SAP $49) is lower after the world’s largest business management software reported 1Q earnings that missed analysts’ forecasts. On the economic front, Spanish retail sales rose 3.5% y/y in March, Italian business confidence improved by a larger amount than expected in April, and Sweden’s unemployment rate unexpectedly fell in March. Germany is set to release consumer price data later today.

Britain’s FTSE 100 Index is up 0.3%, France’s CAC-40 Index and Germany’s DAX Index are off 0.3%, Italy’s FTSE MIB Index is declining 1.1%, while Sweden’s OMX Stockholm 30 Index is up 1.2%. Elsewhere, Greece’s Athex Composite Index is up 2.4%, while Spain’s IBEX 35 Index is 0.9% lower and Portugal’s PSI General Index is tumbling 4.7%.

Asia tumbles amid euro-zone debt troubles

Stocks in Asia were lower, with most major markets in the region posting solid declines, led by Japan, which saw its Nikkei 225 Index fall 2.6% on weakness in the financial sector and on companies that rely on sales in the euro-zone in reaction to S&P’s downgrades of Greece and Portugal’s credit ratings, which amplified debt worries in Europe. Also, a report showed Japanese large retailers’ sales fell 5% in March to do little to soothe the uneasy backdrop. Australia’s S&P/ASX 200 Index dropped 1.2% as the resource-rich nation was weighed down by fears about the impact of a potential slowdown in Europe on the global recovery and its possible drag on demand for commodities. A report that showed Australian consumer prices rose more than forecasted in 1Q exacerbated sentiment that the nation’s economy could face headwinds as it supported economists’ expectations that the central bank will raise its benchmark interest rate for the sixth time in seven meetings next week. However, stocks in China were somewhat mixed as Hong Kong’s Hang Seng Index decreased 1.5%, while the Shanghai dipped 0.3% after the government reaffirmed a “moderately loose” monetary policy, as the euro-zone debt woes were a concern, saying that “The world economy may stage a recovery in 2010, yet the foundation is still fragile,” according to Bloomberg News. Also, Reuters reported that China will place a moratorium on capital-raising by real estate companies, which gave traders something else to grapple with.

Elsewhere, South Korea’s Kospi Index declined 0.9% after a report showed the nation’s current account surplus jumped in March, and New Zealand’s NZX 50 index decreased 0.3% after a gauge of business confidence improved to help limit losses from the aforementioned euro-zone fears, and ahead of the nation’s central bank monetary policy announcement later today, where it is expected to keep its benchmark interest rate unchanged at 2.5%. Rounding out the day, Taiwan’s Taiex Index fell 0.8% and India’s BSE Sensex 30 Index dropped 1.8%.