Evening Market Update

Fear-Fueled Selloff

Equity markets more than reversed yesterday’s solid advance as the “light at the end of the tunnel” provided by the 110 billion euro bailout package agreement for Greece appears to have dimmed, and after the attempted bombing in Times Square added an international element with the arrest of several suspects in Pakistan. Stocks were bogged down early by euro-zone contagion fears and uncertainty whether Greece will be able to enact agreed-upon austerity measures amid discontent among its citizens. Treasuries were higher on the flight-to-safety amid the anxiety in the equity markets, which overshadowed better-than-expected readings of factory orders and pending home sales. However, a handful of stocks were able to buck the trend, including Dow members Merck & Co and Pfizer after both topped the Street’s profit expectations, while MasterCard also exceeded analysts’ earnings forecasts. In other news on the equity front, CVS Caremark missed revenue forecasts, Archer Daniels Midland fell short of EPS projections, while Interactive Data Corporation agreed to a $3.4 billion offer from two private equity firms.

The Dow Jones Industrial Average plunged 225 points (2.0%) to close at 10927, the S&P 500 Index fell 29 points (2.4%) to 1,174, and the Nasdaq Composite skidded 74 points (3.0%) to 2,424. In heavy volume, 1.5 billion shares were traded on the NYSE and 3.0 billion shares were traded on the Nasdaq. Crude oil tumbled $3.45 to $82.74 per barrel, wholesale gasoline toppled $0.12 to $2.32 per gallon, and the Bloomberg gold spot price stumbled $8.63 to $1,173.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 1.2% to 83.29.

Dow member Merck & Co Inc. (MRK $36) reported 1Q EPS ex-items of $0.83, above the $0.75 that was the consensus estimate of Wall Street analysts, with revenues of $11.4 billion, compared to the $11.2 billion that the Street expected. The drug company said eight of its top ten product families saw growth in 1Q, with international sales of pharmaceutical and vaccine products reporting overall strong growth of 10%, including the favorable impact of foreign exchange.

MRK said the passage of health care reform in March will result in greater access to coverage and important market reforms that begin this year with more significant changes and improvements beginning in 2014. However, the company said it will begin to incur costs related to the health care reform starting in 2010, including increased Medicaid rebates and a one-time charge related to taxes on retiree medical benefits. MRK said it sees net unfavorable sales impacts of the legislation of about $170 million in 2010 and approximately $300-350 million in 2011. The company also issued full-year EPS guidance that the midpoint of its range fell short of analysts’ forecasts, but shares were able to buck the downtrend and finish higher.

Fellow Dow component Pfizer Inc. (PFE $17) posted 1Q EPS ex-items of $0.60, compared to the $0.53 that analysts were expecting, with revenues jumping 54% year-over-year (y/y) to $16.8 billion, versus the $16.6 billion that the Street was looking for. PFE said its US revenues jumped 47% y/y, while its international sales surged 60% y/y. The company reaffirmed its full-year guidance, while it lowered its 2012 revenue forecast. The company did not comment on its 2011 guidance. Shares closed higher on the day.

In related industry earnings news, CVS Caremark Corp. (CVS $37) reported adjusted earnings of $0.60 per share, two cents above analysts’ forecasts, with revenues increasing 2% y/y to $23.8 billion, but below the $24.1 billion that the Street had anticipated. The company said same store sales in both its pharmacy and front store were negatively impacted by a weak flu season and severe weather in certain markets. CVS raised the low end of its prior full-year EPS outlook, but shares were lower.

MasterCard Inc. (MA $251) announced 1Q EPS of $3.46, compared to the $3.14 that analysts were anticipating, with revenues increasing 13.1% y/y to $1.3 billion, roughly inline with the Street’s forecast. The credit card transaction processor said transactions processed rose 4.6% and its gross dollar volume rose 8.3% to $631 billion. Shares of MA finished in the green.

Archer Daniels Midland Co. (ADM $26) came under solid pressure after it reported fiscal 3Q EPS of $0.65, compared to the $0.72 than analysts were anticipating, with revenues rising 2% y/y to $15.1 billion, roughly inline with the Street’s forecast. The company said its profit in its oilseeds processing segment improved on increased volumes, while its corn processing earnings rose on stronger bioproducts results. ADM also said its agriculture services unit increased as it saw a “good global supply” of grains and oilseeds and modestly improving demand.

In M&A news, Interactive Data Corporation (IDC $33) reported that it has entered into a definitive agreement to be acquired by private equity firms Silver Lake and Warburg Pincus in a transaction with a total value of $3.4 billion. Under the agreement, IDC shareholders will receive $33.86 per share in cash for each share they own. Pearson Plc, IDC’s largest shareholder, has formally approved the transaction. ICD closed modestly higher as the deal was widely expected after the company had announced that it was exploring strategic alternatives back on January 15th.

Factory orders and pending home sales post strong gains

Factory orders unexpectedly rose, gaining a respectable 1.3% month-over-month (m/m) in March, compared to the flat reading that economists surveyed by Bloomberg had expected, marking the seventh-straight monthly increase, while February’s increase was revised nicely higher, from a 0.6% gain to a 1.3% advance. March durable goods orders—reported two weeks ago—were favorably revised from a 1.3% drop to a 0.6% decline. Nondefense capital goods ex-aircraft, considered a good proxy for business spending, increased 4.5%, from the initial report of a 4.0% increase.

Elsewhere, pending home sales posted another solid gain, rising 5.3% m/m in March, compared to the 5.0% gain that economists had expected. Moreover, February’s 8.2% jump in the gauge of the pipeline of existing home sales was revised to an advance of 8.3%.

Treasuries finished higher on a flight-to-safety amid the global anxiety surrounding a Greece debt contagion in the euro-zone. The yield on the 2-year note was down 4 bps to 0.96%, the yield on the 10-year note lost 8 bps to 3.61%, and the 30-year bond yield was 11 bp lower at 4.42%.

Greece fears strengthen

Anxiety about how Greece’s debt problems will impact other euro-zone nations, such as Spain and Portugal—which are strapped with elevated debt levels—and what impact it could have on the economic recovery, hit a new level as investors grappled with continued uncertainty regarding whether Greece can successfully implement agreed-upon austerity measures, amid resistance from its populace, in order to gain access to the 110 billion euro bailout package that was agreed to over the weekend between the EU and International Monetary Fund (IMF).

An unexpected 2.4% m/m drop in March German retail sales headlined the economic calendar across the pond, as economists polled by Bloomberg expected a flat reading for the month. As well, producer prices in the euro-zone rose by a smaller-than-expected 0.6% m/m for March, the first increase in the index in more than a year. Reports out of the UK were mixed, as a report showed mortgage approvals increased by a smaller amount than expected, while a separate release showed the nation’s Manufacturing PMI expanded slightly higher than what economists were anticipating. Elsewhere, Spain’s unemployment fell while the nation’s consumer confidence improved.

Further east, sentiment was hamstrung by a report out of China, which showed the nation’s Manufacturing PMI declined from 57.0 in March to 55.4 in April, the lowest level in six months. However, the reading remained above the 50 mark—the demarcation point between expansion and contraction. Meanwhile, the Reserve Bank of Australia increased its benchmark interest rate by 25 basis points to 4.50%, marking the sixth rate increase in seven meetings since October. The RBA noted that the risk of serious economic contraction in Australia has passed “some time ago,” and as a result of today’s decision, rates for most borrowers will be around average levels.

Read on services sector and job report preview on tap

The ISM Non-Manufacturing Index will be released tomorrow, and is forecasted to increase to 56.0 in April from 55.4 in March, which would mark the fourth month above the 50.0 level that separates expansion from contraction. The report is generally considered a measure of economic strength in the service sector and is the companion to the ISM Manufacturing Index, which was released on Monday and posted the highest level since July 2004 at 60.4.

The services PMI has lagged the manufacturing index, which has been in expansion territory for nine months, as the higher cyclicality of the manufacturing sector leads changes in the overall economy, and increased production has resulted in job gains, resulting in a positive feedback cycle that results in consumer spending that further propels production increases given the severe reduction in inventories that businesses allowed during the recession.

Due to the importance for job growth to sustain the economic recovery, traders will also be eyeing tomorrow’s ADP Employment Change Report where the forecast is that private sector employers added 28,000 jobs in April, after shedding 23,000 jobs in March. The Bloomberg survey of economists is expecting an increase of 189,000 jobs in April in Friday’s broader Labor Department report, which includes changes in government payrolls, and March’s increase of 162,000 jobs included the addition of 48,000 temporary workers for the Census.

The other release on tomorrow’s US economic calendar is the weekly MBA Mortgage Applications Index.

International economic releases will include euro-zone service PMIs and retail sales, UK housing prices, India’s service PMI, and Australian building approvals.