Evening Market Update

Relief Over Euro-area Rescue Package Aids Stocks

The equity markets surged to start the week following the announcement that euro-zone members, along with the IMF, agreed to a euro-area financial rescue package of nearly $1 trillion, on top of the 110 billion euro bailout of Greece. As well, the European Central Bank committed to providing additional stability through euro-area government bond purchases in the hopes of calming anxiety over contagion in the region. Treasuries were under pressure following the announcements and subsequent rally in stocks, as well as after the Federal Reserve announced the re-establishment of temporary US dollar liquidity swap facilities. On the equity front, Dow member McDonald’s reported positive same-store sales for April, DISH Network and Tyson Foods both exceeded the Street’s profit projections, while Dean Foods missed the Street’s forecasts and offered a disappointing outlook.

The Dow Jones Industrial Average added 405 points (4.0%) to close at 10,785, while the S&P 500 Index gained 49 points (4.4%) to 1,160, and the Nasdaq Composite surged 109 points (4.9%) to 2,375. In moderately heavy volume, 1.9 billion shares were traded on the NYSE and 2.8 billion shares were traded on the Nasdaq. Crude oil rose $1.69 to $76.80 per barrel, wholesale gasoline was $0.04 higher at $2.17 per gallon, while the Bloomberg gold spot price lost $7.40 to $1,201.00 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.2% to 84.25.

Dow member McDonald’s Corp. (MCD $71) reported global same-store sales—sales at stores open at least thirteen months—for April, which grew 4.9% for the month, led by a 3.8% gain in the US and a 5.3% increase in Europe. MCD said its Asia/Pacific, Middle East and Africa sales increased 3.9%. The company said its US performance was supported by its new McCafe offerings and its all-day, everyday value message, while Europe sales benefitted from growth in France, the UK, Germany and Russia. Shares were nicely higher.

DISH Network Corp. (DISH $22) announced 1Q EPS of $0.52, two cents above the consensus forecast of Wall Street analysts, with revenues increasing 5.2% year-over-year (y/y) to $3.1 billion, just above the $3.0 billion that was expected. The satellite TV firm said it added about 237,000 net subscribers during the period, which was the fourth consecutive quarter of growth. Shares were higher.

Tyson Foods Inc. (TSN $18) reported fiscal 2Q EPS ex-items of $0.46, above the $0.35 that the Street had forecasted, with revenues increasing 9.5% y/y to $6.9 billion, compared to the $6.6 billion that analysts had anticipated. The meat producer said all its operating segments were profitable, with its beef and pork above their historical normalized ranges. TSN said its predicted tightening domestic availability of protein, which lead to stronger fundamentals, happened sooner than expected. Shares of TSN gave up an early gain and were lower.

Dean Foods Co. (DF $10) was sharply lower after the company posted adjusted 1Q earnings of $0.23 per share, short of the $0.28 that analysts had expected, but revenues increased 10% y/y to $3.0 billion, slightly higher than the $2.9 billion that was anticipated. The company said its expenses increased due to higher fuel and freight costs but it was able to grow revenues on volume growth and pass-through of higher average dairy commodity costs. The company issued 2Q EPS guidance below analysts’ estimates as it said the “road ahead appears rocky” at its fresh dairy direct unit as the price environment—widening price gaps between branded and private level—that appears unsustainable has not yet abated.

Fed re-deploys measures to support the euro-area rescue mission

With no economic reports released in the US today, Treasuries were solidly lower against strength in the equity markets on the news of the near $1 trillion euro-zone financial rescue package. The yield on the 2-year note was up 4 bps to 0.86%, the yield on the 10-year note gained 11 bps to 3.54%, and the 30-year bond yield was 14 bps higher at 4.41%.

In related news, the Federal Reserve, along with the Bank of Canada, Bank of England, the European Central Bank, and the Swiss National Bank announced the re-establishment of temporary US dollar liquidity swap facilities. The Fed said the action is in response to the re-emergence of strains in US dollar short-term funding markets in Europe and these facilities are designed to help improve liquidity conditions in US dollar funding markets and to prevent the spread of strains to other markets and financial centers. This afternoon, the Bank of Japan announced that it had joined the Fed’s currency measures.

There were no major US economic reports scheduled for today and the week will be relatively light as there are few major releases scheduled.

Europe announces massive rescue package

The European Union (EU) agreed to a 720 billion euro ($955 billion) rescue package, on top of the 110 billion euro bailout of Greece, aimed at stabilizing the euro-zone financial system and preventing contagion in the region. The package consists of 440 billion euros in guarantees from euro-member states, plus 60 billion euros from the European Commission (EC), and the International Monetary Fund (IMF) will contribute 220 billion euros to the cause. Moreover, the European Central Bank has committed to buying euro-zone government bonds in order to provide further stability. Last week, the ECB’s reluctance to announce even the discussion of bond purchases contributed to the steep losses that the global markets posted. The nations that need to use the funds will need to get approval from EU members and focus turns to what near-term austerity measures these nations will have to make, and whether or not fiscal changes can be made to move to long-term sustainability of the debt-ridden nations.

In other economic news in the region, the Bank of England kept its benchmark interest rate unchanged at a record low of 0.5%, as expected, and made no changes to its asset purchase target. Elsewhere, French industrial production rose 1.0% month-over-month (m/m), well above the 0.3% increase projected by economists, while manufacturing production in the nation also rose, up 0.8% m/m for March, compared to the 0.5% forecast, and Germany’s trade surplus increased more than what economists expected in March.

In euro-area political news, German Chancellor Angela Merkel’s Christian Democratic Union—a center-right coalition—lost a key vote over the weekend, giving up majority control in the upper house of Parliament, which makes policy making more difficult for Europe’s largest economy. Merkel said “we suffered a bitter defeat,” and it came amid some opposition to the nation’s approval of the Greek bailout package and could have some impact on the approval of this weekend’s $1 trillion euro-area rescue package. Additionally, British Prime Minister Gordon Brown announced that he will step down from his post as leader of the nation, as well as head of his party in the next few months, after the Labour Party finished second in last week’s elections. The move opens the door for discussions among Brown’s Labour Party, the Conservative Party, which won the majority of the votes, and the Liberal Democratic Party in order to form a coalition government after the elections resulted in the country’s first “hung parliament” since 1974.

In the Asia/Pacific region, the Bank of Japan released the minutes from its last monetary policy meeting, which showed policy makers voted unanimously to keep its benchmark interest rate unchanged at 0.1%. Moreover, the BoJ kept its semi-annual economic outlook unchanged. Elsewhere, a report in Australia showed business sentiment deteriorated in April, while China posted an unexpected trade surplus in April, but shrank by 87% y/y per Bloomberg.

The only item on tomorrow’s US economic calendar is wholesale inventories, forecast to rise 0.5% in March following a 0.6% increase in February.

Overseas, economic reports include industrial production and home prices in the UK, Germany and Sweden report CPI figures, and China will post employment numbers.