Evening Market Update

Markets Whipsaw in the Final Minutes

The equity markets moved from being deep in negative territory to finish marginally in the green in the last half-hour of trading on mixed messages from a number of fronts. Continued anxiety over euro-zone debt concerns, a larger-than-expected decline in a US manufacturing gauge, and a disappointing 2Q outlook from Lowe’s Companies, despite its better-than-expected 1Q earnings report, overshadowed a plethora of global M&A announcements, and a positive move in a gauge of homebuilder sentiment. As well, General Motors reported its first quarterly profit since 2007. Treasuries finished marginally lower.

The Dow Jones Industrial Average rose 6 points (0.5%) to close at 10,626, while the S&P 500 Index gained 1 point (0.1%) to 1,137, and the Nasdaq Composite was 7 points (2.0%) higher at 2,354. In moderate volume, 1.4 billion shares were traded on the NYSE and 2.4 billion shares were traded on the Nasdaq. Crude oil fell $1.53 to $70.08 per barrel, wholesale gasoline lost $0.09 to $2.04 per gallon, and the Bloomberg gold spot price declined $12.88 to $1,220.30 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.1% to 86.15.

Lowe’s Companies Inc. (LOW $25) reported 1Q EPS of $0.34, three cents above the consensus estimate of Wall Street analysts, with revenues increasing 4.7% year-over-year (y/y) to $12.4 billion, above the $12.2 billion that the Street had anticipated. The world’s number two home improvement retailer said consumers are showing signs of reengagement in home improvement, including discretionary projects and purchases of bigger ticket products that have been hampered by the economic downturn. However, shares were under pressure after the company issued 2Q EPS guidance that came up short of what analysts were forecasting.

General Motors Co. announced its first quarterly profit since 2Q 2007, reporting that it had made $865 million in 1Q and revenues grew 40% y/y to $31.5 billion, driven by increased North American production and gains in emerging global markets. GM emerged from bankruptcy last year and has paid back close to $7 billion of its $50 billion it has received in US government loans. The company is looking to re-emerge as a publicly traded company and the Wall Street Journal reported that the Treasury Department is interviewing bankers to advise on an initial public offering. None of the entities involved have commented on the report.

In global M&A news, Japan’s Astellas Pharma Inc. (ALPMY $34) announced that it has entered into a definitive merger agreement, in which it will acquire biotechnology firm OSI Pharmaceuticals Inc. (OSIP $57) for an 11% increased offer price of $57.50 per share, valued at $4.0 billion. The companies said the deal will create a world-class oncology platform. Shares of ALPMY were higher, while OSIP finished lower.

Moreover, the UK’s Man Group Plc. (MNGPY $3) reported that it has agreed to acquire GLG Partners Inc. (GLG $4) in a cash and stock deal valued at about $1.6 billion, with the cash portion being $4.50 per GLG share, while top GLG executives will receive 1.0856 of MNGPY shares for each GLG share they own. GLG was sharply higher, while MNGPY finished lower.

Additionally, Universal Health Services Inc. (UHS $42) announced that it has entered into an agreement to acquire Psychiatric Solutions Inc. (PSYS $32) for $33.75 per share in cash, or about $2 billion, before the assumption of $1.1 billion in PSYS debt. UHS said the deal will further strengthen its behavioral health division. PSYS was lower, while UHS was higher.

NY manufacturing falls much more than expected, homebuilder sentiment increases

The Empire Manufacturing Index, a measure of manufacturing in the New York region, fell in May to a level of 19.11, well below the estimates of economists surveyed by Bloomberg, which expected a slight decrease to 30.00, from the previous month’s level of 31.86. However, the index remains above the level of zero that suggests conditions are neither contracting nor expanding. The report is the first major piece of data looking at manufacturing conditions in May, and later this week, the Philly Fed Manufacturing Index will be released, expected to increase from 20.2 in April to 21.5 in the current month, providing further insight into the health of the sector (economic calendar).

Today’s report was disappointing and is added to concern in the equity markets, however the index remains above the level of zero that suggests conditions are neither contracting nor expanding. In other economic news, the NAHB Housing Market Index, a gauge of homebuilder sentiment, rose to a level of 22 in May, from a reading of 19 last month, and compared to economists’ estimates of 20. Any reading below a level of 50 indicates more respondents feel conditions are poor.

European debt concerns remain at the forefront

The European Central Bank (ECB) announced that it will offer term deposits in a variable rate tender offer with a maximum bid rate of 1%, aimed to “sterilize” its purchases of 16.5 billion euros of government and corporate bonds in order to control the money supply and prevent inflation from flaring up. The British pound was lower versus the greenback today and touched a more than thirteen-month low amid growing worries about the nation’s fiscal situation. The UK fiscal concerns have been heightened recently as the government operates under new leadership and a “hung Parliament,” following the UK election earlier this month, which saw the Labour Party’s thirteen-year run come to an end.

The economic front was relatively light across the pond today, with a report showing UK home prices rose 0.7% m/m in May, while a separate release revealed Sweden’s industrial production increased 4.1% m/m in March.

Further east, Japanese machinery orders grew 5.4% m/m in March, a smaller increase than the 6.3% growth that economists had expected.

Readings on inflation and housing market on economic calendar

Tomorrow’s release of the Producer Price Index (PPI) is expected to show prices at the wholesale level were up 0.1% month-over-month (m/m) in April, on the heels of a 0.7% increase in March, while the core rate, which excludes food and energy, is also expected to rise a mere 0.1% after increasing 0.1% the prior month. On a year-over-year (y/y) basis, the PPI is expected to show a 5.6% increase on a headline basis, but only a 0.9% increase at the core level. The release precedes the Wednesday report on the Consumer Price Index (CPI), forecasted to show a 0.1% m/m and 2.4% y/y increase, while ex-food and energy, it is expected to rise 0.1% m/m and 1.0% y/y.

Tuesday’s economic calendar also yields the release of housing starts for April, expected to show an increase of 3.8% m/m to an annual rate of 650,000 units, after increasing 1.6% in March, while building permits, one of the leading indicators tracked by the Conference Board, are forecasted to be flat m/m in April at 680,000 units, after rising a surprising 7.5% in March.

New home sales jumped 26.9% m/m in March to an annual rate of 411,000 units, the highest m/m rise since April 1963, while inventory of new homes for sale fell to 228,000, the lowest level since March 1971, according to Bloomberg. Sales were boosted ahead of the expiration of the tax credit at the end of April, and while the months immediately following the expiration will likely have lower sales, there is hope that the housing market can continue to benefit from an economic recovery that is adding jobs, home price stabilization, and high housing affordability with mortgage rates still at historically low relative levels.

International releases tomorrow include Japan consumer confidence, department store sales and machine tool orders, euro-zone CPI, the German ZEW survey, French payrolls, and the UK CPI and retail price index (RPI). Additionally, the Reserve Bank of Australia will release minutes from their most recent monetary policy meeting.