Evening Market Update

Sentiment Remains Touch-and-Go

Stocks closed lower on the first day of trading for the week, nose-diving in the final minutes before the closing bell. A solid increase in existing home sales did little to boost sentiment as caution reined supreme amid the backdrop of the euro-area debt crisis, exacerbated by the Bank of Spain’s weekend bailout of one of its regional banks. On the equity front, Dow component International Business Machines said it will acquire business-to-business solutions firm Sterling Commerce from fellow Dow member AT&T for $1.4 billion, Campbell Soup reported earnings that beat the Street, while disappointing box office receipts of DreamWorks Animation SKG’s latest installment its Shrek franchise hampered its shares. Treasuries finished mixed.

The Dow Jones Industrial Average fell 127 points (1.2%) to close at 10,067, the S&P 500 Index lost 14 points (1.3%) to 1,074, and the Nasdaq Composite declined 15 points (1.2%) to 2,214. In moderate volume, 1.3 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil rose $0.17 to $70.21 per barrel, wholesale gasoline gained $0.01 to $1.97 per gallon, and the Bloomberg gold spot price jumped $16.25 to $1,193.35 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 1.0% to 86.26.

In M&A news, Dow member International Business Machines Corp. (IBM $124) announced that it has entered into a definitive agreement to acquire business-to-business solutions firm Sterling Commerce from fellow Dow component AT&T Inc. (T $24) for $1.4 billion in cash. IBM said the deal will give it new tools to help clients build dynamic business networks that connect partners, suppliers and clients. Both companies were lower on the day.

Campbell Soup Co. (CPB $35) reported fiscal 3Q EPS ex-items of $0.54, three cents above the consensus forecast of Wall Street analysts, with revenues increasing 7% year-over-year (y/y) to $1.8 billion, inline with the Street’s forecast. The company said it saw an improvement in volume trends, while its V8 V-Fusion juices and Prego and Pace sauces helped its US beverages and sauces units post an “outstanding quarter.” The company added that promotions it executed during the quarter helped drive volume growth in all product formats and it was pleased with the earnings growth of its baking and snacking segment, led by Pepperidge Farm. CPB said it expects full-year adjusted EPS growth to be at the high end of a range between 9-11%. Shares finished slightly higher.

DreamWorks Animation SKG Inc. (DWA $31) was sharply lower after the opening weekend results of the movie, Shrek Forever After, missed analysts’ expectations. The fourth version of the company’s Shrek franchise had sales of $71.3 million, and was the number one movie in the US and Canada, but missed expectations that called for a range between $80-120 million, per Dow Jones Newswires.

Existing home sales continue to receive boost from tax credit

Existing home sales rose solidly, increasing 7.6% month-over-month (m/m) in April to an annual rate of 5.77 million units, from an upwardly revised 5.36 million units in March, and are 22.8% higher versus the same period a year ago. The National Association of Realtors (NAR) said buyers were motivated by the tax credit—which expired in April—improving consumer confidence and favorable affordability conditions. The national median existing home price was $173,100 in April, up 4% y/y, with first-time buyers accounting for 49% of purchases. The NAR added that investors accounted for 15% of the transactions in April. Existing home sales account for the majority of total home sales and the NAR expects figures in May and June to be supported by the tax credit—as existing home sales reflect closings from contracts entered one to two months earlier. Moreover, although concerns about the continuation of increasing home sales remain, the NAR said, “many buyers remain in the market even without the tax credit,” as some realtors are noting that they are busy with clients who are entering the market now as a result of improved conditions, while others are welcoming a slowdown from frantic market conditions in recent months.

However, some of the enthusiasm toward the report may be being tempered by the increase of 11.5% in total housing inventory to 4.04 million existing homes available for sale, which represents an 8.4 month supply at the current sales pace, up from 8.1 in March. Also, distressed home sales were 33% of total sales, and given the elevated amount of homeowners that owe more than the value of their home, expected increasing foreclosures and the addition to supply continue to pose a threat to recovery in the housing market.

Today’s existing home sales report kicked of the week’s economic calendar, which will yield a heavy dose of data pertaining to the housing market. Wednesday’s new home sales report will complete the sales picture, expected to rise 3.4% m/m. The homebuyer tax credit expired in April and is likely to have impacted home sales during the month. Other reports on housing will provide insight to housing prices and activity, with Tuesday’s reading of the S&P/CaseShiller Home Price Index, forecasted to dip 0.3% m/m for March, and Wednesday’s release of MBA Mortgage Applications for last week, which declined in the previous week’s report on a sharp drop in purchase applications, possibly as a result of the expired tax credit.

Treasuries finished mixed on the day. The yield on the 2-year note was down 2 bps to 0.74%, the yield on the 10-year note lost 3 bps to 3.21%, while the 30-year bond yield was unchanged at 4.10%.

Spain bails out bank

The announcement over the weekend that the Bank of Spain (BoS) seized control over regional savings bank CajaSur pressured sentiment, adding fuel to the fire surrounding the euro-area debt crisis and global recovery concerns. The move will guarantee the obligations of the firm so “depositors and creditors can maintain absolute peace of mind,” according to BoS Governor Miguel Angel Fernandez Ordonez. The euro continued its weakness versus the dollar and other major currencies—nearly touching the four-year low it hit last week against the greenback, and the British pound relinquished an early gain and was modestly lower versus the US dollar on the heels of the nation’s plan to cut government spending by nearly $9 billion in order to rein in its elevated budget deficit. Volume across the pond was lighter than normal as there were no major economic reports in the euro-area and some markets, such as Switzerland and Greece, were closed for holidays.

In news out of the Asia/Pacific region, Reuters reported that a Chinese newspaper said that the government would delay a property tax, but the report was denied by a Chinese government official, while Bloomberg cited commentary by a separate official saying that China should be cautious in introducing new tightening measures as the global economic environment is complex. Elsewhere, Thailand reported that 1Q GDP rose 3.8% quarter-over-quarter (q/q), compared to the rise of 1.7% that was expected by economists, while Taiwan’s unemployment rate fell more than expected, and industrial production jumped more than anticipated.

In addition to the S&P/Case Shiller Home Price Index release tomorrow, the Richmond Fed Manufacturing Index will be reported, expected to fall to 26 during the month of May from 30 in April, while consumer confidence will also be announced, forecast to rise to a level of 58.5 in May from 57.9 in April.

The international economic calendar will yield consumer confidence and retail sales in Italy, 1Q GDP and mortgage lending in the UK, and euro-zone industrial orders.