Morning Market Update

Overseas Uneasiness Pares Yesterday’s Gains

After posting solid gains yesterday on upbeat manufacturing data in the US and the reaction to the 110 billion euro bailout package agreement for Greece, stocks are under pressure in morning action, bogged down by euro-zone contagion fears and uncertainty whether Greece will be able to enact austerity measures amid resistance among the Greek population. Treasuries are higher in some flight-to-quality buying and ahead of some data on factory orders and housing sales. In earnings news, Dow members and pharmaceutical companies Merck & Co Inc. and Pfizer Inc both topped the Street’s profit projections but their guidance was mixed, while MasterCard Inc also exceeded analysts’ earnings forecasts. Overseas, Asia was lower amid disappointing Chinese data and a rate hike in Australia.

As of 8:52 a.m. ET, the June S&P 500 Index Globex future is 9 points below fair value, the Nasdaq 100 Index is 19 points below fair value, and the DJIA is 67 points below fair value. Crude oil is down $1.29 at $84.90 per barrel, and the Bloomberg gold spot price is up $8.88 at $1,191.05 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.6% at 82.85.

Dow member Merck & Co Inc. (MRK $35) 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.

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.

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.

Factory orders and pending home sales due out after the opening bell

Treasuries are higher in morning trading amid some flight-to-quality buying as equities slide on continued concerns out of the euro-zone. Just after the opening bell, today’s US economic calendar will yield the releases of factory orders for March, forecasted to come in flat after rising 0.6% in February, and pending home sales, which economists are expecting the gauge of the pipeline of existing home sales to post a solid 5.0% increase month-over-month (m/m) in March, following an 8.2% jump in February.

Greece fears along with energy weigh on Europe

Stocks in Europe are under pressure in afternoon action, led by weakness in financials on continued uncertainty regarding whether Greece can implement austerity issues successfully 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). Also, fears are growing about how Greece’s debt problems will impact other euro-zone nations, such as Spain and Portugal, which are strapped with elevated debt levels. Greece’s debt level topped 115% of gross domestic product (GDP) last year and is projected to reach approximately 140% in 2014. By comparison, Spain's debt-to-GDP ratio is around 90% and Portugal sits at about 68%. Further, the Greek deficit (the amount spending exceeds income in a given year) in 2009 was 13.6% of GDP, far above the 3% mandated by the EU. However, they note that as concerns are swirling that the agreed to fiscal reforms could drag Greece, and other parts of Europe into a downward economic spiral—history shows that isn’t necessarily inevitable.

Meanwhile, oil & gas issues are under pressure to pace the decline as the massive oil spill in the Gulf of Mexico continues to garner attention with worries about environmental impact growing and the costs to repair and clean up the disaster mount. Shares of BP Plc (BP $50), the operator of the well that caused the oil leak, has fallen to a seven month low since the oil spill. In other equity news, shares of UBS AG (UBS $16) are lower amid the pressure on financials, which is overshadowing the Swiss bank’s 1Q profit report.

The economic calendar across the pond is also in focus, headlined by an unexpected drop in German retail sales and a smaller-than-expected increase in euro-zone producer prices. Data out of the UK are 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 beyond economists’ forecasts. Elsewhere, Spain’s unemployment fell and its consumer confidence improved, but these reports are being more than offset by Greece contagion fears.

Britain’s FTSE 100 Index is down 1.3%, France’s CAC-40 Index is 1.6% lower, Germany’s DAX Index is declining 1.2%, Spain’s IBEX 35 Index is off 2.9%, Portugal’s PSI 20 Index is 2.4% in the red, and Greece’s Athex Composite Index is dropping 4.2%.

Asia lower on China concerns and following Australian interest and tax rate hikes

Stocks in Asia were mostly lower as some markets return from holidays, while Japan remained closed. Overall sentiment was hampered 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, but still depicted expansion in activity as the index remained above the 50 mark—the demarcation point between expansion and contraction. Stocks in China declined, with Hong Kong’s Hang Seng Index declining 0.2%, while the Shanghai Composite—which was closed yesterday—fell 1.2% partly in reaction to the weekend’s announcement from the Chinese government, in which it increased the reserve requirement rate of funds that banks have to keep at its central bank.

Meanwhile, miners continued to slide in Australia, with the S&P/ASX 200 Index falling 1.0% on continued fallout from the tax hike the Australian government levied on resource profits, and as the Chinese data dampened the optimism regarding demand for commodities. Also, 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. In equity news, Australian miner Newcrest Mining (NCMGY $29) agreed to the acquisition of Lihir Gold (LIHR $34) after it sweetened its takeover offer to $8.5 billion for the Papua New Guinea-based firm.

Elsewhere, India’s BSE Sensex 30 Index fell 1.4%, while South Korea’s Kospi Index dipped 0.1% and Taiwan’s Taiex Index slipped 0.3%. However, Thailand’s SET Index jumped 4.4% after the nation’s Prime Minister proposed a November 14th election to help end eight weeks of protesting, per Bloomberg News.