Morning Market Update

Euro-zone Debt Fears Greece the Bears’ Gears

The equity markets are extending yesterday’s solid decline as protesters take to the streets in Greece in response to the massive changes the Greek nation must make to its fiscal policy to gain access to the 110 billion euro bailout package to avoid a debt default and ensure long-term sustainability. The concerns in Europe are overshadowing a larger-than-expected increase in the ADP Employment Change Report, which also showed a positive revision, wiping out the previous month’s decline. Treasuries are higher on the uneasiness in the global markets, ahead of the release of the ISM Non-Manufacturing Index, and following an increase in mortgage applications. In equity news, Time Warner Inc. posted profits that topped the Street’s expectations, while PulteGroup Inc reported a smaller-than-expected loss. Overseas, Asia was mostly lower, while Europe remains under pressure.

As of 8:50 a.m. ET, the June S&P 500 Index Globex future is 6 points below fair value, the Nasdaq 100 Index is 13 points below fair value, and the DJIA is 44 points below fair value. Crude oil is down $2.20 at $80.54 per barrel, and the Bloomberg gold spot price is down $0.68 at $1,170.60 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.8% at 83.93.

Time Warner Inc. (TWX $33) announced 1Q EPS ex-items of $0.61, compared to the $0.48 that the consensus of Wall Street analysts had called for, with revenues increasing 5% year-over-year (y/y) to $6.3 billion, roughly inline with the Street’s expectations. The company said it posted its biggest revenue gain in nearly two years as the advertising recovery benefitted its Time Inc. and Turner businesses, while home video sales aided its Warner Bros. unit. TWX raised the high end of its full-year EPS guidance.

Homebuilder PulteGroup Inc. (PHM $13) posted a 1Q $0.03 loss per share, compared to the $0.23 per share shortfall that the Street was looking for, with revenues surging 75% y/y to $1.0 billion, but falling short of the $1.2 billion that analysts expected. PHM said closings increased 77% but, “While expectations are for market conditions to remain relatively stable for the remainder of 2010, high resale inventory, particularly foreclosure inventory, expirations of the tax credit and weak consumer confidence could limit the pace of housing’s recovery for several more quarters.” PHM issues full-year guidance that topped analysts’ forecasts.

Private sector payrolls increase and mortgage applications rise

The first piece of this week’s US labor data came in, as the ADP Employment Change Report showed private sector payrolls rose, increasing by 32,000 jobs in April, compared to the forecast of economists surveyed by Bloomberg, which called for a 30,000 increase. March’s figure was revised from a loss of 23,000 to a gain of 19,000. The week’s headlining employment report will come on Friday in the form of the Bureau of Labor Statistics’ release of nonfarm payrolls, with the Bloomberg survey of economists forecasting payrolls advanced by 189,000 jobs in April, and that the unemployment rate will remain at 9.7% (economic calendar). The ADP report does not include government payrolls, which are expected to receive a lift from census hiring, which is contributing to the solid forecast of job gains in Friday’s report. Treasuries are higher following the report, but the move is likely due to reaction to the protests in Greece.

In other economic news, the US MBA Mortgage Application Index rose 4.0% last week, after the index that can be quite volatile on a week-to-week basis, declined 2.9% in the previous week. The increase came amid a 13.0% jump in the Purchase Index, which more than offset a 2.1% decline in the Refinance Index. Moreover, the increase in the overall index came on a 6 basis-point decrease in the average 30-year mortgage rate, which declined to 5.02%, remaining above the record low of 4.61% that was reached at the end of March 2009.

However, the highlight of today’s economic calendar will come after the opening bell, as the ISM Non-Manufacturing Index will be released, 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.

Europe remains in the red amid continued Greece dread

Stocks in Europe are lower in afternoon action as traders continue to grapple with concerns about the debt problems in Greece, which is under pressure amid local protests as the debt-ridden nation faces aggressive austerity measures—including tax increases and wage cuts—to gain access to the 110 billion euro bailout package. Also, fears are lingering regarding the potential spillover to other euro-area nations, which is weighing on the equity markets across the pond. However, losses are being limited as materials issues are rebounding from recent weakness that came from worries about the global economic recovery and subsequent demand for resources amid the aforementioned Greek concerns and on the fallout from the massive oil spill in the Gulf of Mexico. Moreover, some upbeat earnings reports are also helping stem the decline in Europe, headlined by an advance in shares of French bank Societe Generale (SCGLY $10) after it reported 1Q profits that topped analysts’ forecasts, led by improvements in its corporate and investment banking unit. Elsewhere, Anheuser-Busch InBev (BUD $48) is nicely higher after the world’s largest brewer posted adjusted earnings that rose 11% y/y and topped analysts’ estimates. However, shares of the world’s largest cement firm Lafarge SA (LFRGY $17) are solidly lower after it posted profits that missed analysts expectations.

In economic news, euro-zone retail sales came in flat month-over-month (m/m) in March, compared to the increase of 0.1% that economists had expected, but fell by a smaller amount than anticipated on a y/y basis. Meanwhile, Services PMI in the euro-area, Germany, and France were all revised higher, while Construction PMI in the UK jumped much higher than expected. In other economic news, Spain’s industrial output posted a solid 6.8% y/y increase, but the nation’s Services PMI deteriorated to a level just above the 50 mark, which is the demarcation point between expansion and contraction.

Britain’s FTSE 100 Index is down 0.9%, France’s CAC-40 Index is 1.1% lower, Germany’s DAX Index is off 0.6%, Spain’s IBEX 35 Index is declining 2.2%, Portgual’s PSI 20 Index is decreasing 2.0%, and Greece’s Athex Composite Index is 4.2% in the red.

Asia mostly lower amid euro-zone concerns

Stocks in Asia came under pressure following the steep decline in the US and Europe yesterday on fears about the potential effect of the debt problems of Greece on other euro-area nations and the global economic recovery. Financial issues came under pressure in Australia, leading the S&P/ASX 200 Index 1.3% lower, amid the aforementioned euro-zone fears, which overshadowed a jump in the country’s building approvals in March, and following a solid decline in shares of the nation’s second-largest lender Westpac Banking Corp. (WBK $123) despite its better-than-expected first half profit report. Analysts were disappointed by the company’s net interest margin and smaller-than-forecasted dividend. Elsewhere, shares in China were mixed as weakness in materials paced a 2.1% drop in Hong Kong’s Hang Seng Index, while the Shanghai Composite Index gained 0.8%. The fall in Hong Kong came despite a report that showed the region’s Purchasing Managers Index improved in April. In other economic news, India’s Services PMI improved for April, helping limit losses for the BSE Sensex 30 Index, which dipped 0.3%. However, trading remained lighter than usual, with markets in Japan and South Korea closed for holidays.