Morning Market Update

Sentiment Stung as Euro-Debt Fears Continue to be Flung

The dismal week for the equity markets continues to be severely pressured by uncertainty surrounding Greece’s debt issues and subsequent riot-evoking austerity measures, along with frustration with the European Central Bank’s lack of efforts to help the crisis from spanning the euro-zone. Stocks are off of the worst levels of the day but volatility is high following after yesterday’s steep losses on elevated Greek debt concerns and potential euro-zone contagion, which were exacerbated by a potential computer-induced intra-day freefall. The equity markets showed a modest reaction to the labor report, which showed more jobs were added to nonfarm payrolls, while the unemployment rate unexpectedly increased to 9.9%. Treasuries have turned higher in elevated flight-to-safety buying, as the focus remains on the debt crisis in Europe. Meanwhile, weakness in technology is exacerbating the downward move, as Nokia has filed a patent complaint against Apple Inc. In other equity news, Simon Property Group Inc raised its takeover bid to acquire General Growth Properties Inc to a total value of $33.5 billion, and PG&E topped analysts’ earnings forecasts. Overseas, Asia fell amid the global slide, but the Bank of Japan deployed actions to stem the surge in the yen, while Europe is under solid pressure on the persistent debt concerns and amid the early results of the UK Parliament Elections.

At 11:04 a.m. ET, the Dow Jones Industrial Average is 1.7% lower, the S&P 500 Index is down 2.0%, and the Nasdaq Composite is declining 2.3%. Crude oil is down $2.16 at $74.95 per barrel, wholesale gasoline is $0.04 lower to $2.12 per gallon, and the Bloomberg gold spot price is down by $11.30 at $1,197.28 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.1% at 85.00.

Apple Inc. (AAPL $231) is extending early losses and is solidly lower after Nokia Corp. (NOK $11) filed a complaint against AAPL with the Federal District Court in Wisconsin, alleging that AAPL’s iPhone and iPad 3G products infringe on five important NOK patents. The patents relate to technologies for enhanced speech and data transmission. AAPL has not commented on the complaint. NOK is also lower.

Simon Property Group Inc. (SPG $85) raised its takeover bid to acquire General Growth Properties Inc. (GGP $16) from a total value of about $32.8 billion to $33.5 billion. The deal includes an offer of $20 per share, $6.5 billion, for GGP equity, with $7 billion to eliminate GGP’s debt and the assumption of about $20 billion of mortgages on GGP’s mall properties. GGP did not comment and SPG said it looks forward to engaging immediately with GGP’s advisors and counsel so they can effectuate a transaction that is clearly in the best interest of GGP’s shareholders. GGP is higher, while SPG is lower.

PG&E Corp. (PCG $43) reported 1Q EPS ex-items of $0.79, above the $0.72 consensus forecast of Wall Street analysts, with revenues increasing 1% year-over-year (y/y) to $3.5 billion, just above the $3.4 billion that the Street expected. PCG reaffirmed its full-year EPS outlook, but shares are lower.

Jobs increase more than expected

Nonfarm payrolls rose by 290,000 jobs in April, compared to the Bloomberg estimate, which called for a 190,000 increase in jobs, while March’s figure was revised higher to 230,000 from 162,000, and the 14,000 decline in February’s report was revised to a 39,000 increase. The unemployment rate rose to 9.9%, above expectations calling for it to remain at 9.7%. Average hourly earnings were flat, versus the Street's forecast of a 0.1% increase, while average weekly hours ticked higher to 34.1, matching the forecast of economists. Government payrolls rose as Census hiring added 66,000 temporary workers. Treasuries pared some losses immediately after the report, but have moved solidly into positive territory on continued flight-to-safety buying amid the late-morning slide in the equity markets.

At first glance at the headline figures, investors may have been unnerved by the unexpected in increase in the unemployment rate, but there are a few of points to consider regarding the figure. The unemployment rate typically lags the recovery so a sticky number should not be too surprising. Moreover, the rate was impacted by a solid increase in the labor force, which grew by 805,000, and showed 195,000 unemployed people reentered the labor force, possibly a sign that the employment outlook may be starting to improve. Also, the disparity between the nonfarm payroll figure and the unemployment rate is not that unlikely as the numbers are derived from two separate surveys, with corporations giving the jobs change number, while the unemployment rate comes from a survey of households.

There were other some encouraging signs in today’s release, such as the favorable revisions to the previous two months, which makes gains in five out of the past six months in nonfarm payrolls. Also, considering the expectations that Census hiring could contribute to a large portion of April’s gain, the fact that over 200,000—excluding the Federal Government hiring—private sector jobs were added should help the outlook for the labor market. Finally, the construction sector, which for obvious reasons has suffered amid the recession, showed the second-straight month of job increases.

However, although a positive trend may be forming, it will take a massive amount of monthly gains to restore the employment markets to normal levels. Also, the exacerbated debt crisis in the euro-zone is taking some of the focus off of the improving conditions in the US, as it poses a threat to the global economic prosperity and to some of the forces that are supporting the improving employment picture. Regardless of the aid to Greece that is gaining needed approval across the euro-zone today many countries need to reduce deficits, as deficits add to debt, requiring higher interest rates to attract investors. This, in turn, increases the ratio of interest payments to revenues—which further exacerbates deficits, while ratings downgrades add to the negative feedback loop. Higher debt service costs reduce the ability to use funds for productive, growth-generating purposes. The challenge is to give markets confidence that sufficient deficit reductions will be made, while simultaneously sustaining growth. The conclusion is that the rout in Greece and spillover effects to other weak countries will result in continued downward revisions to eurozone growth forecasts. The threat of deflation—regardless of whether Greece receives aid from EU governments, siphoning funds from domestic uses to fund another country's economy—or a debt restructuring that forces losses on bondholders (primarily foreign banks) both pose threats.

In the final hour of trading, the economic calendar will yield the latest look at consumer credit, forecasted to show a $3.7 billion decline for the month of March, versus the $11.5 billion drop that was recorded in February.

Europe continues to feel pressure

Stocks in Europe are sharply lower in late-day action amid continued euro-zone debt fears and following early reports that the UK election may have resulted in a “hung Parliament,” in which the Conservative Party—which received the most votes—failed to get enough votes to gain an overall majority, which could possibly hamstring the policy making process. Traders are choosing to book profits from the recent recovery in the global equity markets, preferring to limit exposure to riskier assets heading into the weekend, with the approval of Greece’s 110 billion euro bailout package by the EU and the International Monetary Fund making its way throughout the euro-zone. Greece debt concerns remain even though Greece’s Parliament approved the austerity measures—that include wage cuts and tax hikes and have resulted in Greek protests—in order to gain control of the bailout funds. Yesterday’s failure by the European Central Bank to broach the subject of asset purchases to try to stabilize the deteriorating confidence in the euro-zone is also dampening sentiment and preserving contagion fears. Moreover, the G7 nations are conducting a conference call to discuss the Greek bailout and Reuters is reporting that the ECB will hold a separate conference call later today to discuss the state of money markets in the face of the Greek debt crisis. However, stocks are down sharply even as both houses of Parliament in Germany—Europe’s largest economy, which is considered a pivotal aspect of the approval process—voted in favor of the bill to provide the aid to Greece, along with France, Spain and Portugal.

In equity news, shares of Royal Bank of Scotland Group Plc (RBS $14) are down after the firm posted a 1Q loss, while HSBC Holdings Plc (HBC $47) has turned lower amid the sell-off, erasing early gains that came after it posted its first US business profit in nearly three years, per the Dow Jones Newswires, helping its pretax profit across the company increase compared to last year.

On the economic front, German industrial production rose a solid 4% month-over-month (m/m) in March, more than double the 1.5% increase that economists had expected, while UK housing prices unexpectedly dipped m/m in April and its PPI input prices rose by a smaller amount than forecasted, while its PPI output prices rose more than expected.

Britain’s FTSE 100 Index is 2.8% lower, France’s CAC-40 Index is down 2.6%, Germany’s DAX Index is declining 2.7%, Spain’s IBEX 35 Index dropping 3.0%, Portugal’s PSI 20 Index is off 2.4% and Greece’s Athex Composite Index is decreasing 2.9%.

Asia follows global markets lower

Stocks in Asia were solidly lower even though the intra-day plunge in the US equity markets was chalked up to a computer error amid the global uneasiness toward the euro-zone debt crisis. The uneasiness across the global financial markets after the Greek Parliament approved the austerity measures that have induced riots in the streets of Greece and the ECB failed to soothe sentiment about the euro-zone debt crisis sent the Japanese yen sharply higher versus the euro and US dollar, which exacerbated the pressure on equities of Japan, with the Nikkei 225 Index falling 3.1%, as the stronger local currency dampens the outlook for profits of companies that rely heavily on sales outside of the domestic market. The Greece and euro-zone debt crisis and surge in the yen prompted the Bank of Japan to deploy 2 trillion yen ($21.8 billion) into the financial system in the form of repurchase operations, in an attempt to stabilize the financial markets and try to combat the precipitous advance in the yen. Equity news in Japan did little to lend support to markets, with shares of Nintendo Co. Ltd. (NTDOY $40) down solidly after it said it expects a second-straight year of declining profit after posting the first decline in annual net profits for the first time in six years, per the Wall Street Journal. Also, shares of Japan’s largest clothing retailer Fast Retailing (FRCOY $15) came under heavy pressure after it posted a sharp drop in same-store sales.

Meanwhile, Australia’s S&P/ASX 200 Index fell 2.0% on the aforementioned uneasiness, which overshadowed the Reserve Bank of Australia’s monetary policy statement, in which the RBA upgraded its outlook for economic growth and inflation. Elsewhere, China stocks came under pressure, with Hong Kong’s Hang Seng Index declining 1.1% and the Shanghai Composite Index falling 1.9%. Moreover, South Korea’s Kospi Index dropped 2.2%, India’s BSE Sensex 30 Index decreased 1.3%, while Taiwan’s Taiex Index dipped 0.2%, possibly aided by a report that showed its trade surplus unexpectedly widened to more than double economists’ forecasts. However, some markets did finish off of the worst levels of the day on news that the G7 plans to hold a conference call to discuss the debt problems in Greece.