Morning Market Update

More Pressure as Global Uneasiness Persists

The global equity markets are extending their recent decline as sentiment continues to be hampered by festering euro-area debt fears—despite today’s approval of the $1 trillion European bailout package by the German Parliament—and following a negative reaction to Dell Inc’s better-than-expected profit report. Treasuries are moving higher, extending their weekly advance amid more risk aversion on the aforementioned uneasiness toward the euro-area and US. A more than $2 billion M&A announcement from Abbott Laboratories is doing little to help sentiment in morning action. Overseas, Asia finished mostly lower, and the European markets are under pressure amid the lingering debt fears, exacerbated by a disappointing reading of German business confidence.

As of 8:53 a.m. ET, the June S&P 500 Index Globex future is 8 points below fair value, the Nasdaq 100 Index is 13 points below fair value, while the DJIA is 75 points below fair value. Crude oil is down $1.28 at $69.52 per barrel, and the Bloomberg gold spot price is down $7.65 at $1,174.70 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.3% at 85.72.

Dell Inc. (DELL $14) reported 1Q EPS ex-items of $0.30, four cents above the consensus estimate of Wall Street analysts, with revenues jumping 21% year-over-year (y/y) to $14.9 billion, above the $14.2 billion that the Street was forecasting. The company said an overall improving business environment contributed to its 1Q results and commercial customers increased their purchases of its enterprise solutions. Looking ahead, DELL said it believes it is seeing the early stages of a “corporate IT refresh,” and it is optimistic the trend in building commercial demand will continue throughout the year. However, shares are under some pressure as some analysts are expressing disappointment toward the company’s gross margin, which declined to 16.9% from 17.6% last year.

In M&A news, Abbott Laboratories (ABT $46) announced that it has reached a definitive agreement to acquire full ownership of the healthcare solutions business of Piramal Healthcare Limited, for an up front payment of $2.12 billion, plus $400 million annually for the next four years. The deal is expected to make ABT the leading generic drug maker in the Indian pharmaceutical market.

Treasuries higher despite lack of US economic data today

Treasuries are higher in morning trading, with yields extending their solid weekly decline on continued flight-to-quality buying as the global equity markets remain under siege of growing headwinds that are dampening the outlook for the global economic recovery. There are no major US economic reports due to be released today to evoke demand for Treasuries but this week has given traders plenty of reasons to rein in their risk appetites. Euro-area debt contagion fears, along with disappointing economic data in the US this week—a jump in weekly jobless claims, the Index if Leading Economic Indicators snapping a twelve month winning streak, NY manufacturing activity falling more than expected, and a steep drop in building permits—have prompted the sharp sell off in the global equity markets and persistent risk aversion among traders.

Moreover, financial industry reform, which passed through the US Senate this week, and Germany’s surprising announcement of a ban on naked short selling—the selling of a security without owning or obtaining the approval to own the security—of 10 of the nation’s financial institutions and some derivative securities on euro-area government bonds added to the volatility in the markets this week.

Europe continues to see red amid lingering debt uneasiness

Stocks in Europe are under pressure in afternoon action amid a plethora of economic data, which included a disappointing report on business confidence in Germany—Europe’s largest economy—and as euro-area debt concerns continue to impair sentiment. The debt concerns are persisting despite both houses of the German Parliament approving the $1 trillion euro financial bailout package. In related news, Spain announced that it has approved the first public wage cuts since returning to a democracy in 1978, per Bloomberg, and it downwardly revised its GDP growth forecast for next year.

On the euro-zone economic front, Germany reported its Ifo Business Climate Index—a measure of business confidence—unexpectedly declined from 101.6 in April to 101.5 in May, compared to the increase to 101.9 that economists had expected. Also, a separate report showed that Germany’s 1Q GDP was left unrevised at a 0.2% rate of expansion quarter-over-quarter (q/q). In other economic news, Manufacturing PMI reports out of Germany, France, and the euro-zone all deteriorated in May, while UK mortgage applications increased by an amount that was below forecasts.

The UK FTSE 100 Index is 1.9% lower, France’s CAC-40 Index is down 2.2%, Germany’s DAX Index is declining 2.5%, Spain’s IBEX 35 Index is decreasing 2.1%, and Greece’s Athex Composite Index is 0.3% in the red.

Asia mostly lower after yesterday’s tumble in the US

Most equity markets in Asia were lower on the heels of the steep losses in the US that followed continued concerns about the possibility the euro-area debt crisis could spread, exacerbated by weak US economic data. Japan’s Nikkei 225 Index fell 2.5% to pace the decline in the Asia/Pacific region on concerns that the global economic recovery may be in jeopardy and on uneasiness toward Japanese companies that rely on sales outside of the Asian nation as the aforementioned fears have boosted the yen versus major world currencies recently, dampening the outlook for revenues of firms that do business in the US and Europe. The Asian economic calendar was relatively light, with the Bank of Japan leaving its benchmark interest rate unchanged at 0.1%, while a separate report showed the final reading of Japan’s Leading Index for March was revised slightly lower.

Meanwhile, volume in the region was a bit lighter than usual, with markets in South Korea and Hong Kong closed for holidays. However, part of China’s equity markets traded today, and the Shanghai Composite Index posted a solid 1.1% increase after overcoming early losses as traders sought stocks that have been pressured recently amid the global concerns and lingering expectations that the Chinese government could deploy further measures to cool down its economy. Elsewhere, Australia’s S&P/ASX 200 Index declined 0.3%, Taiwan’s Taiex Index fell 2.5%, and India’s BSE Sensex 30 Index was 0.5% lower.