Evening Market Update

Bank Overhaul Boosts Financials, Keeps Markets Afloat

Stocks ended Friday mixed, after fluctuating around the flatline for most of the day, as the financial sector carried the market after US lawmakers reached an early-morning agreement on financial regulatory reform. Traders seemed relieved that the legislation appears less strict than some feared, although the impact the changes will have on the financial markets is still to be determined. Economic news was mixed, as US 1Q GDP was unexpectedly revised downward, while the final University of Michigan Consumer Sentiment Index reading was adjusted upward. The equity front was also full of mixed signals, as Oracle Corp and Accenture Plc both beat top- and bottom-line profit projections, while Research in Motion posted disappointing first quarter sales and KB Home announced a larger-than-forecasted loss. Meanwhile, BP Plc continued its downward spiral on fears that a tropical storm in the Gulf could hamper containment and cleanup efforts. Treasuries overcame early weakness and finished higher.

The Dow Jones Industrial Average fell 9 points (0.1%) to close at 10,144, the S&P 500 Index rose 3 points (0.3%) to finish at 1,077, and the Nasdaq Composite increased 6 points (0.3%) to 2,223. In heavy volume, 2.6 billion shares were traded on the NYSE and 3.5 billion shares were traded on the Nasdaq. Crude oil rose $2.52 to $79.03 per barrel, wholesale gasoline gained $0.02 to $2.17 per gallon, and the Bloomberg gold spot price gained $11.20 to $1,254.65 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was 0.6% lower at 85.28. For the week, including dividends, the DJIA fell 2.9%, the S&P 500 Index fell 3.7%, and the Nasdaq Composite decreased 3.7%.

Oracle Corp. (ORCL $23) reported fiscal 4Q EPS ex-items of $0.60, topping the $0.54 Reuters estimate, with adjusted revenues rising 40% year-over-year (y/y) to $9.6 billion, above the $9.5 billion that analysts were expecting. The business software company said it "continues to take large chunks of market share away” from its German rival SAP AG (SAP $46), and also added that it "beat International Business Machines(IBM $127) 30 times on sales during the quarter." A spokesman for SAP AG disputed that claim, saying "we continue to be the market leader in business applications - almost twice as large as our next competitor" and IBM declined to comment. Shares of ORCL and SAP were higher, while IBM traded lower.

Research in Motion (RIMM $52) announced fiscal 1Q EPS of $1.38, four cents above the Street's forecast, with revenues growing 24% y/y to $4.24 billion, below the $4.35 billion that analysts were expecting. Also, the maker of the Blackberry handheld device said it shipped 11.2 million units or 43% more compared to the same period last year, and it added 4.9 million net new subscriber accounts, but both figures came in below analysts estimates, according to Reuters. Additionally, RIMM announced a stock repurchase program to buy up to 31 million common shares. The company issued 3Q EPS guidance that topped analysts’ forecasts. RIMM traded solidly lower.

Accenture Plc (ACN $41) reported 3Q EPS of $0.73, beating analysts' estimates by four cents, while net revenue grew 8.3% y/y to $5.57 billion. The world's second-largest technology-consulting company, per Bloomberg, cited strong growth in its products and financial services segment, while revenue grew in all five of its operating groups. The company issued 4Q revenue guidance of $5.15 - $5.35 billion, slightly lower than the Street's estimate of $5.36 billion, and said fiscal-year earnings will be in the lower half of its previously announced range of $2.61 - $2.69 per share. Shares of ACN were higher.

KB Home (KBH $11) posted a fiscal 2Q net loss of $0.40 per share, compared to the shortfall of $0.32 that the Street was expecting, with revenues declining 2.7% y/y to $374.1 million, slightly above the $372 million that was expected by analysts. The homebuilder said its new orders fell 23% y/y, due to a lower community count, generally weak economic conditions, and the April expiration of the homebuyer tax credit. KBH posted a solid decline.

Shares of BP Plc(BP $27) hit fourteen-year lows today, amid concerns that a potential hurricane in the Gulf of Mexico over the weekend could disrupt the company's oil leak containment and cleanup efforts as the first tropical storm of the hurricane season could make its way into the Gulf. Additionally, the Wall Street Journal reported that BP has boosted its cash and available credit by $5 billion to a total of $20 billion, in response to last week’s agreement with the White House to set up a $20 billion escrow fund for compensating victims of the oil spill.

The financial sector received increased attention on Wall Street today following the early morning agreement between US lawmakers on financial regulatory reform, in a session that lasted more than 21 hours, per Reuters. The reform still needs to win final approval from both the House and Senate. The agreement includes new capital controls, derivative trading restrictions, and proprietary trading limitations. Financials traded solidly higher today.

Final read on 1Q GDP revised lower, consumer sentiment unexpectedly revised higher

The final look at 1Q Gross Domestic Product, the broadest measure of economic output, was released this morning and showed a 2.7% annualized rate of growth, compared to the 3.0% gain in the first revision last month, and where economists surveyed by Bloomberg had forecasted for output in the first quarter of the year to remain. Personal consumption gained 3.0%, below the 3.5% that was forecasted and where the figure was revised to in May. Real final sales, which exclude changes in inventory, were 0.8% higher, versus the 1.4% that was reported in the revised reading in May.

The GDP Price Index rose 1.1%, slightly above the consensus of economists, which called for it to remain at a 1.0% increase. The core PCE Index, which excludes food and energy, increased 0.7%, above expectations which called for it to remain at a 0.6% increase.

Elsewhere, the final University of Michigan Consumer Sentiment Index increased by a larger amount than initially reported in the preliminary release, rising from an initial reading of 75.5 to 76.0 in June, compared to the expectation of economists, who forecasted an unchanged reading. The 76.0 level is above the May level of 73.6 and is the highest level since January 2008. The upward revision came as the current economic conditions component of the report increased from 82.9 in the preliminary report to 85.6, offsetting a decline in the economic outlook component from 70.7 to 69.8.

Treasuries finished higher after showing little reaction to the GDP report and falling initially after the better-than-forecasted reading on consumer sentiment. The yield on the 2-year note was down 3 bps to 0.65%, the yield on the 10-year note fell 3 bps to 3.10%, and the 30-year bond yield decreased 5 bps to 4.06%.

In other global economic news, the G20 meeting of world leaders will commence over the weekend in Toronto, and may garner extra attention given the backdrop of the euro-area debt crisis and subsequent tough austerity actions across the region, China's announcement this week that it will allow yuan currency fluctuation after being pegged to the US dollar for two years, and given the mixed US economic data and financial regulatory reform agreement early today.

International economic data on the light-side today

On the economic front across the pond, German import prices rose 0.6% month-over-month (m/m) in May, above the 0.2% gain that economists forecasted, and Germany released its IFO business climate survey by industry report, which showed manufacturing production deteriorated, construction orders declined, while retail trade and wholesale trade business both improved. Additionally, a Financial Times report suggests that new rules for European financial regulation are moving closer to an agreement, as further talks are scheduled for next week.

In Asia/Pacific news, Japan's Consumer Price Index fell 0.9% y/y in May, compared to a 1.3% drop that economists expected, while excluding food and energy, consumer prices dropped 1.6% y/y, matching forecasts. Meanwhile, Taiwan's central bank pledged to increase oversight of the country's mortgage market, in a move that follows yesterday's unexpected interest rate increase.

Weak data drives down week

US stocks finished with solid losses this week, courtesy of disappointing reports from both the economic and earnings fronts, which reopened global economic recovery wounds, pressuring sentiment. The recovery uneasiness discounted some positive developments this week as China's announcement that it is de-pegging its yuan currency from the US dollar, along with a smaller-than-forecasted drop in durable goods orders-which also revealed continued strength in spending after stripping out volatile components of transportation and defense-and a larger-than-expected drop in weekly initial jobless claims, all had little impact on limiting the body blows to the bulls.

Housing was a main catalyst for the week's downward direction, with existing home sales unexpectedly falling despite having continued support from the government homebuyer tax credit, while new homes sales, which were expected to take a hit from the absence of the government incentive, fell much more than forecasted to a record low level. Also, Friday's disappointing earnings report from KB Home teamed up with fellow homebuilder Lennar Corp’s (LEN $15) lackluster results on Thursday to exacerbate the sentiment toward the health of the housing sector and spark some concerns about a double dip in the housing market.

A housing market double dip has been expressed as a major concern among the Federal Reserve policymakers, along with the continued weak employment market and the emergence of the European debt crisis. In fact, it was these headwinds that prompted the Fed to downgrade its assessment of the economy on Wednesday upon the conclusion of the Federal Open Market Committee’s (FOMC) meeting, in which it left the fed funds rate at 0-0.25%, while keeping its accompanying policy statement language of an "extended period" for keeping rates at an "exceptionally low" rate.

Adding insult to injury, a few disappointing earnings reports from some consumer-related firms exacerbated sentiment and contributed to the solid declines for the equity markets, with Bed Bath & Beyond Inc. (BBBY $39) offering disappointment guidance, while Nike Inc. (NKE $70) and Darden Restaurants Inc.(DRI $39) missed the Street’s profit projections.

All eyes on the employment report next week

The economic calendar starts off slow with Tuesday's reading of the S&P/CaseShiller Home Price Index, forecasted to decline 0.1% m/m in April, and lags the sales data by a month. On Thursday, the ISM Manufacturing Index will be released, which is expected to show a decrease to 59.0 in June from 59.7 in May, with 50 being the level that separates contraction versus expansion in the economy. Despite declining, last month's reading fell less than expected, and indicated the tenth consecutive month the manufacturing sector grew, with the overall economy gaining for the 13th consecutive month. The ISM Non-Manufacturing Index is not scheduled to be released until July 6, and is expected to increase to 55.5 from 55.4.

Nonfarm payrolls will headline the week on Friday, with the Bloomberg survey of economists forecasting payrolls fell by 105,000 in June after increasing 431,000 in April, while excluding government hiring, private sector payrolls are expected to increase 114,000, after expanding by a disappointing 41,000 in May. Temporary hiring for the Census is distorting the headline number, as the government has said that Census hiring could peak in May. The unemployment rate is estimated to increase to 9.8% from 9.7%, as workers re-enter the workforce as job openings increase.

Businesses have a high level of uncertainty, including government policies regarding healthcare, regulation, taxes and trade, which is likely putting a crimp in hiring. The high level of unemployment, as well as slow economic activity and low levels of inflation, are contributing to the case for an "extended period" of low rates that the Fed expressed this week. However, demand is still positive and businesses slashed both inventories and jobs in response to the crisis, and with productivity high, companies need to start hiring to keep up with demand.

Other releases next week include personal income and spending, the Conference Board's measure of consumer confidence, MBA Mortgage Applications, the ADP Employment Change Report, the Chicago Purchasing Manufacturing Index, initial jobless claims, construction spending, pending home sales, and factory orders.

Elsewhere in the Americas, Canada releases April GDP and industrial product prices, while Brazil announces manufacturing PMI and industrial production.

In Europe, releases include euro-zone business confidence, CPI, PPI, and the unemployment rate, UK and euro-zone manufacturing PMI reports and consumer confidence, UK mortgage approvals, housing prices, final 1Q GDP, as well as German retail sales and unemployment.

In the Asia/Pacific region, announcements include Japan's retail sales, jobless rate, industrial production, manufacturing PMI, vehicle production and sales, housing starts, construction orders, monetary base, and the Tankan business outlook. Elsewhere, releases out of China and India include their manufacturing PMI indexes as well as the leading index for China, and Australia releases new home sales, retail sales, housing prices and building approvals.