Evening Market Update

Late-Day Losses Bring First Half of the Year to a Sour Close

The equity markets took a turn for the worse in the final hour of trading, leaving stocks in the red again after yesterday’s steep losses. Early weakness was seen after a smaller-than-expected increase in private sector jobs was reported, although those losses were mostly pared by a positive reading in the Chicago PMI and lower-than-anticipated demand for a European Central Bank lending facility. However, a late-day announcement from Moody’s that it may downgrade Spain’s debt closed out the first half of the year on a negative note. In equity news, Ford Motor Co. announced that it plans to reduce its debt by $4 billion, while General Mills Inc. met analysts’ earnings expectations and Monsanto Co missed the Street’s revenue forecast. In M&A news, Celgene Corp agreed to acquire Abraxis BioScience Inc in a deal valued at $2.9 billion, and Dow member Boeing Co. announced that it will purchase defense-equipment maker Argon St Inc for $775 million. Treasuries finished the day mixed.

The Dow Jones Industrial Average fell 96 points (1.0%) to close at 9,774, the S&P 500 Index lost 11 points (1.0%) to finish at 1,031, and the Nasdaq Composite declined 26 points (1.2%) to 2,109. In moderate volume, 1.4 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil fell $0.54 to $75.40 per barrel, wholesale gasoline was flat at $2.06 per gallon, and the Bloomberg gold spot price gained $1.60 to $1,242.25 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was flat at 86.05.

Ford Motor Co. (F $10) was higher after it announced plans to reduce its debt by more than $4 billion, primarily by retiring debt owed to the United Auto Workers (UAW) Retiree Medical Benefits Trust ahead of schedule. F said it is taking the action to further strengthen its balance sheet and remains on track to deliver solid profits and positive automotive operating-related cash flow this year. The company added that its plan to profitably grow its business is working and, “we are increasingly confident about the future.”

General Mills Inc. (GIS $36) reported fiscal 4Q EPS ex-items of $0.41, inline with the Reuters estimate, as revenues declined 2% year-over-year (y/y) to $3.6 billion, just above the $3.5 billion that the Street was anticipating. Sales in the cereal maker’s US unit fell 2% y/y as price and product mix reduced the rate of net sales, while its international segment sales grew 4%, with volume growth offsetting a negative impact of price and product mix. GIS issued full-year EPS guidance that came in short of analysts’ forecasts. Shares were lower.

Monsanto Co. (MON $47) announced fiscal 3Q EPS ex-items of $0.81, two cents above the consensus estimate of analysts, while revenues declined 6% y/y to $2.96 billion, short of the $3.16 billion that the Street was looking for. The agriculture firm said price decreases for its Roundup and other herbicides affected its results, despite volume growth in these products. Shares finished lower.

In M&A news, Celgene Corp. (CELG $51) announced a definitive merger agreement in which it will acquire Abraxis BioScience Inc. (ABII $74), with ABII shareholders obtaining the right to receive an upfront payment of $58 per share in cash and 0.2617 shares of CELG, valuing ABII at $2.9 billion. Also under the deal, each ABII share will also receive one tradable Contingent Value Right (CVR), which entitles its holder to receive payments for future regulatory milestones and commercial royalties. CELG traded solidly lower and ABII was sharply higher.

Also on the M&A front, Dow member Boeing Co (BA $63) agreed to acquire defense-equipment maker Argon St Inc. (STST $34) for $775 million. Under the terms of the deal, which is expected to close by October, Boeing will pay $34.50 per share of STST, a 41% premium to Tuesday’s closing price. Argon, which makes sensor equipment in complex intelligence systems, will operate as a stand-alone business in Boeing’s space and security segment division. Shares of BA were lower, while shares of STST jumped over 40%.

Private sector jobs show tepid growth, but Midwest activity read is better than expected

The ADP Employment Change Report showed private sector payrolls rose by 13,000 jobs in June, compared to the forecast of economists surveyed by Bloomberg, which called for a 60,000 increase, while May’s 55,000 job increase was upwardly revised to 57,000. The release comes ahead of Friday’s broader nonfarm payrolls report, where economists expect a decrease of 125,000 in June, after increasing 431,000 in May, but most of the increase was attributed to government Census hiring (economic calendar). Excluding government hiring, private sector payrolls are expected to increase 110,000, after expanding by 41,000 in May. Treasuries were mixed on the day, as the short-end of the curve lost ground, while long-term bonds moved higher. The yield on the 2-year note gained 2 bps to 0.61%, the yield on the 10-year note declined 1 bp to 2.94%, and the 30-year bond yield decreased 4 bps to 3.89%.

Meanwhile, the Chicago PMI fell by a smaller amount than expected, declining from 59.7 in May to 59.1 in June, compared to the decline to 59.0 that was forecasted by economists. The index of business activity in the Midwest continued to expand as a reading of 50 is the demarcation point between expansion and contraction, and the employment component of the report jumped back into expansion territory, rising from 49.2 in May to 54.2 in June. Also, the prices paid component fell from 64.0 to 61.9. However, some other key components of the report such as production, new orders, and order backlogs all deteriorated in June.

In other economic news, the US MBA Mortgage Application Index increased 8.8% last week, after the index that can be quite volatile on a week-to-week basis, fell 5.9% in the previous week. The increase came as the Refinance Index jumped 12.6%, offsetting a 3.3% decline in the Purchase Index. The gain in the overall index and the solid increase in refinancing came amid an 8 basis-point drop in the average 30-year mortgage rate to 4.67%, near the record low of 4.61% that was reached at the end of March 2009.

Moody’s puts Spain’s debt on review for possible downgrade

In European economic news, Moody’s said it may downgrade Spain’s Aaa credit rating, raising further concern about the ongoing euro-area debt crisis. The European Central Bank’s twelve-month lending facility ended today, and the ECB said requests to borrow from its recently extended three-month lending program totaled 131.9 billion euros ($161.9 billion), which was a smaller amount than some expected. Elsewhere, Germany’s unemployment change declined by a smaller-than-expected amount in June, UK total business investment increased by a larger amount than forecasted, a year-over-year euro-zone CPI estimate came in below expectations, and Ireland’s 1Q GDP expanded on a quarter-over-quarter (q/q) basis, bringing its year-over-year (y/y) contraction to a much lower amount compared to 4Q. Additionally, UK consumer confidence deteriorated by a smaller amount than anticipated but a separate report showed UK house prices rose less than expected, while Italian producer prices rose more than forecasted but its consumer prices came in below expectations.

In Asia/Pacific news, Japan’s housing starts unexpectedly declined year-over-year (y/y) in May, while construction orders rebounded from April’s 25% drop, to increase 9.2% y/y in May. South Korea reported a slew of economic reports that painted a mixed picture, with the nation’s Leading Index showing a slower pace of growth, and a business survey of manufacturing business activity came in flat while a separate service sector business activity survey deteriorated. Additionally, South Korea’s industrial production gained more than economists had forecasted in May. Elsewhere, Thailand’s trade balance swung to a surplus, manufacturing production rose at a slower rate than anticipated, while a business sentiment index improved.

Back in the Americas, Canada’s GDP unexpectedly remained flat on a m/m basis in April, ending a string of seven months of gains. Economists surveyed by Bloomberg were looking for a 0.2% gain, and the stall raises questions as to whether the Bank of Canada will continue to raise interest rates at its next meeting on July 20th, since the central bank had a target growth rate of 0.5% for May and June. Within the report, retailing fell by 1.7% and manufacturing declined 0.3%, while mining gained 0.5% and wholesale trade rose 0.6%.

ISM Manufacturing Index on tap for tomorrow

Tomorrow, the US economic calendar will bring the release of the ISM Manufacturing Index, forecasted to dip slightly from 59.7 in May to 59.0 in June. A reading above 50 depicts expansion, and economists are calling for the headline figure to denote the eleventh month of expansion in the manufacturing sector and the 14th consecutive month of economic growth. Another strong reading from the manufacturing sector may give some needed relief to sentiment that has been destabilized recently amid exacerbated euro-zone financial market concerns, concerns of a slowdown in China, and mixed economic data out of the US.

The only other report on the domestic front tomorrow is weekly initial jobless claims, which are expected to decrease to 455,000 from a previous reading of 457,000.

Releases on the international front include German retail sales, French producer prices, PMI manufacturing reports from Brazil, Italy, Germany, and the euro-zone, Brazilian industrial production, and Australian building approvals.