Morning Market Update

Mixed Morning in the Wake of Yesterday’s Afternoon Slide

The US equity markets are mixed in morning trading as traders remain uneasy following yesterday’s disappointing late-day dive, which erased an early rally on optimism following China’s weekend announcement that it will allow its yuan currency to fluctuate more freely. Also, uncertainty regarding the ability of European economies to prosper as nations make aggressive fiscal policy changes, exacerbated by today’s announcement by the UK of tough austerity measures, is pressuring stocks across the pond, and is overshadowing an unexpected increase in a gauge of German business confidence. Treasuries are modestly higher in early trading, ahead of a key report on the US housing market and as the Federal Reserve begins its two-day monetary policy meeting. In equity news, Dow member Caterpillar’s CEO offered some upbeat comments, while Walgreen Co missed the Street’s profit forecast. In other overseas action, Asian markets finished mostly lower.

As of 8:49 a.m. ET, the September S&P 500 Index Globex future is 1 point below fair value, the Nasdaq 100 Index is 3 points above fair value, and the DJIA is 1 point below fair value. Crude oil is down $0.55 at $77.27 per barrel, and the Bloomberg gold spot price is up $3.18 at $1,236.88 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% at 86.05.

Dow member Caterpillar Inc’s (CAT $66 ¹) CEO said that he expects the company’s sales to grow 25% this year as, “We’re coming back very strongly after the recession,” per Bloomberg News, which quoted the CEO at a business conference in Lima, Peru. The company’s Chief added that he sees strong demand for equipment coming from the mining and energy industries, particularly from rapid-growth emerging economies.

Walgreen Co. (WAG $30) reported fiscal 3Q EPS ex-items of $0.54, short of the $0.57 Reuters estimate, with revenues increasing 6.1% year-over-year (y/y) to $17.2 billion, slightly above the $17.1 billion that the Street was forecasting. The pharmacy and retailer said that it “Anticipated a challenging quarter for several reasons, including the sluggish economy, prescription reimbursement pressure compounded by a slowdown in the rate of introduction of new generics, and a lower incidence of flu compared with the beginning of the H1N1 pandemic a year ago.”

Housing data on the horizon, Fed meeting begins

Treasuries are modestly higher in morning action ahead of a key release on today’s economic docket the housing market with the release of existing home sales, which are forecasted to increase by 6.0% month-over-month (m/m) in May to an annual rate of 6.12 million units. This would mark the third-straight solid monthly advance, joining 7.0% and 7.6% gains in March and April, respectively. However, any optimism regarding the health of the housing recovery is likely to be discounted somewhat as the May figures benefited from the rush to the end of the homebuyer tax credit as they reflect closings from contracts entered one to two months earlier, and reality has begun to set in regarding if the housing market can continue to stabilize and recover without the assistance of the government stimulus. Also, last year, December existing home sales fell sharply by over 16% as the homebuyer tax credit, before its extension to April 2010, was initially set to expire in November, suggesting we may see a drop off in sales as the employment picture and the flare up in the euro-area debt crisis exacerbate sentiment and further dampen willingness to purchase homes.

Also, the two-day Federal Open Market Committee (FOMC) meeting begins today and will conclude mid-day Wednesday with the release of the statement. While no interest rate changes are expected, the status of the extra measures the Fed has taken to address liquidity and the cost of capital will continue to be monitored. Minutes from the April meeting showed that there was debate about the pace and timing of asset sales on the Fed’s balance sheet, while the crisis in Europe prompted the Fed on May 10th to re-open its currency swap lines to central banks to ensure financial institutions had access to dollars in conjunction with the larger European rescue package that was unveiled that day. The Fed’s balance sheet expanded very modestly after the action, but has since leveled off, remaining fairly flat over the past two months. Since the last meeting, economic growth forecasts globally have been revised lower due to the European crisis and the likelihood of a slowdown in China, and traders have pushed out the timing of the first US rate hike from late this year to the first half of next year.

The only other report due out today will be the Richmond Fed Manufacturing Index for June, which is expected to decrease to 20 from a prior reading of 26, although any figure above zero denotes expansion.

Europe under pressure as UK unveils budget cuts and after a bank downgrade

Stocks in Europe are under solid pressure in afternoon action, giving back some recent gains in the wake of the failed rally in the US yesterday as the optimism that came from China’s announcement that it will let its yuan currency fluctuate was thwarted. Fitch Ratings’ credit downgrade of France’s largest bank, BNP Paribas (BNPQY $31), which was part of the reason for yesterday’s late-day slide in the US, is pressuring financials across the pond today, contributing to the broad-based decline in the region. Also adding to the pressure in region, the UK announced its emergency budget today, where it revealed aggressive austerity measures, projecting to bring borrowing down from 10.1% of GDP this year to 1.1% by 2015-2016. The announcement is exacerbating uncertainty regarding whether the European economic recovery can continue as several nations try to rein in their deficits in an attempt to implement long-term fiscal sustainability.

The aforementioned uneasiness is overshadowing an unexpected increase in a gauge of business confidence in Germany—Europe’s largest economy. The German IFO Business Climate Index increased from 101.5 in May to 101.8 in June—the highest since May 2008—and compared to the decline to 101.2 that economists surveyed by Bloomberg had expected. In other economic news, Switzerland’s trade surplus narrowed, Sweden’s unemployment rate fell more than expected in May, the euro-zone current account balance fell to a deficit, and Spain’s trade deficit widened in April. Later today, euro-zone consumer confidence will be released.

The FTSE 100 Index is 1.2% lower, France’s CAC-40 Index is down 1.1%, Germany’s DAX Index is off 0.6%, Spain’s IBEX 35 Index is declining 1.2%, Switzerland’s Swiss Market Index is decreasing 1.0%, and Sweden’s OMX Stockholm 30 Index is 0.3% in the red.

Asia gives back some of yesterday’s advance

Stocks in Asia finished mostly lower following the late-day slide in the US, as traders are booking some profits from yesterday’s solid broad-based advance on the weekend news that China will allow more flexibility in the exchange rate in the yuan. Focus on the impact of an advance in the Chinese yuan on the prices of Chinese exports and fiscal policy uncertainty in the euro-area provided some motivation for profit taking in the region, and Japanese and Australian stocks led the decline, with the Nikkei 225 Index and S&P/ASX 200 Index both falling 1.2%. The Japanese equity markets may have been bogged down by a report showing that the nation’s supermarket sales fell 5.3% y/y in May, after dropping 4.9% in April. Meanwhile, Chinese stocks were mixed, as the Hong Kong Hang Seng Index declined 0.5% and the Shanghai Composite Index ticked 0.1% higher. In other economic news in the region, Hong Kong’ s consumer prices increased 2.5% y/y in May, compared to the 2.6% increase that was anticipated by economists surveyed by Bloomberg. Additionally, Taiwan’s unemployment rate declined from 5.43% in April to 5.22% in May, versus the 5.33% that was expected, and the Taiex Index decreased 0.3%. Elsewhere, South Korea’s Kospi Index dropped 0.5% and India’s BSE Sensex 30 Index fell 0.7%.