Morning Market Update

Mixed on Notes from Fed Chief and Lingering Euro-Debt Grief

The Dow and S&P 500 Indexes have moved back above the flatline heading into afternoon action, supported by enthusiasm from Federal Reserve Chairman Ben Bernanke’s relatively encouraging economic recovery comments, but sentiment continues to be jittery as euro-area debt fears fester. Meanwhile, the Nasdaq Composite Index is posting a decline on weakness in oil & gas and healthcare issues, while a solid decline in shares of Dow member Microsoft Corp after it announced a $1.25 billion convertible note offering to pay down debt, is also weighing on the index. Treasuries remain lower, maintaining early losses that came on the enthusiasm from the Fed Chief’s comments, and as there is a lack of major US economic data today. In other equity news, Dow member McDonald’s Corp announced growth in May same-store sales, but the company, along with fellow Dow component 3M, offered warnings about the negative impact of currency fluctuations on earnings. Elsewhere, Dollar General topped the Street’s 1Q expectations and increased its full-year outlook, and General Motors announced a 1.5 million vehicle recall. Overseas, Europe finished under pressure in afternoon action across the pond on mixed data and the aforementioned lingering European debt fears.

At 12:55 p.m. ET, the Dow Jones Industrial Average is up 0.7% and the S&P 500 Index is 0.5% higher, while the Nasdaq Composite is declining 0.5%. Crude oil is up $0.81 at $72.25 per barrel, wholesale gasoline is $0.01 higher at $2.00 per gallon, and the Bloomberg gold spot price is up by $3.84 at $1,244.04 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.4% at 88.17.

Dow member McDonald’s Corp (MCD $68) reported May global same-store sales—sales at stores open at least thirteen months—increased 4.8% year-over-year (y/y), led by a 5.7% jump in comparable stores sales in Europe. US same-store sales rose 3.4%, fueled by the company’s food and beverage value offerings, and the addition of Frappes to its McCafe coffee line-up. Sales growth in France, Germany, the UK, and Russia helped lead European sales, while sales in Australia and China helped lead a 3.8% increase in sales from its Asia/Pacific, Middle East and Africa segment. Shares are back above the flatline, overcoming late-morning pressure that came on comments from MCD saying it expects foreign currency translation to have a negative impact on net income per share for the full year.

Meanwhile fellow Dow component, 3M Co (MMM $74) is under pressure after the company’s Chief Financial Officer warned at an investor conference that the weakness in the euro may negatively impact full-year EPS by $0.05. The company executive added that the impact could be greater if the euro’s decline turns out to be structural, but the existing hit is expected to be focused in the second half of the year, according to Dow Jones Newswires.

In other Dow member news, Microsoft Corp (MSFT $25) announced that it intends to offer up to $1.25 billion in convertible senior notes due in 2013 in a private offering to qualified institutional buyers, subject to market and other conditions. MSFT said it intends to use the net proceeds from the offering to repay short-term debt. Shares are lower.

Dollar General Corp (DG $30) reported 1Q adjusted EPS of $0.42, above the $0.34 that Wall Street analysts had expected, with revenues increasing 11.9% y/y to $3.1 billion, compared to the $3.0 billion that the Street had expected. Same-store sales rose 6.7%, led by customer traffic and larger average transaction amount. The company raised its full-year EPS guidance and shares are higher.

General Motors Co announced that it will recall 1.5 million vehicles in the US, Mexico and Canada to fix a defect in heated washer-fluid systems that could catch fire. GM said the recall covers models under its Buick, Cadillac, Chevrolet and GMC brands and the fix consists of disabling the washer fluid system. GM said that it will reimburse vehicle owners $100 to compensate for the system being disabled, and its analysis shows the number of incidents is very small compared to the number of vehicles on the road.

Fed Chief Bernanke offers cautiously optimistic economic view

Treasuries remain lower, holding onto losses following some relatively favorable comments toward the economic recovery from Federal Reserve Chairman Ben Bernanke, and as there are no major economic reports slated to be released today. Bernanke’s comments came as he participated in a Q&A session Monday evening with ABC News journalist Sam Donaldson. The Fed Chief said that the economic recovery continues at a moderate pace and it is unlikely that US economy will double dip into a recession, but due to the jobs picture, “it won’t feel great,” as the unemployment rate is still going to be high for a while and that means a lot of people are going to be under financial stress. Bernanke added that the Fed will raise interest rates from the “exceptionally low” level before the economy returns to “full employment,” but they don’t know when that process will start. On the European debt crisis, the head of the Fed said European leaders are committed to avoiding a default in Greece and elsewhere, and ensuring the survival of the euro, and have enough money to meet obligations of debt-strapped member nations.

Europe sees red despite comments from Fed

Stocks in Europe finished lower despite the relatively soothing economic recovery comments from US Fed Chairman Ben Bernanke and a stronger-than-expected increase in industrial production in Germany—Europe’s largest economy. European debt fears remained in focus to dampen sentiment as Fitch Ratings said, “The scale of the United Kingdom’s fiscal challenge is formidable and warrants a strong medium-term consolidation strategy, including a faster pace of deficit reduction than set out in the April 2010 budget,” which was issued by the recently ousted Labour Party. Also, a separate report showed the German trade surplus contracted by a larger amount than forecasted, as exports tumbled 5.9%, while a business sentiment indicator in France unexpectedly deteriorated, to add to the uneasy backdrop across the pond. But some of the uneasiness was tempered as finance ministers from the euro-area agreed on how to deploy the $1 trillion bailout fund if needed to try to avoid a default of a member nation.

The equity front offered little help to the day’s trading session, as German utilities came under steep pressure after the government announced a tax increase on nuclear fuel, while BP Plc (BP $35) declined solidly amid festering fallout from the massive oil spill in the Gulf of Mexico and uncertainty regarding the amount of containment of the leak. Moreover, shares of Tesco Plc (TSCDY $17) were lower after the announcement that the CEO of the UK supermarket company will step down after 14 years of duty.

In other economic news in the busy day in Europe, France’s trade deficit contracted by a smaller amount than expected in April, Switzerland’s consumer prices unexpectedly declined and its unemployment rate remained at 4.0%, while Sweden’s jobless rate increased from a downwardly revised 9.0% to 9.5% for April.

The UK FTSE 100 was down 0.8%, France’s CAC-40 Index finished 1.0% lower, Germany’s DAX Index declined 0.6%, Switzerland’s Swiss Market Index was off 0.7%, and Sweden’s OMX Stockholm 30 Index decreased 0.6%, while Greece’s Athex Composite Index rose 0.4%.