Morning Market Update

Avoiding the Red Ahead of the Fed

US equity markets are gaining some ground in morning action, following another disappointing afternoon slide yesterday on a disappointing existing home sales report, as traders are awaiting another key reading on the housing sector and the afternoon conclusion of the Federal Reserve’s monetary policy meeting. Treasuries are nearly unchanged before the aforementioned events, and after a decline in the MBA Mortgage Application Index. In equity news, Adobe Systems and Carmax both topped analysts’ profit projections, while Red Hat matched the Street’s earnings forecasts. Overseas, Asia came under pressure, while Europe is lower on a plethora of economic reports.

As of 8:50 a.m. ET, the September S&P 500 Index Globex future is 5 points above fair value, the Nasdaq 100 Index is 8 points above fair value, and the DJIA is 46 points above fair value. Crude oil is down $0.41 at $77.44 per barrel, and the Bloomberg gold spot price is up $1.05 at $1,241.10 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% at 86.02.

Adobe Systems Inc. (ADBE $33) reported fiscal 2Q EPS ex-items of $0.44, one penny ahead of the Reuters estimate, with revenues increasing 33.8% year-over-year (y/y) to $943 million, above the $907 million that the Street was looking for. The software company said its strong revenue growth was driven by the successful launch of its Creative Suite 5, and the company’s growth is being fueled by “the explosion of digital content across all media and devices.” ADBE issued better-than-expected 3Q EPS guidance and announced a $1.6 billion stock repurchase program.

Carmax Inc. (KMX $20) announced fiscal 1Q earnings of $0.44 per share, well above the $0.33 that analysts were anticipating, with revenues rising 23% y/y to $2.26 billion, above the $2.1 billion that was forecasted by the Street. The auto retailer said it had another quarter of “healthy increases” in both used and wholesale vehicle sales, and its 9% increase in same-store sales—sales at stores open at least a year—of used vehicle sales reflected the benefit of a continuing gradual rebound in customer traffic, as well as the easy y/y comparison.

Red Hat Inc. (RHT $31) posted fiscal 1Q EPS ex-items of $0.18, matching the Street’s forecast, as revenues, which increased 20% y/y to $209 million, exceeded the $203 million expectation of analysts. The open source solutions technology firm said it achieved a “significant” increase in large deals booked y/y, including several with an initial consulting component which it believes is a positive indicator of new project spending and future subscription billings.

Mortgage applications decline, but key releases are slated for later

Treasuries are nearly unchanged in morning action following the release of the US MBA Mortgage Application Index, which declined 5.9% last week, after the index that can be quite volatile on a week-to-week basis, jumped 17.7% in the previous week. The decrease came as the Purchase Index declined 1.2% after increasing 7.3% the week prior, while the Refinance Index fell 7.3% after surging 21.1% the week prior. The decrease in the overall index came despite a 6 basis-point drop in the average 30-year mortgage rate to 4.75%, near the record low of 4.61% that was reached at the end of March 2009.

The economic calendar will heat up later today, beginning with new home sales, providing the first glimpse into housing demand after the government stimulus has worn off. New home sales are expected to plunge 18.7% month-over-month (m/m) in May to an annual rate of 410,000 units as these sales reflect contract signings and will not benefit from the government tax credit because of the April deadline. New home sales jumped 14.8% in April but account for a smaller portion of the total housing sales, with yesterday’s existing home sales report providing a broader look at sales on the housing front. However, housing affordability remains high, which could help limit the impact of the end of the support from the government..

However, today’s headlining economic event will come in afternoon action with the conclusion of the two-day Federal Open Market Committee (FOMC) meeting, and the mid-day release of the monetary policy statement. No interest rate changes are expected, and 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, causing traders to push out the timing of the first US rate hike from late this year to the first half of next year. The language of today’s statement will be the main focus of traders as they will scrutinize it word for word, searching for clues on the timing that the Fed deems appropriate for beginning to increase rates. For some time now, the FOMC has maintained that economic conditions continue to warrant “exceptionally low” levels of the fed funds rate for an “extended period” and it is this language that will likely garner the most attention if any tweaks are made. Also, the status of the extra measures the Fed has taken to address liquidity and the cost of capital will continue to be monitored.

Europe slightly lower amid slew of data

Stocks in Europe are under modest pressure in afternoon action, with basic materials leading the decline amid global economic concerns following the disappointing day in the US on an unexpected drop in US existing home sales, which came even as the government homebuyer tax credit continued to support sales. Traders are also sifting through a plethora of economic data across the pond, highlighted by the release of the Bank of England’s minutes from its most recent monetary policy meeting earlier this month, in which it left its benchmark interest rate at a record low of 0.5%. The report revealed that there was one BoE member that voted against keeping the rate unchanged, voting for an increase to 0.75% on concerns about “resilient” inflation in the aftermath of the recession.

In other economic news, separate readings of consumer confidence showed German sentiment topped expectations, while Italy’s report came in below forecasts. Meanwhile, a slew of services and manufacturing PMI reports were released, with Germany’s manufacturing topping forecasts, while its services came in short of expectations, France’s services exceeded forecasts, but its manufacturing report disappointed, and euro-zone services fell short of forecasts, while manufacturing came in above economists’ expectations.

In equity news in the euro-zone, BASF SE (BASFY $57) is higher after the world’s largest chemical company by sales announced that it has agreed to purchase specialty chemicals company Cognis GmbH for a deal valued at about 3.1 billion euros ($3.8 billion). Also, BP Plc (BP $30) announced the New Gulf Coast Restoration Organization, which formally shifted responsibility from BP’s CEO Tony Hayward to Robert Dudley.

The UK FTSE 100 Index is 0.2% lower, France’s CAC-40 Index is down 0.5%, and Germany’s DAX Index is off 0.2%, while Italy’s FTSE MIB Index is flat.

Asia declines following down day in the US

Stocks in Asia came under pressure amid resurfacing global economic concerns on the heels of the solid decline in the US yesterday, and uncertainty regarding the euro-area debt crisis. Japanese stocks led the way, with the Nikkei 225 Index falling 1.9%, as export issues in the nation weighed on the markets amid strength in the Japanese yen versus most major currencies, which came courtesy of some flight-to-safety buying resulting from the disappointing housing data in the US and lingering European deficit concerns. A stronger yen dampens the outlook for revenues of companies that rely on sales in the US and other major international economies. Meanwhile, stocks in the resource-rich nation of Australia also helped pace the decline, with the S&P/ASX 200 Index dropping 1.6%, amid the backdrop of global economic recovery concerns, which hampered the prospects for demand for commodities.

However, stocks in China were mixed, as Hong Kong’s Hang Seng Index rose 0.2%, while the Shanghai Composite Index fell 0.7%, pressured by a report by the government that Shanghai housing sales by floor area in the first five months of the year dropped 32.5% compared to the same period a year ago, per Bloomberg. In other economic news in Asia, Taiwan’s industrial production rose 30.67% y/y in May and commercial sales increased 14.44% y/y, but both figures came in just shy of economists’ forecasts, and the Taiex Index declined 0.4%, while New Zealand’s current account balance unexpectedly swung to a surplus and the NZX 50 Index finished flat. Rounding out the day in the region, South Korea’s Kospi Index declined 0.3%, and India’s BSE Sensex 30 Index was nearly unchanged.