Evening Market Update

Early Rally Tempered

The bulls shrugged off a larger-than-expected deterioration in the US ISM Non-Manufacturing Index in early trading, pushing the markets well into positive territory, but the momentum faltered and stocks briefly crossing into the red, but were able to end the day with respectable gains. Equity news was on the light side, with Walgreen besting June same-store sales estimates, Netflix giving details on an online movie streaming agreement, BP Plc gaining ground for a second-straight day following an analyst upgrade and comments from a Libyan oil industry, while semiconductor firms were mixed despite an upbeat chip sales report. Treasuries ended higher after briefly losing some ground following the gauge of service sector activity.

The Dow Jones Industrial Average rose 57 points (0.6%) to close at 9,744, the S&P 500 Index gained 5 points (0.5%) to finish at 1,028, and the Nasdaq Composite edged 2 points higher (0.1%) to 2,094. In moderate volume, 1.3 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil declined $0.16 to $71.98 per barrel, wholesale gasoline fell $0.01 to $1.97 per gallon, while the Bloomberg gold spot price lost $16.83 to $1,192.45 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.5% lower at 84.09.

Walgreen Co. (WAG $27) reported same-store sales—sales at stores open at least a year—rose 2.0% year-over-year (y/y) in June, after posting declines in sales for April and May, and above the 1.1% increase that analysts surveyed by Reuters had expected. WAG said its pharmacy sales, which accounted for 65.6% of total sales, were negatively impacted by generic drug introductions and lower incidence of flu. Shares were higher.

Netflix Inc. (NFLX $107) announced that it has reached a long-term agreement with Relativity Media, LLC through which major theatrically released films owned by Relativity will be licensed directly and exclusively to NFLX for streaming to its subscribers during the “pay TV window.” The DVD rental and online streaming firm said the deal marks a continued shift in the distribution of major motion pictures in the US, and will increase the amount of movies previously encumbered by pay TV agreements with channels such as HBO, Showtime and Starz available to be streamed from NFLX “months—and not years—after their release on DVD.” Shares fell well off the highs of the day to finish only modestly higher.

Chip firms moved higher after the Semiconductor Industry Association (SIA) reported that global chip sales rose 4.5% in May month-over-month (m/m), and sales surged 47.6% compared to the same period last year, which was when the global economy and demand was still being marred by the recession. The SIA said emerging markets, including China and India, are fueling sales and the automotive market is also slowly recovering after several years of weak sales. “Demand from the corporate information technology and industrial sectors that had pushed out replacement cycles during the global economic recession is beginning to come back,” the SIA added. Dow member Intel Corp. (INTC $19) finished higher, while fellow chip maker Advanced Micro Devices Inc. (AMD $7) lost ground.

Shares of BP Plc (BP $32) traded solidly higher for a second-straight session, following an analyst upgrade of the energy firm that has tumbled as the costs of the Gulf of Mexico oil leak have surged. BP is also getting some support from the announcement that it will not issue new equity to raise capital to cover the costs, and from yesterday’s comments from a Libyan oil industry executive that BP’s shares are a bargain and he would recommend the nation’s sovereign wealth fund invest in the oil company.

The week’s headlining economic report due out after the opening bell

The ISM Non-Manufacturing Index fell in May to 53.8 from 55.4 in April, the eighth month in the past ten months above the 50.0 level that separates expansion from contraction, but slightly below the forecasted level of 55.0, the first decrease after the index was flat for three straight months. The report is generally considered a measure of economic strength in the service sector and is the companion to the ISM Manufacturing Index, which posted a worse-than-expected decline to 56.2 in June from 59.7 in May.

Like last week’s manufacturing reading, underlying components were negative, as new orders fell 5.5 points to 48.0 and employment declined by 0.7 points to 49.7, contracting after posting the first reading in expansion territory last month in 28 months. The survey indicated that while respondents were mostly positive about business conditions, there was concern about the effect of employment on the economic recovery.

The last two jobs reports indicated fewer jobs were created than expected, amid uncertain demand prospects and heightened volatility in the stock market, creating doubts on the part of businesses with respect to expansion.

Treasuries were higher after briefly losing ground following the ISM Non-Manufacturing report. The yield on the 2-year note was 1 bp lower at 0.63%, the yield on the 10-year note lost 2 bps to 2.98%, and the 30-year bond declined 4 bps to 3.94%.

Spain debt auction aids sentiment

Euro-area debt concerns eased and the euro gained ground, after Spain was able to raise about 6 billion euros ($7.6 billion) by selling 10-year notes, and a government spokesperson said “demand was very high.” However, the rate that the Spanish government has to pay on the funds was 195 basis points above the benchmark swap rate. Economic news across the pond was on the light side, with the lone major report being a larger-than-expected 0.4% month-over-month (m/m) drop in Switzerland’s June Consumer Price Index, compared to the 0.1% decline that was expected by economists.

In the Asia/Pacific region, the Reserve Bank of Australia left its benchmark interest rate unchanged at 4.5%, as expected, saying that the global economy continued to expand over recent months and growth in Asia and Latin America, to date, is “very strong.” The RBA added that it views its current policy as appropriate and the current setting of monetary policy is resulting in interest rates to borrowers around their average levels of the past decade. Moreover, Australia reported that its trade surplus increased to level that far exceeded economists’ forecasts.

The only report on tomorrow’s US economic calendar is MBA Mortgage Applications. However, the docket for international economic reports scheduled for release will be heavier and will include France’s trade balance, a PMI gauge out of Canada, euro-zone household consumption and final 1Q GDP, Japanese machinery orders, trade balance and its current account, while Australia will report employment figures.