Evening Market Update

Bulls Look to Get Back on Track

With little in the way of economic news to dampen the mood, the bulls rode the wave of sentiment from overseas and pushed stocks just above the DJIA 10,000 mark. The positive attitude came courtesy of reports that details of the European bank stress test methodology are forthcoming, giving a leg-up to financials which led the advance, while an upbeat outlook from State Street Corp and a favorable report on loan delinquencies added to the jubilation. Treasuries moved lower after overcoming early gains that came from another refinancing-fueled rise in mortgage applications, which was today’s only report on the US economic calendar. In other equity news, Family Dollar Stores beat the Street’s profit expectations, but disappointed with its guidance, and FTI Consulting slashed its full-year and 2Q guidance.

The Dow Jones Industrial Average rallied 275 points (2.8%) to close at 10,018, the S&P 500 Index gained 32 points (3.1%) to finish at 1,060, and the Nasdaq Composite jumped 66 points (3.1%) to 2,159. In moderate volume, 1.3 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil rose $2.09 to $74.07 per barrel, wholesale gasoline added $0.06 to $2.03 per gallon, while the Bloomberg gold spot price gained $9.98 to $1,202.60 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.1% lower at 83.94.

Family Dollar Stores Inc. (FDO $36) reported fiscal 3Q EPS of $0.77, one penny above the Reuters estimate, with previously reported revenues increasing 8.4% year-over-year (y/y) to about $2.0 billion, which matched the consensus estimate of analysts. The discount retailer said the environment remains challenging for consumers, and customers continue to buy close to need. FDO issued 4Q and full-year EPS guidance that came in short of analysts’ forecasts. Shares were solidly lower.

State Street Corp. (STT $37) announced that it expects 2Q EPS ex-items of $0.93, with revenues forecasted to be $2.2 billion. Analysts were anticipating the financial firm to report 2Q EPS of $0.73, on revenues of $2.2 billion. The company’ CEO said the results were aided by servicing fee revenue as well as improvement in trading-services fee revenue. The company also announced a plan to increase client access to liquidity, saying the action “demonstrates our commitment to resolving the challenges resulting from the market turmoil over the past several years.” STT was sharply higher and the report helped to lift the financial sector.

Also providing some support to financials, the American Bankers Association reported that consumer loan delinquencies, loans that are more than 30 days past due, improved for the third-consecutive quarter, declining from 3.19% in the prior quarter to 2.98%. Loan delinquencies are considered a proxy for gauging the amount of charge-offs—the amount of loans that companies do not expect to be repaid—that a lender may face. Credit card issuers are being boosted by the report.

FTI Consulting Inc. (FCN $32) was down over 25% after the global business advisory firm revised its full-year guidance, reporting that revenues are expected to be between $1.40-1.45 billion, compared to its previous estimate of between $1.47-1.57 billion. Also, FCN said EPS ex-items are expected to come in between $2.50-2.80, compared to the previous outlook of between $3.00-3.25. Analysts were anticipating the company reporting revenue of $1.46 billion and EPS of $3.06. The company said its original business outlook for 2010 anticipated an improving economy and demand environment for its practices that are “pro cyclical.” FCN added that it became apparent that, based on current economic conditions, markets for bankruptcy, restructuring, and M&A are “significantly slower than we anticipated.” The company also issued 2Q guidance that missed the Street’s forecasts.

Mortgage applications buoyed by refis again

Treasuries finished lower amid the rally in the equity markets. The yield on the 2-year note was 1 bp higher at 0.62%, the yield on the 10-year note gained 6 bps to 2.99%, and the 30-year bond rose 7 bps to 3.97%.

The lone release on today’s US docket was a 6.7% increase in the MBA Mortgage Application Index last week, after the index that can be quite volatile on a week-to-week basis, rose 8.8% in the previous week. The increase came as the Refinance Index gained 9.2%, offsetting a 2.0% decline in the Purchase Index. The gain in the overall index and the solid increase in refinancing came as the average 30-year mortgage rate remained at 4.68%, near the record low of 4.61% that was reached at the end of March 2009.

Imminent European bank stress test details remove some uncertainty

News that details about how the stress tests of the European banking industry were conducted could be released soon, helping to buoy sentiment overseas. The details could potentially help quell fears that the tests were not as stringent as needed to provide a constructive look at the health of the sector. According to Bloomberg, publication of the test criteria could come as soon as tomorrow, and may include a 17% “haircut”—or assumed loss—on Greek government debt, and a 3% reduction on Spanish bonds, citing individuals briefed on the matter. In other news out of the sector, the European Union Parliament voted in favor of limiting bonuses in the banking industry and reinforcing banking firms’ capital requirements. According to the Wall Street Journal, under the guidelines of the agreement, a 30% cap would be put in place for total bonuses, or 20% for exceptionally high payouts, while new minimums of capital will be required for banks in order to insure against the risks of their trading books and portfolios of complex securitized investments, such as mortgage-backed securities.

Economic news across the pond was mixed. German factory orders dropped 0.5% in May, following an upwardly revised 3.2% jump in April, and compared to the 0.3% increase that economists surveyed by Bloomberg had expected. Euro-zone 1Q GDP was left unrevised at a 0.2% expansion quarter-over-quarter (q/q) and a 0.6% rate of growth on a year-over-year (y/y), while household consumption in the euro-zone for 1Q remained unrevised at a 0.1% contraction. Rounding out the day in Europe, France’s trade deficit unexpectedly widened in May.

The Asian economic calendar was light, with the only release being the AiG Construction Index in Australia which declined from 53.2 in May to 46.4 in June, with a reading below 50 depicting contraction in the industry.

Tomorrow’s US economic calendar will include weekly initial jobless claims, expected to fall to 460,000 from a previous reading of 472,000, and consumer credit, which is forecast to fall $2.3 billion during May.

However, the international economic docket will be chock full of reports and events. Germany will report its trade balance, current account and industrial production, Switzerland will release employment figures, Sweden will post CPI numbers, and the UK will offer housing prices and industrial production. As well, both the Bank of England and the European Central Bank will announce their respective interest rate decisions. The focus on the ECB’s monetary policy meeting will likely be on President Jean-Claude Trichet’s customary press conference after the central bank’s rate decision, as Trichet is expected to comment on the bank stress tests, set to be revealed on July 23.