Evening Market Update

Markets Rangebound Before Start of 2Q Earnings Season

With no economic reports released and 2Q earnings season unofficially beginning with Alcoa’s report after the close, investors appeared to be on the fence for most of the day and stocks ended near where they began. As well, Treasuries finished mostly unchanged amid the lack of news, with Fed Chief Ben Bernanke’s remarks to a small business forum the lone item garnering attention. Equity news was also light, as AON Corp and Hewitt Associates agreed to merge in a deal worth about $4.9 billion, Dow member Microsoft Corp unveiled its cloud computing operating system, Apple’s new iPhone 4 got a less-than-stellar review from Consumer Reports, Weyerhaeuser announced a special $5.6 billion dividend, and BP Plc offered some upbeat news on progress in containing the Gulf of Mexico oil spill.

The Dow Jones Industrial Average rose 18 points (0.2%) to close at 10,216, the S&P 500 Index edged 1 point (0.1%) higher to finish at 1,079, and the Nasdaq Composite added 2 points (0.1%) to 2,198. In light volume, 855 million shares were traded on the NYSE and 1.8 billion shares were traded on the Nasdaq. Crude oil fell $1.14 to $74.95 per barrel, wholesale gasoline lost $0.04 to $2.03 per gallon, while the Bloomberg gold spot price declined $11.80 to $1,199.80 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.6% higher at 84.25.

After the closing bell, Dow component Alcoa (AA $11) unofficially kicked off 2Q earnings season by reporting EPS of $0.13 on revenues of $5.2 billion, above analysts’ forecasts for earnings of $0.12 per share on revenues of $5.03 billion.

In M&A activity, AON Corp. (AON $36) and Hewitt Associates Inc. (HEW $47) announced that they have come to a definitive agreement under which HEW will merge with a subsidiary of AON, in a $4.9 billion deal consisting of 50% cash and 50% AON stock, valuing HEW at $50 per share. After the deal closes, AON intends to integrate HEW with its existing consulting and outsourcing operations and operate under the newly created AON Hewitt brand. HEW was sharply higher, while AON was under solid pressure.

Dow member Microsoft Corp. (MSFT $25) moved higher after the company introduced its Windows Azure platform appliance, a cloud computing operating system —a method of storing data and applications at an offsite location. MSFT said Dell Inc. (DELL $13), ebay Inc. (EBAY $20), Fujitsu Ltd. (FJTSY $32) and fellow Dow component Hewlett Packard Co. (HPQ $46) are all early adopters of a limited production release of Azure.

In related industry news, shares of Apple Inc. (AAPL $257) were lower after the Wall Street Journal reported that Consumer Reports is saying that it can’t recommend the company’s new iPhone 4, due to persistent reception issues. The report said the product-review entity tested three iPhone 4’s and found that touching a spot on the left side of the phone can cause reception to “significantly degrade enough to cause you to lose your connection altogether if you’re in an area with a weak signal.”

Weyerhaeuser Co. (WY $39) was nicely higher after the forest product company announced a special dividend of $5.6 billion, marking a “major milestone” in the company’s plan to convert to a real estate investment trust (REIT) by distributing its earnings and profits to shareholders.

Shares of BP Plc (BP $37) moved higher as the company said it was making progress on a new system being deployed to contain the oil leak in the Gulf of Mexico. As well, several media outlets reported that the company may be mulling the sale of assets to help foot the bill for the containment and clean up of the oil spill. BP did not officially comment on the asset sale reports, and last week said that it will not issue new shares to help raise capital. But CNBC reported that the company has confirmed to the network that it is in substantive talks with potential buyers about selling some of its assets, and a spokesperson denied specifically that it is in discussions to be acquired by Dow member Exxon Mobil Corp. (XOM $59) as some reports have suggested.

Bernanke speaks but today’s US economic calendar was weak

Treasuries finished mostly unchanged as there were no major economic releases today. The yield on the 2-year note rose 1 bp to 0.65%, the yield on the 10-year note was flat at 3.06%, and the 30-year bond yield gained 1 bp to 4.05%. However, there was some Fedspeak that garnered some attention, headlined by Federal Reserve Chairman Ben Bernanke’s remarks at a small business forum this morning. Bernanke did not offer much in terms of updated economic assessment or any clues regarding the timing of any changes to monetary policy. The Fed Chief provided opening remarks at the forum, in which the discussion centers around next steps policymakers and stakeholders can take to ensure that small businesses are able to participate in and contribute to the economic recovery. Bernanke noted that small businesses are central to creating jobs—as they “employ roughly one-half of all Americans and account for about 60% of gross job creation.” He also pointed out that the formation and growth of small businesses depends critically on access to credit.

With the beginning of the economic week relatively quiet, the Street’s attention may revolve around the looming 2Q earnings season, which unofficially began with the release of Dow component Alcoa’s,report after the closing bell. 2Q earnings reports are not expected to be the main focus of this season, as traders will likely pay close attention to the corporate commentary that will accompany the reports, as well as the outlooks and guidance that will be delivered, looking for any clues suggesting what may be in store for the second-half of the year.

Little news in Europe to buoy sentiment, Japanese political landscape changes

Economic news across the pond was light, but offered some reports worth a mention. The UK’s 1Q GDP figure was left unrevised at a 0.3% expansion quarter-over-quarter (q/q), and a 0.2% contraction on a y/y basis, as expected. Elsewhere, Ireland reported that its industrial production increased 7.5% month-over-month (m/m) in May, versus a 9.7% drop in April, while Spain said its housing transactions increased 11.9% y/y in May, versus the 17.5% increase that was seen in April.

Further east, some political uncertainty surfaced in Japan after the ruling Democratic Party of Japan lost control of the upper house of Parliament yesterday. The results could hamper Prime Minister Kan’s ability to pass legislation, but the nation’s equity markets showed a muted reaction. In China, the government reported that its trade balance unexpectedly rose, led by a 43.9% jump in exports in June year-over-year (y/y), down from the 48.5% that was posted in May but above the 38% growth that economists had expected. Imports rose 34.1% y/y for June compared to the 35.4% increase that was anticipated. Other reports showed new yuan loans for June came in at 603.4 billion yuan, compared to the 600 billion yuan forecast and the 639.4 billion that was seen in the prior month, while the nation’s money supply rose by a smaller rate than forecasted and a report showed the pace of growth in housing prices slowed. Elsewhere, a report showed Australian home loans unexpectedly increased, and India’s industrial production rose by a smaller amount than forecasted.

The only report on tomorrow’s US economic calendar will be May’s trade balance, forecasted to narrow to a $39.0 billion deficit, from the $40.3 billion gap reported in April. However, the international docket will hold plenty of reports including industrial production from Japan, Switzerland’s employment figures, CPI numbers out of France, Spain and the UK, as well as the UK’s retail price index, while Germany will release its ZEW economic survey.