Evening Market Update

Encouraging Start to 2Q Earnings Season Excites the Bulls

Stocks finished nicely higher on the day, posting a triple-digit gain on the Dow, following a better-than-expected profit report from Dow member Alcoa, along with an upbeat outlook from fellow Dow component Chevron Corp. As well, CSX Corp beat the Street and provided upbeat commentary to add to the sentiment. The positive start to 2Q earnings season overshadowed a downgrade of Portugal’s credit rating by Moody’s Investors Service to start the day, also aiding stocks overseas. Despite showing little early reaction to a wider-than-forecasted US trade deficit report and a drop in small business confidence, Treasuries were mostly lower. In other news on the equity front, Tyco Electronics announced it will acquire ADC Telecommunications for about $1.25 billion.

The Dow Jones Industrial Average rose 147 points (1.4%) to close at 10,363, the S&P 500 Index increased 17 points (1.5%) to finish at 1,079, and the Nasdaq Composite gained 44 points (2.0%) to 2,242. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil rose $2.20 to $77.15 per barrel, wholesale gasoline added $0.05 to $2.08 per gallon, while the Bloomberg gold spot price gained $14.15 to $1,211.00 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.8% lower at 83.58.

Dow member Alcoa Inc. (AA $11) unofficially kicked off 2Q earnings season by reporting EPS of $0.13, one penny above the Reuters estimate, with revenues increasing 6% quarter-over-quarter (q/q) to $5.2 billion, also above the $5.03 billion that analysts were expecting. The aluminum producer said stronger volumes, productivity improvements, favorable currency and lower energy costs more than offset slightly lower average realized metal prices. AA said revenues were supported by a 4% increase in aluminum shipments and a 1% increase in third-party prices for alumina. The company also increased its outlook for worldwide aluminum consumption growth this year as it expects higher demand on improved end-market demand. Shares were higher.

Fellow Dow component Chevron Corp. (CVX $73) announced that earnings for 2Q are “expected to be higher than in the first quarter.” CVX said its upstream earnings—exploration—are projected to be inline with 1Q results, while its downstream—refining—earnings are forecasted to be “significantly higher” than 1Q. CVX traded higher.

CSX Corp (CSX $52) was the first railroad company to report 2Q earnings, posting $1.07 per share, nine cents above the Street’s forecast, with revenues jumping 22% year-over-year (y/y) to nearly $2.7 billion, compared to the $2.6 billion that analysts were forecasting. The company said while the economy remains dynamic, its markets overall continue to improve, and its outlook remains positive. CSX added that it experienced volume gains across all major markets. However, shares gave up an early gain and were lower.

In M&A news, Tyco Electronics Ltd. (TEL $26) and ADC Telecommunications Inc. (ADCT $13) announced that they have reached a definitive agreement under which TEL will acquire ADCT for $12.75 per share in cash, or a value of approximately $1.25 billion. TEL said the deal will be accretive to EPS by about $0.14 in the first full year after it closes and will position its network solutions segment as a leading global provider of broadband connectivity products. Shares of both firms finished higher.

Trade deficit unexpectedly widens, and small business confidence falls

The trade deficit widened from an unrevised $40.3 billion in April to $42.3 billion in May, versus the Bloomberg estimate calling for the deficit to decrease to $39.0 billion.

In other economic news, the NFIB Small Business Optimism Index declined more than expected, falling from 92.2 in May to 89.0 in June, compared to the expectation of economists, which called for the index to decline to 91.2. The larger-than-anticipated decline came as the number of firms reporting plans to hire remained weak and those expecting the economy to improve fell. Also weighing on the reading, firms planning to increase capital spending declined, along with components denoting easing of credit conditions and positive earnings trends.

Treasuries showed little initial reaction to the trade and small business optimism reports, but finished mostly lower as equities gained ground. The yield on the 2-year note was flat at 0.65%, while the yields on both the 10-year note and 30-year bond rose 4 bps to 3.11% and 4.10%, respectively.

Moody’s downgrades Portugal, ZEW Survey falters

Moody’s Investors Service downgraded Portugal’s credit rating by two notches to A1, noting the nation’s increased debt levels and saying the weak economic growth outlook “are likely to remain relatively weak unless recent structural reforms bear fruit over the medium-to-long term.” In other debt-related news overseas, Greece sold 1.625 billion euros of 26-week Treasury bills at a yield of 4.65%, below the 5% the European Union charged in bailing out the country, successfully gathering interest shown by a bid-to-cover ratio of 3.64.

The economic front provided a plethora of data for traders to digest, headlined by a larger-than-expected deterioration in the ZEW Survey of Economic Sentiment in Germany—Europe’s largest economy—which fell from 28.7 in June to 21.2 for July, compared to the decline to 25.3 that economists were expecting. Inflation data was also prevalent across the pond, highlighted by hotter-than-anticipated readings on consumer and retail prices in the UK, an unexpected drop in German wholesale prices, a flat reading of France’s consumer prices, while Spain’s gauge of consumer prices ticked higher to match expectations of economists, but the core rate of consumer prices in Spain unexpectedly increased. In other economic news, Sweden’s unemployment rate moved higher to 4.8% in June, as expected, and a reading on UK housing prices rose more than expected.

In the Asia/Pacific region, China’s government said it will “strictly enforce” the measures that it deployed in order to curb property speculation, per Bloomberg News. Elsewhere, a report showed that business conditions in Australia improved in June, while a separate reading denoted deterioration in business confidence. Additionally, Japan’s industrial production came in at a 0.1% rate of growth for the final revision for May, compared to a previous reading of a 0.1% decline, while Japanese capacity utilization increased 0.8%. Moreover, a separate report showed Japanese consumer confidence improved for June.

FOMC meeting minutes on tap

Tomorrow the US economic calendar will heat up with several reports headlined by the release of advance retail sales for June, forecasted to decline 0.3%, while excluding autos, sales are expected to dip 0.1%. Headline retail sales dropped in May, the first decline since September 2009, and retailers’ same-store sales—sales at stores open at least a year—were mixed for the month of June, as Target Corp. (TGT $50) posted disappointing results on soft sales of electronics and video games and music and movies, while apparel sales allowed J.C. Penney Co. Inc. (JCP $23) to report better-than-expected results. Continued weak employment conditions and depleted household net worth are keeping consumers—who account for the lion’s share of the economy—clutching their purse strings, which is keeping the outlook for the continued economic recovery uncertain. Constrained consumer spending and inflation pressures remaining subdued are some reasons the Federal Reserve said economic conditions are likely to warrant “exceptionally low” levels of its benchmark interest rate for an “extended period.”

Tomorrow’s other key release on the US economic calendar will provide further detail on how the Fed feels about the economy, with the release of the Federal Open Market Committee’s (FOMC) minutes from last month’s monetary policy meeting, where it left the fed funds rate unchanged at 0.00—0.25%, while reiterating the aforementioned language. Focus on the report will likely be on discussion related to the its slightly downgraded economic assessment in the FOMC’s policy statement that accompanied its interest rate decision last month, where it acknowledged the “developments abroad” and said financial conditions have become less supportive of economic growth. Other areas of interest in the Fed’s release may be on discussions regarding appropriate timing for an interest rate increase and when the Fed may begin to scale back its balance sheet, and if any other policymakers moved closer to joining Thomas Hoenig, who was the lone Committee member to vote against the Fed’s policy action for the fourth-straight meeting.

Also on tomorrow’s docket, business inventories for June are forecast to rise 0.2% following a 0.4% increase the month prior, and MBA Mortgage Applications will be released.

Internationally, Italy will report CPI, the UK will release employment figures, and the euro-zone will also provide CPI numbers as well as industrial production.