Evening Market Update

Bank Shortfalls and Drop in Sentiment Lead Bulls into Stalls

US equity markets continue to trade solidly lower on Friday with the Street reacting negatively to some better-than-expected profit reports from Bank of America Corp and Citigroup Inc, as disappointing trading revenues and concerns about loan demand are overshadowing continued improvements in credit losses. Meanwhile, General Electric Co also topped analysts' earnings expectations, but Google Inc and Mattel Inc both missed bottomline expectations. In other US equity news outside of the earnings front, Goldman Sachs Group Inc confirmed late-day reports yesterday that it has settled an SEC fraud case, paying a record $550 million, while Vivus Inc received a rejection by a FDA panel of its weight-loss drug. Treasuries continue to trade higher, following a steeper-than-forecasted drop in the University of Michigan's Consumer Sentiment Index, after showing little reaction to another subdued inflation report. Overseas, Europe gave up an afternoon advance and finished lower, even after BP Plc announced that it has temporarily capped the Gulf of Mexico oil leak.

At 1:00 p.m. ET, the Dow Jones Industrial Average is down 2.1%, the S&P 500 Index is 2.4% lower, and the Nasdaq Composite is dropping 2.5%. Crude oil is down $1.03 at $75.59 per barrel, wholesale gasoline is off $0.03 at $2.04 per gallon, and the Bloomberg gold spot price is down by $17.88 at $1,190.38 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-is up 0.2% at 82.56.

Dow component Bank of America Corp. (BAC $14 ¹) posted 2Q EPS of $0.27, above the $0.22 that analysts were anticipating, with revenues net of interest expense dropping 11% y/y to $29.2 billion, compared to the $29.8 billion that was forecasted by the Street. BAC said its results were driven by lower credit costs, which improved for the fourth-straight quarter, with its provision for credit losses-earmarked capital to help absorb losses-falling from $13.4 billion a year ago to $8.1 billion in 2Q. However, shares are under solid pressure as analysts are noting concerns about the firm’s trading results and the near-term outlook for demand for loans.

Meanwhile, Citigroup Inc. (C $4) announced 2Q earnings of $0.09 per share, four pennies above what was forecasted by analysts, with revenues falling 26% y/y to $22.1 billion, roughly inline with the consensus estimate of analysts. The company said its provisions for credit losses and for benefits and claims declined by $2.0 billion versus last quarter to $6.7 billion-the lowest level since 3Q 2007. C is trading to the downside, also on concerns about weak loan demand and lower revenue from its securities and banking segment. The company said economic conditions remain challenging and global regulatory frameworks are uncertain.

Dow member General Electric Co. (GE $15 ¹) reported 2Q EPS of $0.30, three cents above the Reuters estimate, with revenues declining 4% year-over-year (y/y) to $37.4 billion, short of the $38.2 billion that the Street had expected. The company said its economic environment continues to improve on growth in orders, with equipment orders increasing 17%, including growth in its energy infrastructure and technology infrastructure segments. The company added that its GE Capital subsidiary delivered over 90% growth in net income as "losses have peaked and earnings are rebounding." GE is lower.

Elsewhere on the earnings front, Google Inc. (GOOG $469) released its 2Q results, which showed the world's largest internet search engine posted profits excluding items of $6.45 per share, but that was shy of the $6.50 that was expected. Revenues, excluding traffic acquisition costs (TAC), came in at $5.09 billion, above the Reuters estimate, excluding TAC, of $4.99 billion. GOOG is down about 5%.

Goldman Sachs Group Inc. (GS $148) confirmed that it has agreed to a settlement with the US Securities and Exchange Commission (SEC) to resolve the SEC's pending case against the firm, which alleged that GS misled investors relating to a subprime mortgage financial security. GS will have to pay a record $550 million to settle the charges and the company said it entered into the settlement without admitting or denying the SEC's allegations. GS is higher.

Mattel Inc. (MAT $21) is under solid pressure after the toy company reported 2Q EPS of $0.14, one penny below the Street's forecasts, with revenues increasing 13% y/y to $1.02 billion, roughly inline with expectations. On a conference call with analysts, the company's CEO said, "We remain cautious and conservative and retailers remain cautious and conservative."

Vivus Inc. (VVUS $5) is down over 50% after a US Food and Drug Administration (FDA) panel rejected its experimental weight-loss drug Qnexa, voting that based on current available data the overall benefit-risks to patients were not favorable to support it's approval for the treatment of obesity. VVUS said it is disappointed with the vote and it will closely work with the FDA to address the safety questions raised during yesterday’s proceedings.

Consumer prices remain benign, consumer sentiment falls

The Consumer Price Index showed prices at the consumer level were down 0.1% in June month-over-month (m/m), matching the forecast of economists, after falling 0.2% in May. Meanwhile, the core rate, which strips out food and energy, rose 0.2% in June after rising 0.1% in May, just above the estimate of a 0.1% increase. On a year-over-year basis, consumer prices were up 1.1% in June, down from the 2.0% rate in May, and the core CPI was 0.9% higher y/y for the third month in a row. The index for energy declined 2.9% to contribute to the dip in the headline reading, with gasoline accounting for the bulk of the decrease. Meanwhile, the slight increase in the core rate came amid a broad-based increase in all items excluding food and energy, which offset declines in the index for household furnishings.

The report follows yesterday's Producer Price Index release, which also gave no indication of inflation posing a threat anytime soon, and the Federal Reserve reduced its outlook for inflation, in response to lower oil and other commodity prices, the strength in the US dollar, and greater amount of economic slack in the Fed’s forecast. The Fed also noted that risks to its forecast are on the downside and that it had broached the subject of the risk of deflation at its last policy meeting in June, allowing it to focus on the other side of its dual mandate of promoting full employment.

In other economic news, the preliminary University of Michigan's Consumer Sentiment Index fell more than forecasted on Friday, deteriorating from 76.0 in June to 66.5 for July, well below the decline to 74.0 that was expected. This was the lowest reading since August 2009, led by solid declines in both the economic condition and outlook components of the survey. The report also revealed that inflation expectations for both the one-year and five-year time horizon’s ticked higher from 2.8% to 2.9%.

Treasuries are in the green, after turning higher following the consumer sentiment release after showing little reaction to the consumer inflation report.

Europe gave up early gains on a disappointing reaction to US data

Stocks in Europe erased an afternoon advance and traded lower as gains in basic materials and oil and gas issues evaporated amid the disappointing reaction to a slew of US financial earnings reports and a larger-than-forecasted drop in US consumer sentiment. However, BP Plc. (BP $39) remained higher to limit losses after it announced that it has at least temporarily stopped the oil leak in the Gulf of Mexico. BP said it is analyzing data from a pressure test after it placed a containment cap on the leaking well to try to determine if it can remain sealed. BP said even if no oil is released during the test, this will not be an indication that oil and gas flow has been permanently stopped. BP also got a boost from reports that the company is close to announcing a deal to sell some of its assets, although BP has not confirmed that reports. In other equity news, shares of fertilizer firm Yara International (YARIY $35) were nicely higher to help minimize the damage, following its better-than-expected 2Q profit report.

Economic news across the pond was relatively light, with the euro-zone trade balance coming in at a larger-than-anticipated deficit, while Italy's trade deficit widened, and Spain reported that its 2Q home prices fell 0.9% quarter-over-quarter (q/q).

The FTSE 100 Index finished 1.0% lower, France's CAC-40 Index was down 2.3%, Germany's DAX Index declined 1.8%, Italy's FTSE MIB Index decreased 1.6%, and Spain's IBEX 35 Index dropped 1.7%.