Evening Market Update

New Home Sales Report Lifts Bulls’ Spirits

Stocks began the trading week on a high note, adding to last week’s solid gains, following an unexpected jump in new home sales and better earnings expectations from FedEx. Elsewhere on the equity front, Dow member IBM is under an antitrust probe by the European Union, cigarette maker Lorillard reported better-than-expected 2Q results, and BP Plc’s embattled CEO may be stepping down. In healthcare news, Onyx Pharmaceuticals announced favorable results from a study of its blood cancer drug, and Genzyme may have caught the attention of another possible suitor. Despite the positive housing report, Treasuries finished nearly unchanged.

The Dow Jones Industrial Average rose 101 points (1.0%) to close at 10,525, the S&P 500 Index gained 12 points (1.1%) to finish at 1,115, and the Nasdaq Composite posted a 27 point (1.2%) increase to 2,296. In modest volume, 1.0 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil was unchanged at $78.98 per barrel, wholesale gasoline lost $0.01 to $2.11 per gallon, and the Bloomberg gold spot price decreased $7.55 to $1,181.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.7% lower at 82.03.

FedEx Corp. (FDX $83) was solidly higher after the company increased its fiscal 1Q and full-year EPS guidance, saying its revenue and earnings growth are “exceeding original expectations,” primarily due to better-than-expected growth in its express and ground volumes. FDX said it expects 1Q EPS to be in range of $1.05-1.25, compared to its previous forecast of between $0.85-1.05, while its full-year earnings outlook is anticipated to come in a range of $4.60-5.20 per share, up from $4.40-5.00. Analysts surveyed by Reuters expected the company to post 1Q EPS of $1.00 and full-year EPS of $4.96.

The European Commission announced that it has initiated formal investigations against Dow member International Business Machines Corp. (IBM $128) in two separate cases of alleged infringements of EU antitrust rules related to the abuse of a dominant market position. Both cases are related to IBM’s conduct on the market for mainframe computers, with the first case following complaints by software vendors T3 and Turbo Hercules, focusing on IBM’s alleged tying of mainframe hardware to its mainframe operating system. The second is an investigation begun on the Commission’s own initiative of IBM’s alleged discriminatory behavior towards competing suppliers of mainframe maintenance services. IBM said it will fully cooperate with the European Union’s probe and there is no merit to the claims being made by T3 and Turbo Hercules, who IBM said were “satellite proxies” of Dow member Microsoft Corp. (MSFT $26). Despite the report and spending most of the day lower, IBM finished nearly flat on the day.

Lorillard Inc. (LO $77) reported 2Q EPS of $1.73, above the $1.61 Reuters estimate, with revenues at the cigarette maker coming in flat year-over-year (y/y) at $1.5 billion, roughly inline with analysts’ forecasts, but sales excluding excise taxes were $1.04 billion. The company said its domestic wholesale shipments decreased 0.6% y/y, compared to a 7.1% drop in total domestic industry wholesale shipments, and its Newport brand gained domestic retail market share. Shares were higher.

Onyx Pharmaceuticals Inc. (ONXX $26) was sharply higher after the company announced positive top-line results from a study of its drug to treat patients with relapsed and refractory multiple myeloma. ONXX said its blood cancer treatment called carfilzomib achieved a 24% overall response rate and a duration of response exceeding seven months in patients.

After the Wall Street Journal reported last Friday that France-based pharmaceutical company Sanofi-Aventis (SNY $30) made an “informal acquisition approach” toward Genzyme Corp. (GENZ $67), the business newspaper is saying that British firm GlaxoSmithKline Plc. (GSK $37) has “casually” approached the US biotechnology firm about a takeover, a move that could spark a bidding war. GSK did not comment on the report. On a separate note, SNY cut its earnings forecast after US regulators approved a generic version of its blood thinning drug Lovenox. GSK and SNY were higher, while GENZ added another 7% to the over 15% jump it saw after Friday’s report.

CNBC is reporting that embattled BP Plc. (BP $39) CEO Tony Hayward will step down from the oil firm’s top post and take a position with TNK-BP, a joint venture in Russia, citing a person familiar with the matter. The company has come under solid pressure amid the fallout from the massive oil leak in the Gulf of Mexico, and it is reported that managing director Robert Dudley will likely succeed Hayward. BP did not comment on the story. Shares of BP were higher.

New home sales surge to start the economic week

New home sales for the month of June jumped 23.6% month-over-month (m/m) to an annual rate of 330,000 units, well above the forecasted increase of 4.0% to an annual rate of 310,000 units. May’s figure was downwardly revised to an annual rate of 267,000 units, from an original rate of 300,000 units. The median sales price of new homes sold during the month was $213,400, and at the current sales pace, the supply of new homes is 7.6 months. One month does not make a trend and June’s figure follows the record low level in May, but the report should soothe some concerns that a relapse in the housing downturn could hurl the economy back into a recession.
The report follows last week’s existing home sales report, which showed sales in June declined by a smaller amount than forecasted to add some optimism regarding the health of the sector. Housing data will continue tomorrow, with the reading of the S&P/CaseShiller Home Price Index, which lags the sales data by a month, and is forecasted to rise 3.9% y/y, and increase 0.2% m/m in May. The only other item on tomorrow’s US economic calendar will be consumer confidence.

Treasuries finished nearly flat despite the surge in new home sales. The yield on the two-year note gained 1 bp to 0.59%, the yield on the 10-year note lost 1 bp to 2.99% and the yield on the 30-year bond was unchanged at 4.02%.

Europe reacts to bank stress tests

Traders across the pond reacted for the first time to Friday’s release of the results of the European banking industry stress tests with most markets finishing in positive territory. The results showed that seven of the ninety-one institutions that were put through adverse scenarios failed to achieve the required capital levels deemed sufficient by the Committee of European Banking Supervisors (CEBS)—five Spanish banks, along with one German institution and a Greek firm. However, concerns that the adverse scenarios that were simulated during the tests were not rigorous enough remain prevalent, as some expressed disappointment that the tests did not include a sovereign debt default scenario and the overall shortfall of capital of banks that failed totaled only 3.5 billion euros.

Economic news in the region was relatively light, with a report showing mortgages on houses in Spain fell in May, Sweden’s trade surplus increased much more than economists’ forecasts, and a housing survey in the UK declined for July.

In Asia/Pacific news, a Japanese report showed the nation’s trade surplus expanded in June, but slightly below economists’ expectations, while South Korea’s 2Q GDP rose 1.5% quarter-over-quarter (q/q) compared to the 1.3% expansion that was anticipated, while on a year-over-year (y/y) basis, the nation’s output expanded by 7.2%, above the 6.9% forecast. Elsewhere, Australia reported that producer prices for 2Q increased by an amount that was below expectations on both the q/q and y/y time frames.

Tomorrow’s international economic calendar will be light and include import prices, retail sales and consumer confidence from Germany, while Australia will report CPI.