Morning Market Update

Modest Pressure in Morning Action

The US equity markets are under modest pressure in morning trading, following yesterday’s gains, which were somewhat disappointing as stocks pared a large portion of a solid advance as a disappointing service sector report added to the recent string of data that has dampened the outlook for the global recovery. The equity and economic calendars are lighter than normal, and the lack of any catalyst to spur conviction could lead to some lackluster action. Treasuries are modestly lower in morning trading, giving up slight gains that followed another refinancing-fueled rise in mortgage applications, which is today’s lone report on the US economic docket. In equity news, Family Dollar Stores Inc posted better-than-expected profits, but offered disappointing guidance, while State Street Corp issued EPS guidance that exceeded analysts’ projections. Overseas, Asia slipped following the modest gains in the US, while some disappointing economic and equity reports are weighing on Europe.

As of 8:51 a.m. ET, the September S&P 500 Index Globex future is 1 point below fair value, the Nasdaq 100 Index is 2 points below fair value, while the DJIA is 7 points below fair value. Crude oil is up $0.79 at $72.77 per barrel, and the Bloomberg gold spot price is flat at $1,192.60 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.3% at 84.29.

Family Dollar Stores Inc. (FDO $39) 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.

State Street Corp. (STT $33) 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.

Mortgage applications buoyed by refis again

Treasuries are modestly lower in morning trading as the economic calendar is relatively light, with the lone release on today’s US docket being a 6.7% increase in the US 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.

Housing starts fell 10% in May while building permits fell 5.9%. Even more telling of the effects of the tax-credit expiration, single family housing starts fell 17.2%—the biggest decrease since 1994. However, Liz Ann and Brad believe demand will start to rebound heading into fall. Mortgage rates remain low, prices have dropped substantially and confidence seems to be building.

Europe lower as data continues to disappoint

Stocks in Europe are under some pressure in afternoon action, as yesterday’s disappointing US service sector data, coupled with an unexpected decline in a gauge of factory demand in Germany—Europe’s largest economy—are preserving some uneasiness toward the global economic recovery. Basic materials and industrials are leading the decline across the pond, following a 0.5% drop in German factory orders 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. In other economic news, 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 y/y basis. Also, euro-zone household consumption in 1Q remained unrevised at a 0.1% contraction. Rounding out the day on the European economic calendar, France’s trade deficit unexpectedly widened in May.

The equity front is offering little help to sentiment and the materials sector, with shares of CRH Plc. (CRH $21) falling solidly after the Irish building materials firm posted disappointing first-half profits, and offered a disappointing full-year sales forecast. Meanwhile, British retailer Marks & Spencer Group Plc. (MAKSY $11) is under pressure to weigh on the equity markets after the company offered some cautious commentary regarding consumer confidence, which are overshadowing its better-than-expected 1Q sales guidance.

The UK FTSE 100 Index is down 0.6%, France’s CAC-40 Index is 0.7% lower, Germany’s DAX Index is declining 0.5%, and Ireland’s Irish Overall Index is dropping 3.5%.

Asia declines after yesterday’s strong day

Stocks in Asia gave back some of yesterday’s solid gains following the disappointing day in the US, which saw a triple-digit rally pared by a larger-than-expected decline in a gauge of the US service sector and a lack of conviction among traders regarding the economic recovery. Japan’s Nikkei 225 Index and South Korea’s Kospi Index both declined 0.6% amid the aforementioned uneasiness, which weighed on shares of Samsung Electronics Co. (SSNLF $656) even after the memory chip firm issued better-than-expected 2Q profit guidance. Meanwhile, Chinese stocks were mixed with Hong Kong’s Hang Seng Index decreasing 1.1%, while the Shanghai Composite Index rose 0.5%. The Asian economic calendar was light, with the lone release worth a mention being a reading on construction in Australia, which the AiG Construction Index declined from 53.2 in May to 46.4 in June, with a reading below 50 depicting contraction in the industry. The Australian S&P/ASX 200 Index declined 0.5%. Elsewhere, Taiwan’s Taiex Index dipped 0.2% and India’s BSE Sensex 30 Index decreased 0.8%.