Morning Market Update

Downward Move Before Earnings Get Into the Groove

The US equity markets are under some pressure in morning action to begin the week, ahead of the unofficial launch of 2Q earnings season, with Dow member Alcoa’s profit report due out after today’s closing bell. Treasuries are modestly higher in early action, with no major US releases scheduled for today, but Fed Chief Ben Bernanke will give some remarks to a small business forum just after the opening bell. Equity news is also light in early trading, as AON Corp and Hewitt Associates Inc agreed to merge in a deal worth about $4.9 billion in cash and stock. Meanwhile, overseas, Asia finished mixed after Japan’s ruling party lost control of both houses of Parliament, while China finished higher as traders digested some economic data in the region. Moreover, European markets are gaining slight ground in afternoon trading.

As of 8:46 a.m. ET, the September S&P 500 Index Globex future is 5 points below fair value, the Nasdaq 100 Index is 4 points below fair value, while the DJIA is 34 points below fair value. Crude oil is up $0.06 at $76.15 per barrel, and the Bloomberg gold spot price is down $5.90 at $1,205.70 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.4% at 84.29.

M&A activity is headlining a light slate of corporate news this morning, with AON Corp. (AON $38) and Hewitt Associates Inc. (HEW $35) announcing 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.

Bernanke speaks and today’s economic calendar is weak

Treasuries are modestly higher in morning action as the economic calendar is void of any major releases today, but there is some Fedspeak that may grab some attention, headlined by Federal Reserve Chairman Ben Bernanke’s remarks at a small business forum this morning. Bernanke will speak from prepared text and there will be no Q&A session to follow.

With the beginning of the economic week relatively quiet, the Street’s attention may revolve around the looming 2Q earnings season, which will unofficially begin after today’s closing bell with the release of Dow component Alcoa (AA $11), forecasted to post EPS of $0.12, on revenues of $5.03 billion. 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.

The economic calendar will heat up on Wednesday with advance retail sales, forecasted to fall 0.3% month-over-month (m/m) in June, after declining 1.2% in May, while sales ex-autos are estimated to be flat in June after decreasing 1.1% in May. Same-store sales results —sales at stores open at least a year—reported by retailers were mixed and marked by steeper than usual discounts. The retail sales report includes spending at supermarkets and gas stations.

Moreover, traders will be closely monitoring the Federal Reserve’s release of the minutes from the June Federal Open Market Committee (FOMC) meeting mid-day Wednesday. There were no changes to interest rates at the meeting, but the Fed downgraded its assessment of the economy stating that financial market conditions were “less supportive” of economic growth, noting the debt crisis in Europe. Additionally, the Fed said that underlying inflation had trended lower and that bank lending had continued to contract. However, Kansas City Fed President Thomas Hoenig dissented for the fourth-straight meeting, stating that a “commitment” to keeping rates exceptionally low for an extended period could result in future imbalances and increase risks to longer-run macroeconomic and financial stability. While the Fed effectively expanded its balance sheet by re-opening dollar swap lines in response to the European debt crisis, Fed Governor Kevin Warsh said in a June speech that any further balance sheet expansion should be subject to strict scrutiny.

Other releases on the US economic calendar include the Producer and Consumer Prices Indexes, the Import Price Index, industrial production and capacity utilization, the Empire Manufacturing Index, MBA Mortgage Applications, business inventories, initial jobless claims, the Philadelphia Fed’s Business Activity Index, and the University of Michigan Consumer Sentiment Index.

Europe moving modestly higher

Stocks in Europe are modestly higher in afternoon trading with economic and equity news on the light side, but oil & gas issues are moving solidly higher, led by an advance in shares of BP Plc. (BP $34) as the company said it was making progress on a new system being deployed to contain the oil leak in the Gulf of Mexico. Also, BP is gaining ground on several media reports 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 has not commented on the asset sale reports, but last week said that it will not issue new shares to help raise capital. However, basic materials are posting a decline to bog down the equity markets across the pond, following a smaller-than-expected increase in Chinese imports. In other equity news, Volkswagen (VLKAY $18) is higher after the automaker said its sales in China jumped 46% year-over-year (y/y) in the first half of the year.

In economic news, 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. 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.

The UK FTSE 100 Index is 0.2% higher, France’s CAC-40 Index is up 0.2%, Germany’s DAX Index is gaining 0.3% and Ireland’s Overall Index is advancing 0.1%, while Spain’s IBEX 35 Index is dropping 1.1%.

Asia mixed as Japan declines following election

Stocks in Asia finished mixed with Japan’s Nikkei 225 Index declining 0.4% as 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 equity markets showed a muted reaction. However, stocks in China moved higher as traders digested some economic data that was released over the weekend. The Chinese 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 came in at 603.4 billion for June, 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. Hong Kong’s Hang Seng Index increased 0.4% and the Shanghai Composite Index rose 0.8%. In other economic news, Australia’s S&P/ASX 200 Index gained 0.3% following a report that showed Australian home loans unexpectedly increased, and India’s BSE Sensex 30 Index advanced 0.6% despite a smaller-than-forecasted increase in industrial production. Elsewhere, Taiwan’s Taiex Index dipped 0.1% and South Korea’s Kospi Index moved 0.6% higher.