Morning Market Update

Earnings Enthusiasm Excites Equities

The US markets are moving higher in early trading on the heels of better-than-expected earnings reports from Dow member Alcoa Inc and railroad firm CSX Corp, while an upbeat outlook from fellow Dow component Chevron Corp is also helping 2Q earnings season sentiment. European markets are also benefitting from the favorable start to earnings season in the US, as stocks are nicely higher across the pond despite a disappointing reading of German economic sentiment. Treasuries are modestly lower in morning action, showing little reaction to a wider-than-forecasted US trade deficit report. In other overseas trading, Asia finished mostly lower, with China’s Shanghai Composite Index coming under pressure from the government reiterating its pledge to keep property speculation under control, but the aforementioned US earnings helped limit losses in other areas of the Asia/Pacific region.

As of 8:47 a.m. ET, the September S&P 500 Index Globex future is 11 points above fair value, the Nasdaq 100 Index is 17 points above fair value, while the DJIA is 85 points above fair value. Crude oil is up $0.98 at $75.93 per barrel, and the Bloomberg gold spot price is up $14.08 at $1,210.93 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% at 84.15.

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.

Fellow Dow component Chevron Corp. (CVX $72) 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.

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.

Trade deficit unexpectedly widens

The trade deficit (chart) 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. Treasuries are modestly lower, showing little reaction to the trade report.

Europe moving higher despite disappointing German data and Portugal downgrade

Stocks in Europe are nicely higher in afternoon action, led by industrials and materials, aided by strong earnings results in the US, which are helping overshadow a downgrade of Portugal’s credit rating by Moody’s Investors Service, citing increased debt levels and a weak economic growth outlook for the nation. A successful debt auction in Greece is helping traders stomach the Portugal downgrade. Also aiding the advance, shares of luxury automaker BMW (BAMXY $16) are moving solidly higher after it offered an upbeat 2010 sales forecast.

The economic front is providing 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.

The FTSE 100 Index and France’s CAC-40 Index are up 1.8%, Germany’s DAX Index is gaining 1.7%, Spain’s IBEX 35 Index is advancing 1.4%, Sweden’s OMX Stockholm 30 Index is rising 2.7%, and Portugal’s PSI 20 Index is increasing 0.6%.

Asia mostly lower on China concerns

Stocks in Asia were mostly lower, led by equity markets in China after the government said it will “strictly enforce” the measures that it has deployed to curb property speculation, per Bloomberg News. China’s Shanghai Composite Index was 1.6% lower on the news, leading the decline in the region. However, moves in other stock markets in Asia were more muted, with Hong Kong’s Hang Seng Index dipping 0.2%, Japan’s Nikkei 225 Index down 0.1%, while South Korea’s Kospi Index managed to increase a slight 0.1%. Elsewhere, Australia’s S&P/ASX 200 Index fell 0.7% and Taiwan’s Taiex Index dropped 0.6%. In equity news in Asia, shares of Infosys Technologies (INFY $63) came under pressure after the Indian technology services company posted quarterly profits that fell short of analysts’ forecasts. However, India’s BSE Sensex 30 Index managed to overcome the disappointing profit report and finished 0.3% higher.

On the economic front in Asia, a report that depicted business conditions in Australia improved in June, while a separate report showed business confidence deteriorated. 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.