Morning Market Update

Advance Wanes, Mixed Tech Results Move Bulls Back to Fence

Stocks have given up early gains that came from carried over optimism following yesterday’s resilience in the US, and as Apple Inc blew away the Street’s profit and revenue projections, while Morgan Stanley and Wells Fargo both exceeded earnings estimates, along with Dow members Coca-Cola and United Technologies. Technology issues are lagging behind to contribute to the late-morning slippage, with Yahoo Inc posting a solid drop on soft revenues and disappointing 3Q guidance. Treasuries have erased early losses and are higher as traders may be treading cautiously ahead of the afternoon semi-annual testimony from Federal Reserve Chairman Ben Bernanke in front of the Senate. The markets showed little reaction to an increase in mortgage applications on a record low 30-year fixed mortgage rate. Overseas, Asia was mixed, while Europe is nicely higher on some favorable earnings and M&A activity across the pond.

At 11:04 a.m. ET, the Dow Jones Industrial Average is flat, the S&P 500 Index is 0.1% lower, and the Nasdaq Composite is declining 0.4%. Crude oil is down $0.55 at $77.03 per barrel, wholesale gasoline is unchanged at $2.08 per gallon, and the Bloomberg gold spot price is up by $0.93 at $1,192.98 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.2% at 82.99.

Apple Inc. (AAPL $257) reported fiscal 3Q EPS of $3.51, well above the $3.12 Reuters estimate, with revenues jumping 61% year-over-year (y/y) to $15.7 billion, also above estimates, which called for revenues of $14.8 billion. The company said it sold 3.47 million Macs during the quarter—a new quarterly record and a 33% y/y gain—while it also sold 8.4 million iPhones, a 61% y/y increase, and 9.41 million iPods, an 8% y/y decline. Also, AAPL started selling its iPads during the quarter, and sales totaled 3.27 million units. In typical fashion AAPL reported conservative guidance, with its 4Q EPS outlook missing the Street’s forecast. Shares are higher.

However, Yahoo Inc. (YHOO $14) is under solid pressure after the world’s number-two internet search engine recorded 2Q revenues excluding traffic acquisition costs (TAC) of $1.1 billion, which came in below the $1.2 billion that the Street was expecting. The revenue shortfall is overshadowing the company’s better-than-anticipated 2Q EPS of $0.15, which topped forecasts of analysts by one penny. YHOO also provided disappointing 3Q guidance.

Meanwhile in the banking industry Morgan Stanley (MS $27) posted 2Q EPS ex-items of $0.80, well above the $0.48 that analysts were forecasting, with revenues gaining 54% y/y to $8 billion topping the $7.9 billion forecast. MS posted better-than-expected trading results, which where not impacted as much from the “challenging” markets during the quarter as analysts had braced for, with its equities trading besting the performance that rival Goldman Sachs Group Inc. (GS $149) reported yesterday. But the financial firm did say that it still has a “great deal of work to do” and it anticipates that the difficult market environment may continue in the months ahead. Elsewhere, Wells Fargo & Co. (WFC $27) reported adjusted 2Q earnings of $0.55 per share, six cents above the Street’s forecast, with revenues of $21.4 billion roughly inline with analysts’ estimates. WFC’s performance came as the company saw a “significant improvement in credit quality” with loan losses declining 16% quarter-over-quarter (q/q) and delinquent loan trends improving in many of its portfolios. MS and WFC are both nicely higher.

In earnings reports within the Dow components, Coca-Cola Co.(KO $54) announced 2Q EPS ex-items of $1.06, above the $1.03 consensus estimate, with revenues increasing 5% y/y to $8.7 billion, matching forecasts. The beverage company said its worldwide volume growth was 5%, which is ahead of its long-term target. Moreover, United Technologies Corp. (UTX $68) posted 2Q profits of $1.20 per share, four cents above what was expected, as revenues grew 5% to $13.9 billion, exceeding the $13.6 billion that was anticipated. UTX also raised its full-year EPS guidance. KO and UTX are gaining ground.

Mortgage applications rise, 30-year rate posts new record

Treasuries have overcome early losses and are slightly higher in late-morning action, after showing little reaction to the release of the US MBA Mortgage Application Index, which increased 7.6% last week, after the index that can be quite volatile on a week-to-week basis, declined 2.9% in the previous week. The gain came as the Refinance Index rose 8.6%, joining a 3.4% increase in the Purchase Index. The advance in the overall index came amid a 10 basis-point drop in the average 30-year mortgage rate to 4.59%, falling below the previous record low of 4.61% that was reached at the end of March 2009.

The housing report was the lone release on today’s US economic calendar but traders will likely focus most of their attention on the semi-annual monetary policy testimony by Federal Reserve Chairman Ben Bernanke on Capitol Hill, where he will go in front of the Senate at about 2:00 p.m. ET today. The Fed Chief’s commentary will command attention given last week’s minutes from the Fed’s most recent policy meeting revealing a downward revision to its economic growth forecast and the recent increase in double-dip recession rhetoric that has ramped up amid some disappointing global economic data and mixed start to the 2Q earnings season.

Corporate Deals and earnings grease the wheels in Europe

Stocks in Europe remain nicely higher in late-day action, following the upbeat finish in the US markets yesterday in the face of some disappointing revenue figures from the corporate sector and another lackluster reading on the housing market, while Apple Inc’s favorable earnings report is helping support technology stocks. However, basic materials are leading the way on economic recovery optimism in the face of a plethora of upbeat earnings reports across the pond and some M&A activity in the region. Drugmaker GlaxoSmithKline Plc. (GSK $36) is higher after it posted adjusted profits that exceeded analysts’ forecasts, which is overshadowing the impact of steep legal costs to settle lawsuits regarding its diabetes drug Avandia and its antidepressant treatment Paxil. Meanwhile, Fiat Spa(FIATY $12) is solidly higher after the automaker swung to a profit and it hinted that it may increase its sales outlook, and hotel operator Accor SA (ACRFY $9) is posting a solid gain after it reported better-than-forecasted sales.

On the M&A front, BP Plc. (BP $35) is trading solidly higher after it agreed to sell some North American and Egyptian assets to Apache Corp. (APA $88) for about $7 billion, while shares of SSL International Plc. (SLSLF $14) are sharply higher after it agreed to be acquired by Reckitt Benckiser Group Plc. (RBGPY $10) for about 2.5 billion pounds ($3.8 billion).

The European economic calendar was light, with the lone major release being a report showing UK policy makers voted 7-1 to keep the Bank of England’s benchmark interest rate unchanged at a record low of 0.5%, with the lone dissenting vote being in favor of a rate hike. In euro-area debt news, Portugal auctioned off just over 1.25 billion euros ($1.6 billion) of 12-month bills and although the costs for the nation to borrow funds rose solidly above the yield of a similar auction in March, the reaction was relatively modest as it attracted bids of 1.3 times the amount offered.

The UK FTSE 100 Index is 1.9% higher, France’s CAC-40 Index is up 1.5%, Germany’s DAX Index is advancing 0.9%, and Portugal’s PSI 20 Index is gaining 0.2%, while Greece’s Athex Composite Index is declining 0.5%.

Asia mixed with stronger yen pressuring bogging down Japan

Stocks in Asia were mixed on the heels of the resiliency in the US markets yesterday, while technology issues in Asia were one of the best performers after Apple Inc’s profit report. However, stocks in Japan finished lower, with the Nikkei 225 Index declining 0.2% as the gains in technology shares were met with weakness in export issues as the Japanese yen is posting a solid gain versus the US dollar and other major currencies on some cautious sentiment ahead of today’s semi-annual testimony from US Federal Reserve Chairman Ben Bernanke and the looming results of the European banking sector’s stress tests. The yen has strengthened recently and reached the highest level since December 2009 last week compared to the dollar, which has dampened the outlook for revenues of companies that rely on sales outside the Asian nation. In economic news, Bloomberg reported that Japan’s Cabinet Office said in its monthly report that “the economy has been picking up steadily and the foundation for a self-sustaining recovery is being laid,” while the release of the Bank of Japan’s minutes from its most recent monetary policy meeting last month revealed that policymakers felt the world economy had continued to recover moderately. In other economic news, a reading of the Australian Leading Index increased in May, and a report showed Thailand’s trade balance unexpectedly expanded for June. Australia’s S&P/ASX 200 Index increased 0.2% and Thailand’s SET Index rose 0.8%. Australia’s markets were supported by an increase in shares of BHP Billiton (BHP $69) after it reported that 4Q iron-ore production rose 16%, but gains were limited by BHP’s outlook, which remains “cautious.”

Elsewhere, stocks in China moved higher again, with the Shanghai Composite Index increasing 0.3% and Hong Kong’s Hang Seng Index rising 1.1%. Moreover, South Korea’s Kospi Index increased 0.7%, India’s BSE Sensex 30 Index gained 0.6%, while Taiwan’s Taiex Index declined 0.1%.