Morning Market Update

Enthusiasm Fades, Waiting to See if Euro Banks Make the Grade

Equity markets remain nearly unchanged in late-morning trading as traders mull over another heavy dose of major corporate earnings reports, while playing their cards close to the vest ahead of the afternoon release of the European banking sector’s stress tests. Meanwhile, there were some positive earnings reports in the US for the Street to digest, with Dow members Microsoft Corp, McDonald’s Corp, and American Express Co joining Ford Motor Co to post better-than-forecasted top and bottom line results. Elsewhere, fellow Dow member Verizon Communications Inc reported favorable wireless results, overshadowing a revenue shortfall, while Amazon.com Inc disappointed the Street with its earnings release. Treasuries are slightly lower in early action as there are no US economic reports scheduled for release today. Overseas, Asia moved broadly higher after yesterday’s rally in the US, while Europe is mixed amid the aforementioned stress test caution, which is overshadowing some favorable economic and earnings reports across the pond.

At 11:02 a.m. ET, the Dow Jones Industrial Average is 0.2% higher, the S&P 500 Index is up 0.1%, and the Nasdaq Composite is declining 0.1%. Crude oil is down $0.41 at $78.89 per barrel, wholesale gasoline is down $0.02 at $2.12 per gallon, and the Bloomberg gold spot price is down by $4.00 at $1,190.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.4% at 82.93.

Dow member Microsoft Corp. (MSFT $26) announced fiscal 4Q EPS of $0.51, four cents above the Reuters estimate, with revenues increasing 22% year-over-year (y/y) to $16.04 billion, which came in above the $15.3 billion that analysts were expecting. The company said product momentum continued during the quarter with the successful launch of Office 2010, and strong performances from Windows 7, Windows Server, Xbox, and Bing. Shares are lower.

Fellow Dow member McDonald’s Corp. (MCD $70) posted 2Q earnings of $1.13 per share, one penny above the Street’s forecast, with revenues increasing 5% y/y to $5.95 billion, which was just above the $5.91 billion that analysts were anticipating. The world’s largest fast food chain said each area of the world generated higher same-store sales—sales at stores open at least thirteen month—traffic and profits. Global same-store sales rose 4.8% y/y, with the US rising 3.7%, Europe gaining 5.2%, and Asia/Pacific, Middle East and Africa advancing 4.6%. MCD is under pressure.

Also, Dow member Verizon Communications Inc. (VZ $28) achieved 2Q profits ex-items of $0.58 per share, two pennies above the Street’s forecasts, as revenues dipped 0.3% y/y to $26.8 billion, which came up short of the $27.1 billion that analysts were expecting. However, shares are moving solidly higher despite the soft revenues as the company said it added 1.4 million total net customer additions, including the addition of 665,000 postpaid customers, or customers under contract, which are the industry’s more profitable group of clients, topping the Street’s expectations.

Rounding out the reports within the Dow components, American Express Co. (AXP $43) announced 2Q EPS of $0.84, seven cents above the consensus forecast of analysts, as revenues increased 13% y/y to $6.9 billion, slightly exceeding the $6.8 billion forecast. The company said it saw higher cardmember spending, offset by a smaller loan portfolio and lower yields on both the securitized and non-securitized portions of its portfolio. AXP also said its provisions for losses—capital set aside to absorb losses—fell 60% y/y, reflecting continued improvement in credit quality. AXP is modestly higher.

Ford Motor Co. (F $13) reported 2Q EPS ex-items of $0.68, well above the $0.40 that was anticipated on the Street, with revenues gaining 16.8% y/y to $31.3 billion, versus the $30.2 billion that was forecasted by analysts. The automaker said it is ahead of where it thought it would be despite still-challenging business conditions, with profits improving across its global business operations. Although the company cautioned that its second-half profits will be lower than the first half, it said it does expect even better results in 2011. F is trading nicely higher.

Amazon.com Inc. (AMZN $120) announced that its 2Q earnings came in at $0.45 per share, but was below the $0.54 that analysts had anticipated. However, revenues at the online retailer grew by 41% y/y to $6.57 billion, which came in slightly above the $6.54 billion that the Street had expected. AMZN issued 3Q earnings guidance that was short of analysts’ forecasts.

US economic docket blank but focus is on corporate earnings and euro-area banks

Treasuries are under modest pressure in late-morning action as some risk aversion continues to dissipate on another round of favorable corporate earnings reports and better-than-expected economic data out of Europe. The US economic calendar is dormant today, allowing traders to focus on the profit reports from the corporate sector and the looming release of the results from the stress tests of the European banking sector, which are due out at about 12:00 p.m. ET.

The Committee of European Banking Supervisors (CEBS) released the methodology of the tests it conducted, saying that banks failed if their Teir-1 capital ratios fell below 6% under two scenarios—the first an adverse scenario and the second being the adverse scenario with the addition of a sovereign debt component. The CEBS said that its adverse scenario included a one-in-twenty-year probability, which compared to the stress tests conducted by the US, which included a one-in-seven-year possibility. The adverse scenario includes a 6% increase in unemployment, a 6% rise on markets’ interest rates, and currency swings, however, some were disappointed that the sovereign scenario did not include the impact of a default.

Europe mixed ahead of stress tests

Stocks in Europe remain mixed in late-day action as traders digest a plethora of economic and earnings data, while traders are treading with some caution ahead of the release of the results from the European banking industry stress tests. In the meantime, there were several major earnings reports to hold traders over until the results are released, highlighted by Vodafone Group Plc. (VOD $23), which is higher after the world’s largest mobile-phone operator returned to growth led by its service revenues. Elsewhere, Akzo Nobel (AKZOY $57) is nicely higher after the world’s largest paint maker, according to Bloomberg, posted better-than-expected 2Q profits, and Adidas AG (ADDYY $27) is gaining ground after it reported 2Q earnings that exceeded analysts’ forecasts. However, Ericsson AB (ERIC $12) is solidly lower after the world’s largest maker of wireless phone networks announced earnings that came up short of expectations.

Meanwhile the economic calendar in Europe continues to yield some favorable data, with the German Ifo Business Climate Index increasing from 101.8 in June to 106.2 in July, and the gauge of business confidence in Europe’s largest economy topped the 101.8 reading that economists had expected. Also, the UK reported that its advance report on 2Q GDP showed a 1.1% expansion quarter-over-quarter (q/q), well above the 0.6% increase that economists had expected. On a y/y basis, UK output rose 1.6%, also exceeding forecasts, which called for a 1.1% increase. Other reports in the region included Italian retail sales unexpectedly declining, but Italy’s consumer confidence unexpectedly increased, while Spain’s producer prices rose slightly as expected and France’s consumer spending surprisingly fell.

The UK FTSE 100 Index is 0.1% lower as an analyst downgrade of some of the nation’s largest financial firms is outweighing the better-than-expected GDP report. Elsewhere, France’s CAC-40 Index is up 0.4%, Germany’s DAX Index is 0.5% higher, and Spain’s IBEX 35 Index is gaining 1.0%.

Asia posts solid gains following data fueled rally in US and Europe

Stocks in Asia were broadly higher on improved economic recovery sentiment in the wake of the strong advances in Europe and the US yesterday following some favorable earnings and economic news. Japan’s Nikkei 225 Index led the way, gaining 2.3% to snap a five session losing streak, with chipmakers helping technology shares pace the advance. Also, a solid gain in shares of Komatsu Ltd.(KMTUY $20) aided the advance, as the world’s number-two construction-equipment maker—per Bloomberg—found support from yesterday’s upbeat earnings report from Dow member Caterpillar Inc. (CAT $68 ¹), and after the company said it may further increase its full-year earnings outlook. Commodity-related issues benefitted from the improved economic sentiment and stocks in resource-reliant Australia also helped lead the charge in the Asia/Pacific region, with the S&P/ASX 200 Index gaining 1.9%, despite a higher-than-expected report on 2Q import prices. In other economic news, Taiwan reported that its industrial production jumped 24.3% y/y in June, after a 30.99% y/y surge in May, and above the 22.00% increase that was expected by economists. Taiwan’s Taiex Index rose 1.2%. Elsewhere, stocks in China posted gains, with Hong Kong’s Hang Seng Index rising 1.1%, while the Shanghai Composite Index rose 0.4%. Rounding out the day, South Korea’s Kospi Index increased 1.3% and India’s BSE Sensex 30 Index advanced 0.1%.