Morning Market Update

Near the Flatline as Europe Mulls Stress Test Results

Coming off a solid advance last week as upbeat corporate earnings and favorable European economic data boosted global recovery sentiment, stocks are nearly unchanged in early trading as another round of major earnings reports and economic data does not shift into high gear until later this week. Meanwhile, European shares are under some pressure as traders across the pond are reacting for the first time to the banking sector’s stress test results, which are supporting financials, but weakness in healthcare issues is offsetting optimism in the region. Treasuries are mixed ahead of a report on new home sales and before Friday’s first look at US 2Q GDP. US equity news is relatively light, with cigarette maker Lorillard Inc posting better-than-expected 2Q earnings, and Onyx Pharmaceuticals Inc announcing favorable results to a study of its blood cancer drug. In other overseas action, Asia was mostly higher following the solid gains on Friday in the US, and as South Korea’s 2Q GDP came in above expectations.

As of 8:52 a.m. ET, the September S&P 500 Index Globex future is at fair value, the Nasdaq 100 Index is 3 points below fair value, while the DJIA is 12 points below fair value. Crude oil is down $0.79 at $78.19 per barrel, and the Bloomberg gold spot price is up $0.20 at $1,189.40 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.2% at 82.30.

Lorillard Inc. (LO $76) reported 2Q EPS of $1.73, above the $1.61 Reuters estimate, with revenues at the cigarette maker coming in flat year-over-year (y/y) at $1.5 billion, roughly inline with analysts’ forecasts, but sales excluding excise taxes were $1.04 billion. The company said its domestic wholesale shipments decreased 0.6% y/y, compared to a 7.1% drop in total domestic industry wholesale shipments, and its Newport brand gained domestic retail market share.

Onyx Pharmaceuticals Inc. (ONXX $22) is solidly higher after the company announced positive top-line results from a study of its drug to treat patients with relapsed and refractory multiple myeloma. ONXX said its blood cancer treatment called carfilzomib achieved a 24% overall response rate and a duration of response exceeding seven months in patients.

New home sales start the economic week

Treasuries are mixed in morning action, as traders await the release of new home sales for June, which will kick off the week’s economic calendar, forecasted to increase 4.0% month-over-month (m/m) to an annual rate of 310,000 units. Housing data continues tomorrow, with the reading of the S&P/CaseShiller Home Price Index, which lags the sales data by a month, and is forecasted to rise 3.9% y/y, and increase 0.2% m/m in May.

Durable goods orders will be reported on Wednesday, expected to have risen 1.0% m/m in June after declining 1.1% in May, while ex-transportation, orders are forecasted to have grown 0.4% m/m, after increasing 0.9% in May. Additionally, the Federal Reserve’s Beige Book will be released mid-day, wherein Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for August 10, and is used as an input to the Fed’s decision on whether to make any changes in monetary policy.

However, the headlining economic release this week will likely be Friday’s first reading of 2Q gross domestic product (GDP), expected to show a 2.5% quarter-over-quarter annualized rate of growth, after expanding by 2.7% in the first quarter. Personal consumption is expected to have grown 2.4%, down from the 3.0% pace in 1Q. Inflation is expected to have remained benign, with the GDP Price Index anticipated to have risen 1.1%, the same pace as in 1Q, and the core PCE Index, which excludes food and energy, is forecasted to increase 1.0%, up from the 0.7% rate in 1Q.

Other US economic releases this week include the Richmond Fed Manufacturing Index, the MBA Mortgage Applications Index, weekly initial jobless claims, and the final University of Michigan Consumer Sentiment Index for July.

Europe modestly lower as healthcare weakness is offsetting stress-test reaction

Stocks in Europe are slightly lower in afternoon action, with financials the lone winners in the euro-area, gaining modest ground as traders across the pond are reacting for the first time to Friday’s release of the results of the European banking industry stress test. The results revealed that seven of the ninety-one institutions that were put through adverse scenarios failed to achieve the required capital levels deemed sufficient by the Committee of European Banking Supervisors (CEBS). The results showed five Spanish banks, along with one German institution and a Greek firm, were the entities that failed the test. However, concerns that the adverse scenarios that were simulated during the tests were not rigorous enough remain, as some are expressing disappointment that the tests did have a sovereign debt default scenario and the overall shortfall of capital of banks that failed totaled 3.5 billion euros. Healthcare stocks are under pressure in Europe to offset the gains in the financial sector, with shares of GlaxoSmithKline Plc. (GSK $37) lower after a Wall Street Journal report said it “casually” approached Genzyme Corp. (GENZ $63) about a takeover, but GSK has not commented on the report. Also, shares of Sanofi-Aventis (SNY $29)—which has also been rumored to be mulling a takeover of GENZ—cut its earnings forecast after US regulators approved a generic version of its blood thinning drug Lovenox.

In other equity news, shares of BP Plc. (BP $37) are moving higher on reports that the energy firm, which has come under solid pressure amid the fallout from the massive oil leak in the Gulf of Mexico, is close to announcing that CEO Tony Hayward will be replaced by Robert Dudley. BP said no decision has been made on possible management changes and its board will meet this evening. Moreover, shares of Connaught Plc. are down almost 80% after the UK public housing maintenance firm said it requires “urgent” funding to meet needs of the business, according to Bloomberg News.

Economic news in the region is relatively light, with a report showing mortgages on houses in Spain fell in May, Sweden’s trade surplus increased much more than economists’ forecasts, and a housing survey in the UK declined for July.

The UK FTSE 100 Index is 0.1% lower, France’s CAC-40 Index is down 0.4%, Germany’s DAX Index is declining 0.5%, Spain’s IBEX 35 Index is off 0.3%, and Sweden’s OMX Stockholm 30 Index is decreasing 0.4%.

Asia mostly higher after strong US data and euro-area stress tests

Stocks in Asia were mostly higher in the wake of the solid gains on Friday in the US on favorable earnings data and as traders gained some clarity on the results of the European banking industry stress tests. Japan’s Nikkei 225 index gained 0.8% on improved global recovery sentiment and on some optimism ahead of key earnings reports that are set to be released in the region. In Japanese economic news, a report showed the nation’s trade surplus expanded in June, but came in slightly below economists’ expectations. Meanwhile, the Asian economic calendar revealed that South Korea’s 2Q GDP rose 1.5% quarter-over-quarter (q/q) compared to the 1.3% expansion that was anticipated, while on a year-over-year (y/y) basis, the nation’s output expanded by 7.2%, above the 6.9% forecast. The South Korean Kospi Index increased 0.6% following the report. Australia’s S&P/ASX 200 Index increased 0.6% following some corporate and economic reports, with a read on the nation’s producer prices for 2Q increasing by an amount that was below expectations on both q/q and y/y time frames. Also, shares of Australian retailer Wesfarmers Ltd. (WFAFY $13) moved solidly higher to help stocks advance, after posting favorable 4Q sales results, helping offset a solid decline in shares of QBE Insurance Group Ltd. (QBEIY $16) after the Australian insurance firm issued a profit warning. Elsewhere, Chinese stocks gained some ground, with the Shanghai Composite Index increasing 0.7% and Hong Kong’s Hang Seng Index inching 0.1% higher. Rounding out the day, Taiwan’s Taiex Index rose 0.3% and India’s BSE Sensex 30 Index declined 0.6%.