Morning Market Update

Slightly Red as Economic Data Suggests Rally Not Durable

US stocks have turned modestly lower in morning action following an unexpected decline in durable goods orders, which is stymieing economic sentiment that has carried recent strength in the equity markets. Treasuries moved higher following the report, extending modest gains that came from a decline in mortgage applications, but the Federal Reserve will release its Beige Book in afternoon action, which is a look at business activity across the nation. In earnings news, Dow member Boeing Co provided a mixed report, while Aetna Inc and Comcast Corp both topped analysts’ profit forecasts. Meanwhile, ConocoPhillips posted earnings that exceeded the Street’s forecast, and it said it will sell its entire stake in Lukoil. Overseas, Europe is mostly lower amid some possible profit-taking, while Asia moved nicely higher on earnings optimism.

As of 8:54 a.m. ET, the September S&P 500 Index Globex future is 2 points below fair value, the Nasdaq 100 Index is 4 points below fair value, while the DJIA is 27 points below fair value. Crude oil is down $0.71 at $76.79 per barrel, and the Bloomberg gold spot price is down $2.03 at $1,159.58 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% at 82.11.

Dow member Boeing Co. (BA $69 ¹) announced 2Q EPS of $1.06, above the $1.01 Reuters consensus estimate of analysts surveyed, but revenues fell 9% year-over-year (y/y) to $15.6 billion, below the $16.2 billion that was expected on the Street. The aircraft maker said its order backlog is nearly five times its current annual revenue projection of between $64-66 billion, which it reaffirmed today.

Aetna Inc. (AET $28) reported 2Q adjusted earnings of $1.05 per share, compared to the $0.74 that analysts were anticipating, with revenues excluding capital gains dipping 2% y/y to $8.50 billion, but above the $8.49 billion that was expected. AET increased its full-year EPS guidance.

Comcast Corp. (CMCSA $19) posted 2Q profits ex-items of $0.33 per share, one penny above the Street’s forecast, with revenues rising 6.1% y/y to $9.5 billion, topping the $9.3 billion that was forecasted.

ConocoPhillips (COP $54) announced that its adjusted 2Q EPS came in at $1.67, above the $1.56 that analysts had anticipated, aided by improved global refining and marketing margins and higher US refining capacity utilization rates. COP said its exploration and production volumes and costs were inline with expectations. Also, COP said it will sell its entire Lukoil stake.

Durable goods unexpectedly fall, mortgage apps dip, Fed data slated for the afternoon

Durable goods orders fell 1.0% month-over-month (m/m) in June, versus the forecast of a 1.0% increase by economists surveyed by Bloomberg, and ex-transportation, orders declined 0.6%, compared to the expectation of a 0.4% increase. However, May’s 1.1% decline was revised to a 0.8% drop. Non-defense capital goods excluding aircraft, considered a good proxy for business spending, increased by 0.6% in June.

In other economic news, the US MBA Mortgage Application Index decreased 4.4% last week, after the index that can be quite volatile on a week-to-week basis, rose 7.6% in the previous week. The decline came as the Refinance Index fell 5.9%, offsetting a 2.0% gain in the Purchase Index. The decline in the overall index came amid a 10 basis-point increase in the average 30-year mortgage rate to 4.69%, moving off the record low of 4.59% that was reached last week.

Treasuries are higher in early action, extending gains following the durable goods and mortgage applications reports, and ahead of the afternoon release from the economic calendar in the form of the Federal Reserve’s Beige Book. In this report, 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, used as an input to the Fed’s decision on whether to make changes in monetary policy.

Winning streak in Europe in jeopardy

Stocks in Europe are mostly lower in afternoon action, with weakness in industrials as traders may be booking some profits from the recent string of gains across the pond, in which the equity markets have been on the positive side of the ledger for six consecutive sessions. However, financials are posting an advance to limit the pressure on stocks in Europe, continuing the sector’s momentum that has come in the wake of the stress test results, favorable earnings, and the recent announcement from the Basel Committee on Banking Supervision that it will temper some of its proposed industry capital and liquidity rules. In earnings news across the pond, Air France-KLM (AFLYY $15) is nicely higher after Europe’s largest airline posted the first quarterly profit in almost two years, topping analysts’ expectations, on recovering cargo and passenger traffic.

The economic calendar is relatively light in Europe, with Spain reporting an unexpected increase in retail sales y/y in June, which rose 0.8%, versus the decline of 1.4% that economists forecasted. Also, German capacity utilization improved for manufacturing and capital goods, but declined in consumer and food sectors. Later today, Germany will release its report on the nation’s consumer prices for July, which are forecasted to show an increase 1.2% y/y. In other economic news in the area, Bank of England Governor Mervyn King noted that it may take “considerable” time before UK interest rates return to normal levels, per Bloomberg.

The UK FTSE 100 Index is down 0.5%, France’s CAC-40 Index is flat, Germany’s DAX Index is declining 0.6%, and Spain’s IBEX 35 is nearly unchanged.

Asia posts a nice advance led by Japan and China

Stocks in Asia were broadly higher as favorable global earnings reports continue to sweeten sentiment regarding the economic recovery. Stocks in Japan led the way, with the Nikkei 225 Index rising 2.7%, boosted by a solid advance in shares of Canon Inc. (CAJ $41) after the world’s largest camera maker posted a sharp increase in 2Q profit that topped analysts’ forecasts. Also, shares of Fuji Heavy Industries Ltd. (FUJHY $52) were up nicely to contribute to the advance in the region, as the maker of Subaru automobiles announced that its total production jumped 70% y/y in June. Also, yesterday’s solid decline in the Japanese yen versus the US dollar and other major currencies helped improve sentiment as a weaker currency improves the outlook of revenues for companies that rely heavily on sales outside the Asian nation. Moreover, the Japanese economic front added to the upbeat backdrop, with a report showing Japanese small business confidence improved in July. Meanwhile, stocks in China posted strong gains, with the Shanghai Composite Index rising 2.3% and the Hong Kong Hang Seng Index advancing 0.6%, aided by a government report that showed earnings of Chinese industrial companies surged 72% in the first-half of the year compared to the same period a year earlier, per Bloomberg.

Australian shares moved higher, with the S&P/ASX 200 Index advancing 0.7%, on the aforementioned global economic optimism and after a report showed 2Q consumer prices rose 0.6% quarter-over-quarter (q/q), versus the 0.9% increase in 1Q and compared to the 1.0% gain that economists had expected, limiting some expectations that the Reserve Bank of Australia will raise interest rates at its next meeting. In other economic news from down under, reports on New Zealand’s business confidence and activity outlook both declined in July, but the NZX 50 Index rose 0.5%. In other markets in Asia, South Korea’s Kospi Index rose 0.3% on the heels of a report that showed the nation’s current account surplus widened in June, and Taiwan’s Taiex Index gained 0.5%, while India’s BSE Sensex 30 Index declined 0.7%.