Morning Market Update

Private Sector Payrolls Release Gives Sentiment Some Relief

US equity markets have moved slightly above the unchanged mark in morning trading, erasing early losses following a larger-than-forecasted increase in the ADP Employment Change Report, which prompted some optimism about private sector job growth ahead of Friday’s labor report. Treasuries remain mixed following the morning’s economic data, which also included a rise in mortgage applications, but a key reading on service sector business activity is set to be released as the morning session matures. US earnings news is relatively light, with Time Warner Inc reporting better-than-expected profits, while Electronic Arts Inc posted a smaller-than-anticipated loss. In equity news outside the earnings realm, Barnes & Noble Inc announced that it intends to evaluate “strategic alternatives,” including the possible sale of the company. Overseas, Asia was mixed with Japanese stocks coming under pressure, while European markets are also mixed amid some earnings reports out of the financial sector.

As of 8:51 a.m. ET, the September S&P 500 Index Globex future is 2 points above fair value, the Nasdaq 100 Index is 7 points above fair value, while the DJIA is 21 points above fair value. Crude oil is down $0.09 at $82.46 per barrel, and the Bloomberg gold spot price is up $10.95 at $1,197.10 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.1% at 80.70.

Time Warner Inc. (TWX $32) reported adjusted 2Q EPS of $0.50, five cents above the Reuters estimate, with revenues rising 8% year-over-year (y/y) to $6.4 billion, above the $6.2 billion that analysts were expecting. TWX said its advertising revenue grew 11% y/y, driven by growth at Turner Broadcasting and Time Inc. TWX raised its full-year EPS guidance.

Electronic Arts Inc. (ERTS $16) posted a smaller-than-forecasted fiscal 1Q loss ex-items of $0.24 per share, compared to the $0.35 shortfall that the Street was looking for, and revenues, even though falling 34% y/y to $539 million, exceeded the $502 million expectation. ERTS reaffirmed its full-year guidance, but issued a 2Q EPS outlook that came in below the Street’s forecast.

Barnes & Noble Inc. (BKS $13) is nicely higher after it announced that it intends to evaluate “strategic alternatives,” including a possible sale of the company, in order to increase stockholder value. BKS said its Board came to this decision based on the price of its shares, which it believes are now “significantly undervalued.”

Private sector payrolls rise, mortgage applications rise, service sector report on deck

The ADP Employment Change Report showed private sector payrolls increased by 42,000 jobs in July, compared to the forecast of economists surveyed by Bloomberg, which called for a 30,000 increase, while June’s 13,000 job increase was upwardly revised to a 19,000 gain. The release does not include government hiring and firing and comes ahead of Friday’s broader nonfarm payrolls report, where economists expect a decrease of 63,000 in July, after falling 125,000 in June. Excluding government hiring, private sector payrolls are expected to increase 90,000, after expanding by 83,000 in June.

In other economic news, the US MBA Mortgage Application Index rose 1.3% last week, after the index that can be quite volatile on a week-to-week basis, declined 4.4% in the previous week. The gain came as the Refinance Index increased 1.3%, teaming up with a 1.5% gain in the Purchase Index. The increase in the overall index came amid a 9 basis-point decline in the average 30-year mortgage rate to 4.60%, moving close the record low of 4.59% that was reached two weeks ago. Treasuries remain mixed following the jobs and mortgage reports.

Meanwhile, a major piece of data from the US economic calendar waits in the wings, with the release of the ISM Non-Manufacturing Index after the opening bell, which is likely to come under close scrutiny as it is a broad measure of business activity, particularly the service sector. Economists are expecting the index to dip slightly from 53.8 in June to 53.0 in July—the seventh-straight month of expansion as noted by a reading above 50—and any upside surprise, such as Monday’s better-than-forecasted reading of the ISM Manufacturing Index—the compliment report to the non-manufacturing report—could help keep the recent momentum in the equity markets intact.

Europe mixed as financials come into focus

Stocks in Europe are mixed in afternoon action, led by a diverse bag of earnings reports out of the financial sector. Allied Irish Banks Plc. (AIB $3) is under pressure after Ireland’s second-largest bank, according to Bloomberg, posted a first-half loss that more than doubled, and shares of Standard Chartered Plc. (SCBFF $30) are solidly lower after the UK bank’s results prompted an analyst downgrade, despite posting better-than-forecasted first-half profits. The disappointing reports are overshadowing some bright spots in the sector, with Lloyds Banking Group Plc. (LYG $5) moving nicely higher after Britain’s largest mortgage lender returned to a profit for the first-half of the year, and Societe Generale (SCGLY $12) is trading to the upside after posting better-than-forecasted profits. Meanwhile, pressure on stocks across the pond is coming also from outside of the financial sector, with shares of Next Plc. (NXGPY $17) falling solidly after Britain’s second-largest clothing retailer reported soft sales and offered a cautious outlook, saying consumer spending will be “more restrained” amid a “noticeable cooling” in demand.

The economic front in Europe is painting a mixed picture, as a report showed euro-zone retail sales rose 0.4% y/y in June, above the 0.1% increase that was expected, while compared to last month, sales were flat. Moreover, a report showed UK home prices unexpectedly rose in July, but several readings of euro-area service sector business activity were revised lower.

The UK FTSE 100 Index is down 0.6%, France’s CAC-40 Index is 0.1% higher, Germany’s DAX Index is gaining 0.4%, and Ireland’s Irish Overall Index is decreasing 1.1%.

Asia mixed as Japanese stocks fall

Stocks in Asia were mixed, as stocks in Japan came under heavy pressure, with the Nikkei 225 Index falling 2.1%, led by weakness in export issues on concerns about the health of the US economy after some housing, consumer, and manufacturing data in the world’s largest economy missed expectations. Also, shares of Japanese firms that rely on sales outside the Asian nation found exacerbated pressure as the yen hit an eight-month high versus the US dollar, dampening the outlook for revenues and profits. Japanese automakers were also weak after some of the nation’s largest carmakers, such as Toyota Motor Corp. (TM $73) and Honda Motor Co Ltd (HMC $33), posted lackluster auto sales in the US for July. But after today’s closing bell in Japan, Toyota Motor reported better-than-expected profits and lifted its full-year profit outlook. However, equity markets in China finished higher, with the Shanghai Composite Index and the Hong Kong Hang Seng Index both advancing 0.4%. Shares in Hong Kong were supported by a solid advance in Cathay Pacific Airways (CPCAY $11) after the nation’s largest airline posted a surge in first-half profits that topped analysts’ forecasts, offsetting a deterioration in the country’s Purchasing Managers Index for July. Meanwhile, stocks in China may have found some support from a report that showed the expansion in the region’s services PMI accelerated in July.

Elsewhere, stocks in Australia were lower, as the S&P/ASX 200 Index declined 0.7% on the disappointing US data and the subsequent pessimism toward the economic recovery, which dampened the outlook for commodities. The decline down under came despite reports that showed the nation’s trade surplus rose more than expected and home prices increased by a larger amount than forecasted. However, a separate report showed Australia’s service sector business activity deteriorated in July. Stocks in India moved higher, as the BSE Sensex 30 Index rose 0.6%, even after a report showed service sector business activity slowed, but remained at a level that depicted solid expansion. Rounding out the day in Asia, South Korea’s Kospi Index dipped 0.1% Taiwan’s Taiex Index gained 0.2%.