Morning Market Update

Disappointing Data Drives Downward Direction

The equity markets are under solid broad-based pressure amid a plethora of lackluster global economic data, which boosting pessimism regarding the global recovery, exacerbated by the reversal of yesterday’s initial positive reaction to the Federal Reserve’s monetary policy announcement, where it announced that it will maintain its bloated balance sheet. Treasuries are gaining ground on some flight-to-safety buying amid the soured global sentiment, showing little reaction to a solid increase in the US trade gap and a modest increase in mortgage applications. The downbeat mood is overshadowing some better-than-expected profit reports from Dow member Walt Disney Co and department store Macy’s Inc. Overseas, Asia found pressure from several reports showing that China’s economy slowed and on the continued strength in the Japanese yen, while data out of the UK is helping exacerbate the decline in European equity markets.

As of 8:55 a.m. ET, the September S&P 500 Index Globex future is 17 points below fair value, the Nasdaq 100 Index is 30 points below fair value, while the DJIA is 133 points below fair value. Crude oil is down $0.99 at $79.26 per barrel, and the Bloomberg gold spot price is up $3.40 at $1,207.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.9% at 81.64.

Dow member Walt Disney Co. (DIS $35) reported fiscal 3Q EPS of $0.67, above the $0.58 Reuters estimate, with revenues increasing 16% year-over-year (y/y) to $10.0 billion, compared to the $9.4 billion that was anticipated by analysts. Growth at the company’s media networks and studio entertainment units led the results for 3Q.

Macy’s Inc. (M $19) announced 2Q earnings of $0.35 per share, above the $0.29 that analysts were anticipating, with revenues rising 7% y/y to $5.5 billion, roughly inline with the Street’s forecast. The department store raised its full-year EPS outlook.

Trade gap widens, mortgage applications tick higher

The trade deficit widened from a modest favorably revised $42.0 billion in May to $49.9 billion in June, versus the Bloomberg estimate calling for the deficit to come in at $42.1 billion.

In other economic news, the US MBA Mortgage Application Index rose 0.6% last week, after the index that can be quite volatile on a week-to-week basis, increased 1.3% in the previous week. The gain came as the Refinance Index increased 0.6%, along with a 0.3% rise in the Purchase Index. The increase in the overall index came amid a 3 basis-point decline in the average 30-year mortgage rate to 4.57%, posting a new record low.

Treasuries are higher in morning action, showing little reaction to the trade and mortgage activity reports, and instead receiving a boost from some flight-to-quality buying as stocks slide amid the pessimism toward the global economic recovery. Disappointing data from Asia, led by reports showing a larger-than-expected moderation in China’s economic growth, and lackluster data out of the UK are teaming up with the delayed negative reaction to yesterday’s monetary policy announcement from the US Federal Reserve. The Fed left rates unchanged at an “exceptionally low” level and maintained its “extended period” language when referring to the fed funds rate. However, the biggest reaction came as the US central bank downgraded its economic outlook and announced that it will opt to keep its balance sheet constant by reinvesting proceeds from principal payments from agency and agency mortgage-backed securities into longer-term Treasuries. On the economy, the Fed said it continues to anticipate a gradual recovery, but that the pace “is likely to be more modest in the near term than had been anticipated.”

Europe pressured by UK data and US Fed announcement reaction

Stocks in Europe are under solid pressure in afternoon action, led by financials and basic materials on exacerbated economic sentiment following some disappointing data out of the UK and as the reaction to yesterday’s US Fed announcement is souring, and the outlook for the world’s largest economy waning. UK consumer confidence deteriorated by a larger-than-forecasted amount, UK jobless claims declined by a much smaller-than-anticipated amount, and the Bank of England, in its quarterly inflation assessment, said the economic outlook is weaker than its last report in May, while providing an inflation outlook that was below its 2% target rate. Meanwhile, a more than 30% drop in shares of Micro Focus International Plc. (MCFUF $7) is also weighing on the equity markets across the pond, after the UK business software firm posted flat revenue and reduced its sales outlook for the full year. However, shares of Nestle SA (NSRGY $49) are posting an advance after the world’s largest food maker, per Bloomberg, increased its full-year guidance after it reported better-than-expected first-half sales.

The UK FTSE 100 Index is down 1.5%, France’s CAC-40 Index is 1.8% lower, and Germany’s DAX Index is declining 1.7%.

Asia falls as data exacerbates US economic pessimism

Most equity markets in Asia were solidly lower as a slew of disappointing data in Asia exacerbated sentiment that deteriorated following an initial positive reaction to the US Fed’s monetary policy announcement. Japanese stocks led the downward move, with the Nikkei 225 Index falling 2.7% as the yen moved closer to a fifteen-year high versus the US dollar following the Fed’s announcement and a disappointing Japanese economic report, dampening the outlook for profits of export issues. Japan’s machine orders rose 1.6% month-over-month (m/m) in June, rebounding from the 9.1% drop seen in May, and well below the 5.4% growth that economists had anticipated. Meanwhile, data from the Chinese economic calendar did little to help the mood toward the economic recovery, as several reports in the region pointed to moderating growth in the nation that has helped lead the recovery. Chinese industrial production slowed inline with expectations in July, but reports on retail sales growth, new yuan loans, fixed asset investments, and money supply, all came in softer than anticipated. However, one bright spot may have come from the Chinese inflation front, as consumer prices rose by an amount that matched forecasts, while wholesale price increases were smaller than expected, possibly helping dampen expectations that the government may deploy further measures to slow down growth and prevent an overheating of the economy. Stocks in China finished mixed, with the Hong Kong Hang Seng Index declining 0.8% while the Shanghai Composite Index rose 0.5%.

Stocks in Australia came under pressure on the global economic concerns, and following disappointments from the economic and equity calendars in the nation down under. The S&P/ASX 200 Index fell 1.9% following a report on consumer confidence that showed a sentiment slowed to a pace in August that was less than half the rate seen in July. Also, shares of Commonwealth Bank of Australia (CBAUF $48) were solidly lower after the lender issued a cautious outlook, which overshadowed its solid increase in first-half profits. Elsewhere, on the negative side on the economic ledger in Asia, South Korea’s unemployment rate increased from 3.5% in June to 3.7% in July, and the Kospi Index finished 1.3% lower. Rounding out the day, Taiwan’s Taiex Index dropped 1.0% and India’s BSE Sensex 30 Index fell 0.8%.