Morning Market Update

Nearly Unchanged Amid Another Round of Earnings Reports

Following yesterday’s solid gains on better-than-expected earnings reports from the retail sector and a much stronger-than-forecasted gain in industrial production, the US equity markets are at arms length of the flatline as traders digest another dose of corporate earnings news. Target Corp topped the Street’s profit projections, while Deere & Co. offered some lackluster comments about European markets after its top and bottom lines exceeded expectations, and BJ Wholesale missed analysts’ earnings forecasts. Treasuries are slightly higher in morning trading, following a solid increase in mortgage applications, which was the lone report on the US economic calendar. In other equity news, BHP Billiton made its $39 billion takeover offer for Potash Corp of Saskatchewan Inc hostile by taking it directly to the shareholders. Overseas, Asia was mixed, while Europe is under some pressure in afternoon action.

As of 8:52 a.m. ET, the September S&P 500 Index Globex future is 2 points above fair value, the Nasdaq 100 Index is 1 point below fair value, while the DJIA is 9 points above fair value. Crude oil is down $0.75 at $75.02 per barrel, and the Bloomberg gold spot price is up $1.10 at $1,225.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.2% at 82.05.

Target Corp. (TGT $51) reported 2Q EPS of $0.92, inline with the Reuters estimate, as revenues increased 3.1% year-over-year (y/y) to $15.5 billion, just shy of the $15.6 billion that analysts were expecting. Same-store sales—sales at stores open at least a year—increased 1.7% y/y. TGT said growth in guest traffic and apparel sales “remained robust” and it continued to exercise thoughtful control of expenses. The company added that its credit card segment also enjoyed very strong results. “Regardless of the pace of recovery, we are well-positioned to continue to gain profitable market share,” TGT’s CEO said.

Deere & Co. (DE $67) reported fiscal 3Q EPS of $1.44, well above the $1.24 that the Street had forecasted, with revenues increasing 16% y/y to $6.8 billion, above the consensus forecast of $6.5 billion. The farm and construction equipment company said while it benefitted from positive conditions in the US farm sector, particularly in terms of demand for large equipment, “European markets are down sharply.” Also, DE said demand for construction and forestry equipment is improved from last year but still remains “far below normal levels.” The company issued 4Q earnings guidance that matched expectations.

In follow-up M&A news, BHP Billiton (BHP $70) announced that after its near $39 billion, $130 per share cash bid to acquire Potash Corp. of Saskatchewan Inc. (POT $143) was rejected by the agriculture firm’s Board of Directors, it will take its proposal directly to the shareholders of POT. By campaigning for votes of the shareholders, BHP’s offer is considered hostile and the company said, “We firmly believe that Potash Corp. shareholders will find the certainty of a cash offer, at a premium of 32% to the 30-trading day period average, very attractive and we have therefore decided to make this offer directly to those shareholders.” POT has not commented on the news, but yesterday called the offer price “grossly inadequate.”

In other earnings news, BJ’s Wholesale Club Inc. (BJ $43) reported 2Q earnings of $0.67 per share, short of the $0.73 that analysts were anticipating, with revenues increasing 8.6% y/y to $2.7 billion, roughly inline with the Street’s forecast. Same-store sales rose 4.4% y/y including gasoline sales, while excluding gas sales, the gain was 2.9%. BJ lowered its full-year outlook.

Mortgage applications jump as refis soar

In a light day on the US economic front, the US MBA Mortgage Application Index jumped 13.0% last week, after the index that can be quite volatile on a week-to-week basis, moved a modest 0.6% higher in the previous week. The gain came as the Refinance Index surged 17.1%, more than offsetting a 3.4% drop in the Purchase Index. The increase in the overall index came amid a 2 basis-point rise in the average 30-year mortgage rate to 4.60%, just off of the record low of 4.58%. Treasuries are slightly higher following the release.

Europe lower on corporate news and weak oil & gas issues

Stocks in Europe are under some pressure in afternoon action, with weakness in oil & gas issues pressuring the equity markets, along with some disappointing news from the corporate front. BHP Billiton is lower on the news it will take its near $39 billion takeover offer of Potash Corp. to the shareholders. Meanwhile, shares of Vestas Wind Systems (VWDRY $18) are down almost 20% after the world’s largest maker of wind turbines slashed its outlook for 2010, as “expected, but still not concluded orders for delivery to the USA, Spain and Germany will now take place at such a late date in 2010 that they will not be recognized as income this year.” The company also posted its second-straight quarterly loss. However, shares of Swiss Life Holding (SZLMY $6) are solidly higher after Switzerland’s largest life insurer, according to Bloomberg, posted better-than-forecasted first-half profits.

Economic news across the pond is relatively light, with the Bank of England saying policymakers voted 8-1 in favor of leaving its benchmark interest rate unchanged at a record low of 0.5% earlier this month, with the lone dissenting vote being in favor of and increase in the rate. In other news, euro-zone construction output increased 2.7% month-over-month (m/m) in June, after falling a favorably revised 0.7% in May.

The UK FTSE 100 Index is down 0.6%, France’s CAC-40 Index is 0.2% lower, and Germany’s DAX Index is off 0.1%, while Switzerland’s Swiss Market Index is up 0.2%.

Asia mixed as US gains help lift Japan

Stocks in Asia were mixed, with yesterday’s strong advance on upbeat retail earnings reports and industrial production data helping support stocks in Japan, as the Nikkei 225 Index rose 0.9%. Meanwhile, profit taking in China weighed on equity markets, with the Hong Kong Hang Seng Index falling 0.5% and the Shanghai Composite Index declining 0.2%. Elsewhere, Taiwan’s Taiex Index dipped 0.1% and South Korea’s Kospi Index increased 0.4%, while India’s BSE Sensex 30 Index gained 1.2%. Australian stocks were nearly unchanged, with the S&P/ASX 200 Index inching 0.1% lower as the aforementioned optimism in the wake of the favorable data in the US was offset by weakness in shares of BHP Billiton after the company’s hefty bid for Potash Corp.

In other equity news in the region, Mazda Motor Corp. (MZDAY $24) came under pressure after the Japanese automaker announced a 215,000 vehicle recall on a potential power steering malfunction, while shares of Westfield Group (WFGPY $22) rose solidly after the Australian shopping center operator posted better-than-forecasted first-half profits. In Asian economic news, Australia’s Leading Index was flat m/m in June and Japan’s Leading Index was revised higher for June.