Morning Market Update

US Data Sours the Day, Despite Continued M&A

The global equity markets have taken a turn for the worse after an unexpected increase in weekly initial jobless claims and a surprising drop in a reading of Mid-Atlantic manufacturing activity. The disappointing reports are overshadowing the announcement from Dow member Intel Corp that it has agreed to acquire security software firm McAfee Inc for about $7.7 billion, boosting optimism and continuing the string of recent M&A activity. Treasuries have moved to the upside on the lackluster economic data, which is also offsetting an increase in the Index of Leading Economic Indicators. Meanwhile, the earnings front is heavy and mixed, with Applied Materials offering a favorable outlook, NetApp Inc topping the Street’s forecasts, and PetSmart Inc raising its outlook and issuing better-than-forecasted earnings, while Staples Inc matched forecasts and GameStop Corp disappointed on its outlook, EPS, and revenues. Overseas, Asia was broadly higher, while the US reports are weighing on Europe despite favorable economic reports out of Germany and the UK.

At 11:07 a.m. ET, the Dow Jones Industrial Average is 1.5% lower, the S&P 500 Index is down 1.6%, and the Nasdaq Composite is declining 1.5%. Crude oil is down $1.04 at $74.74 per barrel, wholesale gasoline is off $0.03 at $1.93 per gallon, and the Bloomberg gold spot price is up by $5.10 at $1,234.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is flat at 82.23.

Dow member Intel Corp. (INTC $19) announced that it has reached a definitive agreement to acquire security software firm McAfee Inc. (MFE $47) for $48 per share in cash, or about $7.7 billion. INTC said the acquisition reflects that security is now a fundamental component of online computing. Both company Boards have unanimously approved the deal, which is expected to close after MFE shareholders approve the deal and it gets regulatory clearances. INTC is lower, while MFE is surging.

Applied Materials Inc. (AMAT $11) reported fiscal 3Q EPS ex-items of $0.17, below the Reuters estimate of $0.25, but revenues rose more than 100% year-over-year (y/y) to $2.5 billion, up 10% versus the prior quarter, and exceeded the $2.4 billion that the Street was looking for. The chip equipment maker said it had strong results across its semiconductor, display and crystalline silicon solar businesses. AMAT issued 4Q EPS guidance the topped analysts’ expectations. Shares are modestly higher.

NetApp Inc. (NTAP $40) achieved fiscal 1Q profits of $0.49 per share, three cents above estimates, as revenues rose 36% y/y to $1.1 billion, roughly inline with forecasts. The data-storage firm said it benefitted from IT organizations transforming their data centers. NTAP’s 2Q EPS guidance range had a midpoint that exceeded analysts’ forecasts. NTAP is trading higher.

Staples Inc. (SPLS $19) announced 2Q EPS ex-items of $0.20, inline with analysts’ forecasts, with revenues flat y/y at $5.5 billion, below the $5.6 billion that the Street was expecting. The office supply chain said the sales environment is “challenging.” SPLS is under pressure.

PetSmart Inc. (PETM $33) is nicely higher after the pet supply firm increased its full-year EPS outlook and posted 2Q EPS of $0.41, five cents above the Street’s expectation. Revenues rose 6.2% y/y to $1.4 billion, inline with forecasts, while same-store sales—sales at stores open at least a year—grew 4.6% y/y.

GameStop Corp. (GME $ 19) is under solid pressure after the video-game retailer lowered its 3Q EPS outlook, posted 2Q earnings of $0.26 per share, which was one penny below expectations, and revenues of $1.80 billion that missed the $1.82 billion that analysts were forecasting. But GME did note that it was able to achieve both top-line and earnings growth “despite the ongoing volatility in the global economy.”

Jobless claims unexpectedly rise, LEI and Mid-Atlantic manufacturing read on the horizon

Weekly initial jobless claims rose by 12,000 to 500,000, versus last week's figure which was upwardly revised by 4,000 to 488,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decrease to 478,000. The four-week moving average, considered a smoother look at the trend in claims, increased by 8,000 to 482,500, while continuing claims fell by 13,000 to 4,478,000, compared to the 4,500,000 that was anticipated by economists.

Additionally, the Philly Fed Manufacturing Index unexpectedly fell, dropping from 5.1 in July to -7.7 in August, compared to the forecast for a slight increase to 7.0. The report depicts business activity in the mid-Atlantic region surprisingly contracted—the first monthly decline since July 2009—as a reading of zero is the demarcation point between expansion and contraction. Every component making up the index deteriorated, with the largest drop coming from the inventory component which tumbled from 4.5 to -11.6, and the employment component fell from 4.0 to -2.7. However, today’s report showed that manufacturing executives expect growth in business activity over the next six months. Today’s report was worse than Monday’s release of the Empire Manufacturing Index, a measure of manufacturing in the New York region, which rose in August to a level of 7.10, but was below the estimated increase to 8.00, from the previous month’s level of 5.08. In the Empire report, new orders and shipments fell sharply to levels below the zero mark, but the employment component of the report rose solidly, moving further into a level depicting expansion.

In other economic news, the Conference Board released the Index of Leading Economic Indicators (LEI) for July, which increased by 0.1%, matching expectations, while June’s 0.2% decline was revised to a 0.3% drop. The increase was paced by positive contributions from the average workweek, pace of deliveries, and stock prices, while negative contributors were money supply and orders from nondefense capital goods.

Both reports continue to show economic expansion, with the manufacturing index easing to 55.5 in July from 56.2, while the nonmanufacturing index rose to 54.3 from 53.8. Looking inside the report tells a more complete story. New orders, which show what future activity may look like, fell back on the manufacturing side to a one-year low, but still in expansionary territory at 53.5. Although that's somewhat disappointing, it continues to show growth, and was offset by the nonmanufacturing new order reading, which rose to 56.7 from 54.4—indicating increasing activity in the much-larger service sector.

Treasuries pared losses and are higher following the jobless claims data and the sharp deterioration in the Philly Fed Index.

Europe falls below the flatline as US data trumps upbeat euro-area reports

Stocks in Europe have moved below the unchanged mark in late-day action as some upbeat economic reports out of key nations in the region are being more than offset by the disappointing jobs and manufacturing data in the US. Economic optimism was initially supported by the German Bundesbank raising its growth forecast for Europe’s largest economy, as the central bank’s previous growth forecast of 1.9% for this year was revised to about 3% on the heels of the much stronger-than-anticipated 2Q GDP report released last week, which showed quarter-over-quarter (q/q) growth of 2.2%, compared to the 1.3% expansion that economists expected. Adding to the early economic optimism across the pond, UK retail sales excluding auto fuel rose 0.9% month-over-month (m/m) in July, versus the rise of 0.2% that was anticipated, and a separate report showed the UK budget deficit was smaller than expected, as the nation’s public sector net borrowing was 3.2 billion pounds in July, after posted a deficit of 13.9 billion pounds in June, and compared to the 4.8 billion pounds that was forecasted for July. However, a solid decline in shares of Holcim (HCMLY $13) is exacerbating losses in the region after the world’s second-largest cement maker posted smaller-than-expected first-half earnings, while it offered a cautious outlook on the impact of government austerity measures on infrastructure spending.

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

Asia higher led by chips

Stocks in Asia were higher across the board, with gains in semiconductor-related stocks leading the technology sector and equity markets in the region nicely higher, on the heels of the better-than-expected outlook from US chip equipment maker Applied Materials. The Japanese Nikkei 225 Index rose 1.3%, with stocks also being boosted by media reports that the Bank of Japan may hold an emergency meeting to discuss further easing of monetary policy amid the backdrop of a surging yen, which is tarnishing the outlook for profits of companies that rely heavily on sales outside the Asian nation. However, the speculation was kept in check as other reports suggested any policy action was unlikely before the BoJ’s regular scheduled meeting set for September 6-7th, according to Reuters. In other Japanese economic news, separate reports showed an all industry activity gauge unexpectedly rose m/m in June, machine tool orders were revised slightly higher for July, while Japan’s department store sales fell 1.4% y/y in July, after falling 6.0% in June. Meanwhile stocks in China were higher, with the Shanghai Composite Index rising 0.8% and the Hong Kong Hang Seng Index increasing 0.2%. Gains in Hong Kong were limited by the equity front as shares of China Mobile (CHL $54) declined solidly even after its first-half profits topped analysts’ forecasts as shares fell victim to profit taking, possibly fueled by some signs of increasing competition facing the world’s largest phone carrier. Moreover, Lenovo Group (LNVGY $12) came under some pressure after the PC maker’s 1Q profits came in short of analysts’ estimates on higher costs and discounting of prices for its products.

Elsewhere, Australia’s S&P/ASX 200 Index inched 0.1% higher after a report that showed average weekly wages grew at a slower pace than expected hamstrung enthusiasm, while New Zealand’s NZX 50 Index moved 0.4% higher on an improved read on consumer confidence and a mixed report on producer prices. In other economic news, India’s producer price increases slowed but still showed double-digit growth, and the BSE Sensex 30 Index increased 1.1%. Additionally, Taiwan’s Taiex Index eked out a 0.1% gain before the government reported that its 2Q GDP expanded 12.5% y/y, compared to the 10.2% growth that was anticipated. Rounding out the day, South Korea’s Kospi Index rose 1.0% amid the optimism in the technology sector.