Morning Market Update

Stocks Fall Ahead of Housing Report

Equities are lower ahead of a report on existing home sales for the US, as fears about the global economic recovery continue to weigh on sentiment, with a report from building material company CRH Plc adding to the bearish case, to the benefit of Treasuries. CRH significantly lowered its forecast on lower-than-expected spending in the US from both commercial and state and local government projects. In equity news, device maker Medtronic lowered guidance, and Dow component Pfizer announced disappointing clinical trial results, while Potash Corp. of Saskatchewan and 3PAR both reportedly could receive new buyout offers. European equities are lower in afternoon trading, and Asian shares were lower, with Japan entering bear market territory.

As of 8:45 a.m. ET, the September S&P 500 Index Globex futures is 12 points below fair value, the Nasdaq 100 Index is 26 points below fair value, and the DJIA is 104 points below fair value. Crude oil is down $1.26 at $71.84 per barrel, and the Bloomberg gold spot price is down $12.38 at $1,213.78 per ounce.

Medical device maker Medtronic Inc (MDT $33) announced a 1Q profit ex-items of $0.80 per share as revenue fell 4.1% year-over-year (y/y) to $3.77 billion, while the Street’s estimate was for $0.80 in EPS on sales of $3.96 billion. The company lowered its full year EPS forecast to $3.40-3.48 from $3.45-3.55, saying that a “softer global healthcare market impacted by decreased utilization and increased price pressure” made for a difficult quarter.

Dow component Pfizer (PFE $16) announced that its cancer treatment Sutent failed in a large-scale study to improve overall survival in patients with a form of lung cancer.

In M&A news, Canada’s Globe and Mail is reporting that Rio Tinto PLC (RTP $49), along with a Chinese partner, may be considering a bid for Potash Corp. of Saskatchewan Inc. (POT $151), after Potash formally rejected the $38.6 billion, $130 per share, unsolicited buyout from BHP Billiton (BHP $66), saying it “substantially undervalues” the company. The report said that Brazil’s Vale S.A. (VALE $27) appears to have left the discussions, and Vale issued a statement saying that any rumors of negotiations or bids were “unfounded.” A spokesperson for Rio Tinto declined to comment but noted the newspaper was the “only one in the world reporting it.”

The other hotly contested merger in recent news, for data storage company 3PAR Inc (PAR $25), is in the headlines today, as Bloomberg is reporting that Dell Inc (DELL ) is readying a sweetened offer after being outbid by Hewlett-Packard Co’s (HPQ $39) $24 per share cash bid. All three companies declined to comment.

Existing home sales and Richmond Fed on tap, Fed vote split at August meeting

The economic calendar starts off after the open with the 10 a.m. EST release of existing home sales, forecasted to drop 13.4% m/m in July to an annual rate of 4.65 million units after falling 5.1% in June and dropping 2.2% in May. Additionally, the Richmond Fed Manufacturing Index will be released, expected to fall to 8 in August from 16 in July, while zero is the line that divides expansion from contraction. Treasuries are surging ahead of the report in a flight-to-safety bid, as global economic recovery anxiety weighs on stocks.

Pending home sales fell 2.6%, which was an improvement to the 30% drop seen in May immediately after the expiration of the federal homebuyer tax credit. Pending home sales are a strong gauge of the pipeline for existing home sales. However, even with mortgage rates at a historic low, the housing market continues to have trouble gaining traction.

The Wall Street Journal is reporting that policymakers at the August 10th meeting of the Federal Reserve were more split than initially reported, with at least seven of the seventeen officials speaking against the proposal or had reservations about the Fed’s decision to keep its balance sheet steady to provide support to the economy.

Europe falls on economic recovery worries

Stocks in Europe are lower in afternoon action, as apprehension about the global economy built after Ireland’s CRH Plc (CRH $15), the world’s second largest maker and distributor of building materials according to Bloomberg, said it would miss earnings as US sales were lower than expected. Shares were off over 15% as CRH said that spending on US commercial, as well as state and municipal projects, were lower than expected, and that July’s prediction of a y/y increase in EBIDTA from last year’s $1.45 billion was now “unlikely,” and that concerns about the US recovery have “increased with a continuing flow of disappointing data.” Adding to economic concerns were comments from Bank of England policy maker Martin Weale, who told the London-based Times that the UK faces a “real risk” of a second recession, with a “significant chance” of economic contraction over a four-quarter period.

On the positive side of the ledger, Persimmon Plc (PSMMF $6) the UK’s third-largest homebuilder according to Bloomberg, posted strong profits after raising prices as the UK housing market improved, and euro-zone industrial new orders of 2.5% were higher than forecast. Germany reported final 2Q GDP at an unrevised 2.2% quarter-on-quarter (q/q), or 9.1% q/q annualized, led by an 8.2% q/q increase in exports, while imports rose 7.0%, capital investment gained 4.7%, and private consumption advanced 0.6%. Elsewhere, Roche Holding AG (RHHBY $33) entered a partnership deal with privately-held US biotech company Aileron Therapeutics to provide a class of drugs to treat diseases such as inflammation and metabolic ailments, where Aileron may receive up to $1.1 billion in milestone payments and fees.

The UK FTSE 100 Index is down 1.8%, France’s CAC-40 Index is lower by 2.0%, and Germany’s DAX Index is declining 1.6%.

Asian shares lower, Japan enters bear market

Stocks in Asia were lower paced by declines in Japan, as the Nikkei 225 Index fell 1.3%, making for a 21% decline since April 5, as the yen continued to post a new 15-year high against the US dollar, and nine-year high versus the euro. Finance Minister Noda remarked today that “excessive and disorderly movements in the currency market can have a negative impact on the stability of the economy,” and the lack of action by policymakers on the currency continues to weigh on Japanese stocks. Meanwhile, the head of the Japanese Trade Union Federation said he told Prime Minister Kan that G-7 finance ministers and central bankers should coordinate action to stabilize the yen.

Elsewhere in Asia, Australia’s S&P/ASX 200 Index fell 1.1%, led lower by resource names, as traders continue to reflect on the global economic recovery after the US reported disappointing initial jobless claims and Philly Fed data last week. Meanwhile, Foster’s Group Ltd (FBRWY $6) fell after reporting a second-half loss after posting a writedown for its wine division. Elsewhere, China's Shanghai Composite Index rose 0.4%, led by property developers after SINA Corp (SINA $42) reported on its website that weekly new home transactions jumped in the southern city of Shenzhen. Hong Kong's Hang Seng Index fell 1.1%, after Aluminum Corp (ACH $20), also known as Chalco, posted a $14 million loss for the June quarter, but said that losses in July narrowed from June, and PCCW (PCWWY $4), Hong Kong’s biggest phone carrier according to Bloomberg, fell nearly 10% after saying it would sell stock to reduce debt. South Korea's Kospi Index lost 0.4%, and India’s BSE Sensex 30 Index fell 0.5%.