Morning Market Update

Disappointing Tech Earnings Reactions Pressure Stocks

The US equity markets are under some pressure in early action as weakness in the technology sector, following lackluster reception by the Street to underlying components of better-than-expected earnings reports from Dow member IBM and Apple Inc, is weighing on sentiment. Meanwhile, an interest rate hike in China is also causing some uneasy sentiment and materials are also finding some pressure. The negative start to the day is overshadowing favorable profit reports from Dow members Bank of America and Coca-Cola Co as well as from Goldman Sachs, while lower-than-expected revenues from Dow member Johnson & Johnson are doing little to help limit the damage in morning action. Even an unexpected increase in housing starts appears to be falling on deaf ears, as building permits posted a surprising decline, and Treasuries are lower. Overseas, Asia was mixed in reaction to the plethora of earnings out of the US, while the central bank action from China is teaming up with a disappointing report on investor sentiment in Germany to bog down European equities.

As of 9:00 a.m. ET, the December S&P 500 Index Globex future is 13 points below fair value, the Nasdaq 100 Index is 35 points below fair value, while the DJIA is 95 points below fair value. Crude oil is down $2.27 at $81.53 per barrel, and the Bloomberg gold spot price is down $16.30 at $1,352.15 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.6% at 77.66.

Dow member International Business Machines Corp. (IBM $143) reported 3Q EPS of $2.82, above the $2.75 consensus estimate of analysts surveyed by Reuters, with revenues increasing 3% year-over-year (y/y) to $24.3 billion, slight exceeding the $24.1 billion that the Street had forecasted. The company said during the quarter it grew revenue in its hardware, software and services businesses, while it achieved “excellent” performance in its growth markets unit, reflecting continued strength of the infrastructure build-out in these countries. IBM raised its full-year EPS outlook. However, shares are under pressure after the company’s technology services contracts declined.

Apple Inc. (AAPL $318) announced 3Q earnings of $4.64 per share, exceeding the $4.09 that the Street anticipated, with revenues rising 67% y/y to $20.3 billion, well above the $18.9 billion that analysts expected. The company said international sales accounted for 57% of the quarter’s revenue. AAPL sold 3.89 million Macs in 3Q, a 27% y/y increase, and 14.1 million iPhones, 91% y/y growth, while sales of 9.05 million iPods where down 11% y/y. Moreover, the company sold 4.19 million iPads during the 3Q, but the results are catching a negative reaction from the Street as analysts were expecting closer to 5 million in unit sales. AAPL offered 1Q revenue guidance that exceeded expectations, but its 1Q EPS outlook came up short of forecasts.

Goldman Sachs Group Inc. (GS $154) achieved 3Q EPS of $2.98, above the $2.28 that analysts were anticipating, with revenues of $8.9 billion, topping the $7.9 billion that the Street had forecasted. The company said its results reflect “solid performances” across its businesses, led by its investment banking unit, but economic conditions continue to be “challenging” in a number of important markets.

Dow component Bank of America Corp. (BAC $12 ¹) posted 3Q profits ex-items of $0.27 per share, eleven cents above the consensus estimate, with revenues increasing 2.6% y/y to $26.7 billion, versus the $27.1 billion that analysts were expecting. The company said its credit costs declined for the fifth-straight quarter, and it benefitted from strong asset management fees out of its wealth management business.

Fellow Dow member Coca-Cola Co. (KO $60) reported 3Q EPS ex-items of $0.92, compared to the $0.89 that was estimated by analysts, with revenues increasing 5% y/y to $8.4 billion, besting the $8.3 billion that was anticipated on the Street. The beverage company said it had “strong” worldwide volume growth of 5% during the quarter.

Rounding out the busy reporting day for the Dow, Johnson & Johnson (JNJ $64) announced 3Q EPS of $1.23, compared to the $1.15 that was forecasted by analysts, but revenues declined 0.7% y/y to $15.0 billion, short of the $15.2 billion that was expected. However, JNJ raised its full-year EPS outlook.

Housing starts and building permits paint a mixed picture

Housing starts  for September came in above expectations, rising 0.3% month-over-month (m/m) from an upwardly revised 608,000 annual rate of units in August to a rate of 610,000 units, and compared to expectations of economists surveyed by Bloomberg, which called for starts to fall to 580,000. However, building permits unexpectedly fell m/m in September, declining 5.6% to an annual rate of 539,000, while August’s figure was upwardly revised by 2,000 to 571,000. The expectation was for permits to increase to 575,000 units. Treasuries are lower, giving up modest gains following the release.

In other economic news in the Americas, Brazil increased taxes on foreign inflows of investments for the second time this month, to try to prevent appreciation of the Brazilian Real and protect exports from what the nation’s Finance Minister Mantega called a global “currency war,” per Bloomberg.

Europe modestly lower after giving up gains on China action and disappointing data

Stocks in Europe are slightly below the flatline in afternoon action, led by weakness in basic materials, which found pressure to pare a majority of early gains following an interest rate hike out of China, which dampened the outlook for demand of resources. Materials also are under pressure after a larger-than-forecasted drop in a gauge of investor confidence in Germany—Europe’s largest economy. The German ZEW Survey of Economic Sentiment, a reading of what investors and analysts expect for economic activity six months from now, fell from -4.3 in September to -7.2 for October, and compared to the -7.0 reading that economists had expected. However, financials are posting solid gains to limit the decline across the pond amid the generally better-than-forecasted results from the US financial sector. Technology issues are also pacing the decline in the region amid the disappointing reaction to results from Apple Inc and IBM.

In other economic news in Europe, the ZEW Survey of euro-zone sentiment unexpectedly remained in positive territory, and euro-zone construction output declined, while a gauge of UK business optimism deteriorated more than expected.

The UK FTSE 100 Index is down 0.3%, while France’s CAC-40 Index and Germany’s DAX Index are declining 0.1%.

Asia mixed in reaction to US earnings

Stocks in Asia finished mixed with yesterday’s upbeat report from Citigroup Inc. (C $4) aiding sentiment but being somewhat offset by the negative reactions to results from the US tech sector. Japan’s Nikkei 225 Index increased 0.4% as traders grappled with the mixed bag of US earnings, but showed some resilience in the face of the Japanese yen remaining near the 1995 highs compared to the US dollar, and after the government downgraded its assessment of the economy for the first time since February 2009, due to the negative economic impact of the surging yen. However, Chinese equity markets moved nicely higher, with the Hong Kong Hang Seng Index increasing 1.3% and the Shanghai Composite Index gaining 1.6%. The positive moves came ahead the announcement from China’s central bank that it increased its one-year lending and deposit rates by 25 basis points. Meanwhile, Australian stocks eked out a gain, as the S&P/ASX 200 Index rose 0.1%, following the release of the minutes from the Reserve Bank of Australia’s October meeting, which revealed the arguments to hold rates steady were “finely balanced,” and while the RBA recognized that it could not wait indefinitely to see whether risks materialized, members judged that they had the flexibility to do so on this occasion. Rounding out the day, South Korea’s Kospi Index fell 1.0% on weakness in technology shares on the aforementioned reaction to earnings in the group.

In other economic news in the region, Hong Kong’s unemployment rate remained at 4.2%, while it was expected to decline to 4.1%, and South Korea’s department store sales rose 6.4% y/y and the nation’s discount store sales surged 18.0% y/y.