Evening Market Update

Greece is the Word

On Friday, US equities succumbed to exacerbated concerns over the eurozone debt crisis, courtesy of renewed default fears toward Greece, as well as a growing lack of confidence in the ability of European policymakers to disentangle the debacle. In addition, there appeared to be some skepticism that Washington has the mettle to unite in order to pass President Obama's proposed $447 billion job plan, as the summer's debt ceiling gridlock remains fresh in the minds of investors. Meanwhile, the equity front did little to aid sentiment as Dow member McDonal's posted lackluster August same-store sales results, fellow Dow component Bank of America is reportedly looking to cut 40,000 jobs, and Texas Instruments lowered its guidance. However, Dow member Johnson & Johnson, along with Bayer AG, received some good news that a committee of the US FDA recommended approval of their new treatment for the prevention of stroke. Treasuries erased early losses and moved higher amid the weakness in stocks, showing little reaction to a larger-than-expected increase in July wholesale inventories, while crude oil prices lost ground, and the US dollar moved sharply higher.

The Dow Jones Industrial Average tumbled 304 points (2.7%) to 10,992, the S&P 500 Index fell 32 points (2.7%) to 1,154, and the Nasdaq Composite dumped 61 points (2.4%) to 2,468. In moderately heavy volume, 1.2 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil lost $1.81 to $87.24 per barrel, wholesale gasoline dropped $0.12 to $277 per gallon, while the Bloomberg gold spot price rose $2.00 to $1,859.50 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was up 1.2% to 77.16. For the week, including dividends, the DJIA was down 2.2%, the S&P 500 Index lost 1.7%, and the Nasdaq Composite fell 0.5%.

Dow member McDonald's Corp. (MCD $85) reported global August same-store sales-sales at stores open at least thirteen months-grew 3.5% year-over-year (y/y), with US sales gaining 3.9% and European sales rising 2.7%. However, sales in its Asia/Pacific, Middle East and Africa (APMEA) segment were down 0.3%. According to Reuters, analysts expected global sales to rise 4.3%, 4.0% in the US, 4.7% in Europe, and 3.5% in its APMEA unit. Shares were solidly lower.

Elsewhere, the Wall Street Journal is reporting that officials at Dow component Bank of America Corp. (BAC $7) are discussing the elimination of roughly 40,000 jobs during the company's first wave of restructuring that CEO Brian Moynihan is expected to discuss Monday, citing people familiar with the matter. BAC did not comment on the report and shares finished lower

Meanwhile, Texas Instruments Inc. (TXN $26) offered its scheduled mid-quarter review, narrowing and lowering its expected ranges for 3Q revenue and EPS. TXN said it currently forecasts revenue between $3.23-3.37 billion, versus its prior range of $3.40-3.70 billion, while its earnings are expected to come in between $0.56-0.60 per share, compared to its previous outlook of $0.55-0.65 per share. The analog semiconductor company said the updated guidance is due to “broadly lower demand across a wide range of products, markets and customers.” TXN was mostly unchanged. 

Finally, Dow member Johnson & Johnson (JNJ $65) and Bayer AG (BAYRY $54) announced that an advisory committee of the US Food and Drug Administration (FDA) recommended approval of their new anticoagulant treatment for the prevention of stroke. JNJ said, "We are pleased with the committee's recommendation and look forward to working with the FDA to help make this important therapy available in the US." Despite the news, shares of both companies were lower amid the broad-based weakness in the equity markets.

Wholesale inventories exceed expectations, Obama’s job plan met with uncertainty

Wholesale inventories rose 0.8% month-over-month (m/m) in July, compared to the 0.7% increase that was forecasted by economists surveyed by Bloomberg, and June's 0.6% gain was left unrevised. Durable goods inventories rose 1.0% m/m, led by computer and computer equipment and software stockpiles, while inventories of nondurable goods were up 0.5%, on rising inventories of apparel and chemicals. Meanwhile, sales were "virtually unchanged", as durable goods sales rose 1.4% m/m, amid gains in motor vehicles and parts, as well as metals and minerals, while sales of nondurable goods fell 1.1%, on weakness in farm product raw materials and alcoholic beverages. The inventory-to-sales ratio-the amount of time it would take to deplete inventories at the current sales pace-rose to 1.17, from 1.16 in June.

Meanwhile, traders digested Thursday night’s $447 billion jobs plan from President Barack Obama, which consists of tax cuts and new government spending. However, the plan was met with some skepticism amid a lack of confidence that cohesion on Capitol Hill can be found to pass the proposed package in the wake of this summer’s debt ceiling debate. Also, there was uncertainty regarding how the plan will be paid for and how many jobs will be created.  Treasuries reversed early losses and finished higher amid the weakness in the equity markets. The yield on the 2-year note fell 3 bps to 0.17%, while the the yields on the 10-year note and the 30-year bond lost 6 bps to 1.92% and 3.25%, respectively.

Greece solvency concerns hammer Europe

Euro-area debt contagion concerns were exacerbated by fears of a possible default of Greece, as Bloomberg reported that German policymakers were told to prepare plans to shield banks in the event of Greek default. In an e-mailed statement, Greece's finance ministry debunked the default chatter as "organized speculation",adding that it is committed to "full implementation" of the bailout agreement. Moreover, uncertainty regarding the ability of policymakers to handle the crisis sapped sentiment, with the European Central Bank (ECB) announcing that Executive Board Member Juergen Stark will step down, due to personal reasons. Reuters had reported earlier that Stark resigned due to conflicts over the central bank's bond-buying program. Adding to the uneasiness, there appeared to be some caution as ahead of a two-day meeting of the finance chiefs and central bankers of the world's largest developed economies that make up the G7 that began today. Before the meeting, International Monetary Fund (IMF) Director Christine Lagarde urged countries to "Act now and act boldly to steer their economies through this dangerous new phase of the recovery", per Bloomberg.

In economic news in the region, Germany's consumer prices were revised higher, French industrial and manufacturing production rose much more than expected, UK producer prices were mixed, and Italy’s 2Q GDP was left unrevised at a 0.3% quarter-over-quarter rate of expansion.

In the Asia/Pacific region, reports showed China’s inflation cooled in August with consumer prices decelerating from a 6.5% y/y rise in July, to a 6.2% gain, matching expectations, while Chinese producer prices rose 7.3% compared to last year, versus the 7.5% increase seen in July, and the 7.2% that was estimated. In addition, the nation’s industrial production, fixed asset investment, and retail sales for August all rose roughly inline with expectations, but were slightly lower from July’s results. The data was welcome news on the inflation front and showed the government's aggressive monetary policy tightening efforts may not be impacting economic growth as much as some had expected.

Elsewhere, Japan's 2Q GDP was unfavorably revised to a 2.1% annualized contraction, compared to the 1.3% decline in output that was previously reported, but it matched economists’ expectations. A decrease in capital spending was the main contribution to the downward revision.

Stocks mixed as sentiment continues to be led by European headlines

The US equity markets finished lower in the holiday-shortened week, as sentiment hinged on news across the pond, with the eurozone debt crisis continuing to hold the bulls' reins. The grip loosened on a favorable court ruling out of Germany on the legality of Europe's largest economy participation in the euro-area bailouts, while tightening on reemerging Greek default concerns and the failure of the ECB to offer monetary policy accommodation in the face of the debt crisis and a downgraded assessment of the economy. Favorable reports out of the US, including an unexpected acceleration in the ISM Non-Manufacturing Index and a much larger-than-expected narrowing of the US trade deficit, had limited impact amid the festering debt uncertainty overseas.

US economic data to heat up, eurozone likely to remain in headlines

The US economic calendar will be more active next week, beginning with Wednesday's advance retail sales, forecasted to rise 0.2% month-over-month (m/m) in August, after gaining 0.5% in July, while sales ex-autos are expected to increase 0.2% and sales ex-autos and gas are estimated to grow 0.3%. Meanwhile, inflation readings will be monitored due to the impact on spending and corporate profits, starting with Wednesday's Producer Price Index (PPI), expected to show prices at the wholesale level fell 0.1% m/m in August after gaining 0.2% in July, while the core rate, which excludes food and energy, is anticipated to slow to a 0.2% rate. The release precedes Thursday's Consumer Price Index (CPI) report, forecasted to show a 0.2% m/m increase after rising 0.5% in July, while ex-food and energy it is expected to remain at a 0.2% rate. Thursday also brings the industrial production report, expected to be flat m/m in August after gaining a surprising 0.9% in July, while capacity utilization is forecasted to remain at 77.5%.

Other important US releases will be the first regional readings on manufacturing in September, after the August reports from the Empire Manufacturing Index and the Philly Fed Manufacturing Index were shockingly disappointing, but the national reading remained in economic expansion.

Other releases on the US economic calendar include import prices, MBA Mortgage Applications, business inventories, initial jobless claims, and the preliminary University of Michigan Consumer Sentiment Index reading for September. Other reports in the Americas include Canada's manufacturing sales, Brazil’s retail sales, and Mexico’s industrial and vehicle production.

Other international releases include euro-zone industrial production, employment, CPI and trade balance, UK housing prices, CPI, retail price index and retail sales, Japan's department store sales, machine tool orders and industrial production, Australia's housing starts, business and consumer confidence, and China's trade balance, new yuan loans and money supply. The central bank of New Zealand will meet and is expected to keep rates unchanged.