Stocks Fall Back to Earth After Starting Strong
The US equity markets were poised to extend the recent rally after starting the session off higher, but an afternoon selloff put an abrupt end to those hopes, leaving the major indexes solidly lower. Eurozone debt concerns continued to limit the market’s upside, as traders look ahead to some key events in the region tomorrow. Reports from the US economic docket were promising, as durable goods orders came in better than expected, and mortgage applications also increased. In earnings news, Jabil Circuit and Family Dollar Stores both beat the Street’s profit expectations, while Darden Restaurants posted results that were inline with analysts’ projections. Elsewhere on the equity front, Amazon.com unveiled a new line of tablet and e-reader devices aimed at competing with Apple. Treasuries moved lower, as did crude oil and gold prices, while the US dollar moved to the upside.
The Dow Jones Industrial Average fell 180 points (1.6%) to 11,011, the S&P 500 Index lost 24 points (2.1%) to 1,151, and the Nasdaq Composite declined 55 points (2.2%) to 2,492. In moderate volume, 1.0 billion shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil fell $3.78 to $80.67 per barrel, wholesale gasoline lost $0.05 to $2.64 per gallon, and the Bloomberg gold spot price declined $43.34 to $1,607.39 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.3% to 78.05.
Amazon.com Inc. (AMZN $230) unveiled its Kindle Fire tablet, seen as competitor to Apple Inc’s (AAPL $397) iPad, which has a 7 inch touch screen and all content backed up with cloud computing technology, for a price of $199. The Fire has Wi-Fi internet capability and can stream movies and TV shows along with its access to AMZN’s library of e-books and app store. However, the device does not have a camera and 3G capability. Additionally, AMZN unveiled a slew of different Kindle e-reader models ranging in price from $79 to $149, depending on if the device carries touch-screen technology and whether it has 3G capability. Shares of AMZN were nicely higher, while AAPL traded modestly to the downside.
Meanwhile, Jabil Circuit Inc. (JBL $19) posted fiscal 4Q EPS ex-items of $0.62, exceeding the $0.56 that analysts had forecasted, with revenues growing 10.3% y/y to $4.3 billion, topping the $4.2 billion that the Street had projected. JBL issued 1Q EPS guidance that topped expectations, noting that “while macroeconomic conditions remain uncertain,” it expects continuing growth due to the sustained demand for its services. Shares finished solidly higher.
As previously indicated early this month, Darden Restaurants Inc. (DRI $44) reported fiscal 1Q profits of $0.78 per share, with revenues rising 7.2% year-over-year (y/y) to $1.9 billion, matching the consensus estimate of analysts surveyed by Reuters. The restaurant company said it saw 2.8% growth in 1Q same-store sales—sales at stores open at least a year—reiterating that strong sales growth at its Red Lobster and LongHorn Steakhouse establishments was offset by lower-than-expected sales at its Olive Garden chain, unfavorable y/y commodity costs and the adverse impact of Hurricane Irene. DRI moved lower.
Finally, Family Dollar Stores Inc. (FDO $53) announced fiscal 4Q EPS of $0.66, three cents above the Street’s expectations, with revenues growing 9.1% y/y to $2.1 billion, inline with analysts’ forecasts. The discount retailer said its 4Q same-store sales increased 5.6% y/y, as a result of increased customer traffic and higher average customer transaction values. FDO issued full-year 2012 EPS guidance the roughly matched the Street’s estimate. FDO gave up early gains to finish in the red.
Durable goods orders come in better than expected and mortgage applications rise
Durable goods orders exceeded expectations, dipping 0.1% month-over-month (m/m) in August, compared to the 0.2% decrease that was expected by economists surveyed by Bloomberg, and July’s figure was revised from a 4.0% gain to a 4.1% rise. Meanwhile, ex-transportation, orders also came in better than forecasts, slipping 0.1% in August, compared to the expectation of a 0.2% decline, and July’s figure was left unadjusted at a 0.7% gain. Elsewhere, orders for non-defense capital goods excluding aircraft, considered a good proxy for business spending, came in well above forecasts, rising by 1.1% in August, compared to the 0.4% increase that was projected, after falling by a favorably revised 0.2% in July, from the initial report of a 1.5% decline.
The report can be volatile on a m/m basis as orders for items expected to last at least three years can fluctuate widely and orders for defense and transportation can skew the headline figure. However, digging into the report, the business spending component is likely to help soothe the growing fears of a return to a recession, along with the favorable revisions seen to July’s data. Orders for computers and related products rose 5.5% and communications equipment orders jumped 7.8% to lead the way, while demand for electrical equipment, appliances and components gained 1.3%. Elsewhere, orders for motor vehicles and parts fell 8.5%, offsetting sharp increases in aircraft and parts.
Although the Federal Reserve characterized the downside risks to its economic outlook as “significant” in their latest monetary policy statement a week ago, the Central Bank noted that business investment in equipment and software continues to expand. Also, the Fed added that they expect “some pickup,” in the economy, versus a “somewhat slower recovery” assessment in its August meeting, while announcing that it will purchase longer-term Treasuries and sell the same amount in shorter-term Treasury securities, known as “Operation Twist.” The Fed’s action is an attempt to further reduce borrowing costs and push money via lending out into the real economy.
In other economic news, the MBA Mortgage Application Index rose 9.3% last week, after the index that can be quite volatile on a week-to-week basis, gained 0.6% in the previous week. The increase came as an 11.2% jump in the Refinance Index was complimented by a 2.6% increase in the Purchase Index. The rise in mortgage activity came as the average 30-year mortgage rate moved lower by 5 basis points (bp) to 4.24%.
Treasuries were modestly lower, as the yield on the 2-year note rose 1 bp to 0.25%, the yield on the 10-year note was 2 bps higher at 1.99%, and the 30-year bond rate gained 1 bp to 3.08%.
Greek concerns continue to curb global optimism
The European markets took a break from the recent rally seen across the pond on optimism eurozone leaders are discussing more aggressive and effective measures to tackle the region’s debt crisis. Traders took a breather on the heels of a late-day report yesterday by the Financial Times that euro-area members are torn between the amount of losses that private creditors should take in their participation in the second bailout of Greece, which fostered a reemergence of uncertainty regarding a potential default of the troubled nation. However, a Greek newspaper reported that indications of Greek bondholders participation in a debt swap, a component of the terms of the second bailout for Greece, has reached its 90% target and could exceed the target amount, citing unnamed Greek Finance Ministry officials. The Greek government declined to comment on the report.
Meanwhile, traders may have treaded with some caution ahead of Germany’s vote tomorrow to ratify the recent expansion of scope of the eurozone bailout fund, known as the European Financial Stability Facility (EFSF), and as euro-area officials are set to meet in Greece to review the nation’s austerity progress in order to determine if it will qualify to receive the next installment of financial aid as part of the first bailout for the country. Meanwhile, Finland did vote in favor of the expansion of the EFSF, offering some support to sentiment across the pond.
Elsewhere, the European economic front provided some key reports worth mentioning, as French 2Q GDP was left unrevised at flat quarter-over-quarter growth, while its y/y rate of output was adjusted modestly higher. On inflation, Germany’s m/m import prices fell more than expected in August, while consumer prices in Europe’s largest economy came in hotter than anticipated. Finally, Italian business confidence deteriorated more than forecasted for September.
In Asia/Pacific economic news, Australia’s new home sales rebounded in August, while reports out of South Korea showed that business sentiment in the non-manufacturing sector improved and manufacturing confidence remained unchanged for October. Elsewhere, Hong Kong’s exports rose by a smaller rate than expected and China’s Leading Index decelerated slightly for August.
The highlight of tomorrow’s US economic calendar will be the final reading of 2Q gross domestic product (GDP), which is expected to be revised higher to 1.2% from the second reading of 1.0%. Personal consumption is expected to be unrevised at 0.4%, while trade is expected to lift the final GDP figure. Weekly initial jobless claims will also be released, with economists looking for a slight drop to 420,000 from last week’s reading of 423,000. Finally, the markets will get one last read on the housing market for the week in the form of pending home sales for August, forecasted to decline 1.9% after falling 1.3% in July. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose 7.7% in August.
On the international front, the UK will report on housing prices and mortgage approvals, Germany will release its unemployment rate for September, and the eurozone will announce its final reading of consumer confidence for September.
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