Morning Market Update

Financials and Labor Data Dampen Recovery Sentiment

After racking up a string of solid upward moves recently, US stocks are under broad-based pressure in late-morning action, with concerns about a return to a recession ramping up on the heels of the August US labor report, which showed no jobs were added to nonfarm payrolls. Moreover, financials are seeing steep downward moves to amplify the losses on the Street, with Greek deficit concerns flaring back up and the New York Times reporting that the US Federal Housing Finance Agency is planning to sue more than a dozen large banks due to mortgage securities sales. Also, Dow member Bank of America Corp is also reportedly being asked by the Fed to issue a contingency plan in case conditions for the bank worsen. Treasuries are mixed, with yields on the mid-to-long end of the curve moving lower following the US jobs data. Elsewhere, gold prices and the US dollar are gaining ground, while crude oil is solidly lower. In other equity news, Starz Entertainment LLC announced that contract renewal negotiations with Netflix Inc have ended. Overseas, Asian markets closed mostly lower but ended the week higher, while European equities are sharply lower on the US data and aforementioned concerns toward Greece.

At 10:59 a.m. ET, the Dow Jones Industrial Average and the Nasdaq Composite are down 1.8%, while the S&P 500 Index is 1.9% lower. WTI crude oil is dropping $2.63 at $86.30 per barrel, and wholesale gasoline is off $0.07 at $2.82 per gallon, while the Bloomberg gold spot price is rising $50.25 to $1,876.35 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.2% at 74.72.

Financials are under some pressure on the heels of a report late yesterday from the New York Times, suggesting the US Federal Housing Finance Agency (FHFA) is planning to sue more than a dozen large banks, including Dow members Bank of America Corp. (BAC $7) and JPMorgan Chase & Co. (JPM $35), along with Goldman Sachs Group Inc. (GS $107). According to the report, the suit is for allegedly misrepresenting the quality of mortgage securities sold during the housing bubble and the FHFA will seek billions of dollars in compensation. None of the entities involved have commented.

Separately, the skittishness toward the sector is being heightened by a report from the Wall Street Journal that the US Federal Reserve is asking for Bank of America Corp. to issue contingency plans it could take if conditions worsen for the financial firm. BAC has not commented on the report and shares are solidly lower.

Meanwhile, shares of  Netflix Inc. (NFLX $213) are solidly lower after its partner Starz Entertainment LLC announced that contract renewal negotiations with NFLX have ended and when the current agreement expires on February 28, 2012, it will cease to distribute its content on the NFLX streaming platform. The expired contract will result in NFLX being unable to offer content from the studios of Dow member Walt Disney Co. (DIS $33) and Sony Corp. (SNE $22). Starz said the decision is a result of its strategy to protect the premium nature of its brand by preserving the appropriate pricing and packaging of its exclusive content. NFLX has not commented.

Nonfarm payrolls come in flat and hourly earnings decline

Nonfarm payrolls were unchanged month-over-month (m/m) in August, compared to the consensus estimate of economists surveyed by Bloomberg, which forecasted a 68,000 increase. Additionally, prior months were revised down by 58,000, with June now reported at a gain of 20,000 and July at an increase of 85,000 jobs. Excluding government hiring and firing, private sector payrolls increased by 17,000 in August, versus the forecast of a gain of 95,000, while prior months were revised by a combined 3,000 lower, to a gain of 156,000 in July and 75,000 increase in June. The unemployment rate remained at 9.1%, matching expectations. Additionally, average hourly earnings unexpectedly declined, dipping 0.1% versus the Street's forecast of a 0.2% increase, while average weekly hours surprisingly slipped to 34.2, from 34.3 in the previous month, compared to expectations of an unchanged reading.

The report was negatively impacted by the Verizon strike, which lowered payrolls by 45,000, and excluding this impact, private payrolls would have increased 62,000. Health care accounted for the majority of the increase in private jobs, growing by 35,500 during the month. Temporary help added 5,000 and has shown little improvement on a net basis so far this year. Elsewhere, manufacturing lost 3,000 jobs.

Treasuries are mixed with the yields on the mid-to-long end of the curve moving solidly lower following the employment data, while rates on the short-end are modestly higher. The yield on the 2-year note is up 2 bps to 0.20%, while the yield on the 10-year note is down 8 bps to 2.05%, and the 30-year bond rate is falling 11 bps to 3.39%.

Please note that all US markets will be closed on Monday in observance of the Labor Day holiday.

Europe under pressure as Greek rescue uncertainty elevates and US jobs data disappoints  

The equity markets in Europe remain solidly lower in late-day action, led by financials, amid festering uncertainty regarding the region’s bailout of debt-laden Greece, after it announced that it could miss its budget deficit target due to the nation’s deepening recession. Also, talks between Greece and the European Union, International Monetary Fund, and the European Central Bank regarding its budget deficit conditions that need to be met to qualify for the eurozone’s rescue funds have been put on hold and will return in mid-September, per Bloomberg.

Meanwhile, the disappointing US labor data is applying further pressure on stocks in Europe. In economic news, eurozone producer prices rose 0.5% m/m in July, matching expectations, after being flat in June. Year-over-year, producer prices were 6.1%, also inline with forecasts, after rising 5.9% in June.

The UK FTSE 100 Index is down 2.7%, while France’s CAC-40 Index, Germany’s DAX Index, and Greece’s Athex Composite Index are falling 4.0%.

Asia falls ahead of US jobs data, but closed out a solid week

Stocks in Asia finished mostly lower in cautious trading ahead of Friday’s US labor report and as debt concerns continued in Europe, but most major markets in the region posted solid gains for the week. Japan’s Nikkei 225 Index dropped 1.2% as the concerns in Europe and the cautiousness preceding the jobs data in the US were exacerbated by a report that showed the Japanese capital spending in 2Q unexpectedly fell. Also, automakers came under pressure to weigh on Japan’s equity markets, following yesterday’s disappointing August US sales reports from  Toyota Motor Corp. (TM $71) and Honda Motor Co. (HMC $33). Elsewhere, South Korea’s Kospi Index declined 0.7%, Australia’s S&P/ASX 200 Index dropped 1.5%, and Hong Kong’s Hang Seng Index fell 1.8%, but all these markets were higher for the week. However, China’s Shanghai Composite Index finished out the biggest weekly decline since May, per Reuters, falling 1.1% on the day. Finally, India’s BSE Sensex 30 Index returned from a multi-session holiday, gaining 0.9%, aided by a report that showed although manufacturing activity in the nation slowed for the fourth-straight month in August—easing concerns about further monetary policy tightening—the index remained at a level depicting expansion.