Morning Market Update

Stocks Moving Higher Despite Ongoing Euro Debt Concerns

Following yesterday’s final hour reversal to the upside, US stocks are extending gains in late-morning action as Greece, Germany, and France are set to talk tomorrow amid the growing uncertainty regarding a potential Greek default. Meanwhile on the US economic front, import prices fell by a smaller-than-expected amount and small business optimism dropped for the sixth-straight month. Treasuries are mostly lower in late-morning action, along with the US dollar, while gold and crude oil prices are higher. In equity news, Best Buy Co Inc missed analysts’ 2Q expectations, but maintained its full-year revenue outlook, while Steel Dynamics issued disappointing 3Q EPS guidance on lack of demand at the steel producer’s flat rolled unit. Overseas, Asia was mixed on the heels of the upside reversal in the US yesterday, and European equities are moving higher on a rebound in financials, but sentiment remains skittish toward the eurozone debt crisis.

At 10:53 a.m. ET, the Dow Jones Industrial Average is up 0.1%, the S&P 500 Index is advancing 0.4%, and the Nasdaq Composite is gaining 0.7%. WTI crude oil is rising $1.02 at $89.21 per barrel, and wholesale gasoline is off $0.01 at $2.73 per gallon, while the Bloomberg gold spot price is increasing $6.55 to $1,821.80 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.1% at 77.02. 

Best Buy Co. Inc. (BBY $23) reported 2Q earnings of $0.47 per share, below the $0.53 consensus estimate of analysts surveyed by Reuters, with revenues flat year-over-year (y/y) at $11.3 billion, also missing the $11.5 billion that the Street had expected. The electronics retailer said its 2Q same-store sales—sales at stores open at least a year—fell 2.8% y/y. BBY said its 2Q results reflect “continued macro challenges to overall consumer spending and lower consumer electronics industry sales,” but it believes it is well positioned for the holiday season. The company reiterated its full-year revenue outlook and issued annual EPS guidance that was roughly inline with expectations. Shares are solidly lower.

Steel Dynamics Inc. (STLD $11) announced that 3Q EPS are expected to be in range of $0.18-0.22, down from 2Q’s earnings of $0.43 per share, and below the $0.29 that analysts had expected. The steel producer said the earnings outlook is due to the “substantial drop” in projected profits at its flat rolled unit as demand during July and August did not materially improve, pricing remained a challenge, and the cost of raw materials did not decline with steel prices. However, the company said if more economic clarity develops throughout the remainder of the year, demand could be expected to increase, along with steel pricing and margins, which have already started to move, with the potential to positively impact 4Q results. Shares have overcome early weakness and are higher.

Import prices fall less than expected, while small business sentiment declines again

The Import Price Index declined 0.4% month-over-month (m/m) for August, compared to the expectation of economists surveyed by Bloomberg, which projected a 0.8% decline for the index. The drop follows the 0.3% increase seen in July, which was unrevised. Year-over-year, import prices are higher by 13.0%, versus the 12.5% forecast of economists, and the downwardly revised 13.8% gain that was posted in July, compared to the 14.0% increase that was originally reported.

Elsewhere, the NFIB Small Business Optimism Index dropped for a sixth-straight month in August, falling from 89.9 in July to 88.1, but was slightly above the expectation of economists, which called for a decline to 88.0. The decrease came as the number of firms reporting expectations of higher sales and a better economy fell, offsetting an increase in plans to hire and a gain in capital spending.

Treasuries are mostly lower in late-morning action on the gains in stocks and despite the data, with the yield on the 2-year note unchanged at 0.20%, while the yield on the 10-year note is rising 3 bps to 1.98%, and the 30-year bond rate is gaining 4 bps to 3.29%.

Europe higher but debt crisis uneasiness continues

The equity markets in Europe are gaining ground in afternoon action, with financials rebounding from yesterday’s steep losses. However, sentiment is being held in check by lingering concerns about a potential default in Greece, growing concerns about the threat of debt contagion in the eurozone, and waning confidence regarding the region’s policymakers’ ability to combat the debt crisis. Germany, France, and Greece are set to talk tomorrow, and German Chancellor Angela Merkel offered cautious comments about letting the Greek nation default. The head of Europe’s largest economy said, “The top priority is to avoid an uncontrolled insolvency, because that wouldn’t just hit Greece and the danger that it hits everyone, or at least a number of countries, is very big,” per Bloomberg. She added that, “I have made my position very clear: that everything must be done to keep the euro area together politically, because we would very quickly face a domino effect.”

Meanwhile, the skittish sentiment toward banks is evident as shares of BNP Paribas (BNPQY $18), which have erased early losses and are higher on the heels of yesterday’s sharp drop, after the bank denied rumors that it has been struggling to gain dollar funding from US money market funds. Additionally, Italian markets are moving higher as yesterday’s report that the nation is in talks with China on a possible debt purchase by the Asian nation is offsetting an auction of Italian debt, which showed higher borrowing costs and slowing demand.

Finally on the economic front, French consumer prices came in hotter than expected, while core consumer prices, excluding food and energy, in the UK exceeded economists’ forecasts. In other economic news, the UK trade deficit came in larger than expected, and a separate read on UK home prices declined inline with forecasts.

The UK FTSE 100 Index is up 0.7%, France’s CAC-40 Index is rising 0.8%, while Germany’s DAX Index and Italy’s FTSE MIB Index are gaining 2.2%, but Greece’s Athex Composite Index is 0.5% lower.

Asia mixed following upside reversal in the US yesterday

Stocks in Asia finished mixed in lighter-than-usual volume, with markets in Hong Kong and South Korea closed for holidays, on the heels of the swift reversal to the upside in late-day trading in the US yesterday on a report that China was meeting with Italy to discuss purchases of the euro-area nation’s debt. Japan’s Nikkei 225 Index rose 1.0% on the relative relief from the festering eurozone debt crisis, despite a solid drop in shares of Nintendo Co. Ltd. (NTDOY $21) ahead of the video game console maker’s conference regarding its 3DS handheld game player that appeared to disappoint analysts. Elsewhere, Australia’s S&P/ASX 200 Index gained 0.9%, led by strength in energy and resource stocks, which overshadowed a negative read on the nation’s business confidence.

However, China’s Shanghai Composite Index fell 1.1% after returning from a holiday yesterday, as stocks reacted to yesterday’s flare-up in default concerns in Greece and some lingering monetary policy tightening worries after the weekend’s data showed the nation’s exports and new yuan loans rose more than economists had anticipated for August.