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U.S. Equity Futures Lower on Portuguese Downgrade, Chinese Rate Hikes

|Includes:ASB, C, CMA, Capital One Financial Corporation (COF), PBCT, RF, SBIB, SBNY, SNV, STI, TCBI, UMBF

This morning.  U.S. equity markets are in a confirmed uptrend, but after yesterday’s mixed trade, futures are lower after Chinese monetary authorities raised deposit and lending rates.  Asian markets closed lower, but are in an uptrend.  In Europe, equity markets are lower, tending to wounds after Moody’s downgrade of Portugal yesterday.  U.S. Treasury prices are higher.  The dollar is slightly stronger.  Commodities markets are generally lower.  After a fair value adjustment of -3.67 points, September SPX equity futures are at 1329.20, down -5.07 points and near the session lows.  The SPX opens at 1337.88, -1.89% below its recent April 29 multi-year closing high, but +3.78% and +1.56% above its respective 20- and 50-day moving averages.  The SPX is +6.38% above its 1257.64 year-end close.  Next resistance is at 1341.08.  Next support is at 1334.49.

Tuesday, U.S. equity markets ended mixed, after 5 days of consecutive gains.  Market segments also closed mixed, with the greatest strength in oil and gas, consumer services and technology.  Financials lagged all other segments, ending -0.81% lower.  Of the major indexes, the Nasdaq posted the best gain, up +0.35%, compared to losses of -0.25%, -0.13%, and -0.10% on the NYSE composite, SPX, and DJI, respectively.  Market breadth was slightly negative.  Volatility rose modestly, though it hit its highest levels early in the session, then trended lower until the 2:00 announcement that Moody’s had downgraded Portuguese sovereign debt.  The VIX spiked to 16.35 on the news, but declined into the close.  The VIX ended at 16.06, up +1.01% from 15.87 the prior day.  NYSE volume rose +4.84% to 0.93x the 50-day moving average.  Despite the advance, trading desks reported a relatively quiet day, with lighter activity as the afternoon progressed.

With the uptrend’s resumption, the distribution day count reset to zero.  Volume was lower on the DJI, Nasdaq, and NYSE composite.  Volume rose on the SPX, but losses were too immaterial to qualify as a distribution day.  On the BKX, which posted a -1.16% decline, volume fell -5.17%.  Distribution days signal institutional selling in the prior 25 trading days.

Asian equity markets closed mixed.  In Japan, equities advanced for a seventh consecutive day.  The Nikkei closed up +1.10% on a +3.76% increase in volume.  The NKY closed at 10082.48, 9972.46, up +7.78% since the June 20th correction low and its first close above 10,000 since May 2nd.  Basic materials, telecommunications, and consumer services were segment leaders.  Technology, health care, and utilities lagged and closed lower.  Financials rose +0.89%.  In China, monetary authorities raised 1-year deposit and lending rates.  The Hang Seng and Shanghai composite fell -1.01% and -0.21%, respectively, with greater weakness in financial shares.  Volume rose on the Hang Seng, but declined -6.48% on the SHCOMP.  Trading focused on the Moody’s downgrade of Portugal and the likelihood of further monetary policy tightening, and growth outlook.  The SHCOMP has rallied +7.22% from its June 20th correction low.  The SHCOMP gapped lower, and trended lower through mid-afternoon, but rallied strongly into the close to end near the intraday high.  Oil and gas, utilities, and health care were segment leaders, while telecommunications, basic materials, and financials lagged and ended lower.  Financials closed off -0.889%.  The SHCOMP ended at 2810.48, -8.07% below its recent April 18th 3057.33 high, +0.09% above its 2010 close, and +0.90% above the 2785.34 50-day moving average.  In Europe, markets are lower in response to the Portugal sovereign debt downgrade and increase in Chinese interest rates.  The EuroStoxx50, FTSE, and DAX are lower, down -0.83%, -0.79%, and -0.45%, respectively.  Equity markets gapped lower and have twice tested resistance at 2825 on the Eurostoxx50.  Market segments are mixed, with technology, health care, and industrials leaders.  Telecommunications, consumer services, and financials are the laggards and lower by at least -1.04%.  Financials are down -2.23%.

Despite sovereign debt and other macro-concerns, LIBOR levels are at their lowest since early 2009, well below those seen prior to last year’s sovereign debt crisis.  Overnight USD LIBOR fell to 0.12450%, from 0.12500% the prior day, and down from 0.25188% at year-end.  USD 3-month LIBOR is unchanged at 0.24575%, compared to 0.24575% the prior day, but down from 0.30950% at year-end.  The U.S. dollar is slightly stronger against the euro, pound, and yen.  The dollar trades slightly below its 74.69 50-day moving average, but well below its respective 75.36 and 77.04 100- and 200-day moving averages.  The euro trades at US$1.4337, compared to US$1.4429 Tuesday and US$1.4539 the prior day.  The Euro trades above its US$1.4389 50-day moving average.  The dollar trades at ¥81.07, compared to ¥81.07 Tuesday and ¥80.80 the prior day.  The yen trades worse than its 50-day moving average ¥80.84.  U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.415% and 3.101%, respectively, compared to 0.426% and 3.121% Tuesday.  The yield curve narrowed to +2.686%, from +2.695% the prior day.  In the past year, the 2- and 10-year spread has varied from a low of +1.959% on August 26, 2010, and a high of +2.889% on February 3, 2011.  Commodities prices are mostly lower, with lower energy and precious metals, higher aluminum and copper, and lower agriculture.

U.S. news and economic reporting.  Reporting includes June Challenger job cuts and ISM non-manufacturing.  Challenger job cuts were +5.3% compared to the prior year, indicating continued worsening of employment markets.  The ISM report is released at 10:00.  Thursday’s reporting turns to June employment, with the release of ADP employment and the latest week’s initial jobless claims.  Friday, the Labor Department releases June non-farm payrolls. 

Overseas news:  Today, the People’s Bank of China raised the one-year deposit and lending rates by 25 basis points each, to 3.5% and 6.56%, respectively.  In June, U.K. home prices rose +1.2% over the prior month, the largest increase since October.  Today, the International Swaps and Derivatives Association said the current Greek debt rollover plan would not trigger credit default swap (CDS) payouts.  Today, yields on Portugal’s 2-year debt increased by +224 basis points to 15.19% following Moody’s downgrade to junk status yesterday.    

Company news/research:

·         C – placed on the Top Picks list at BofA/ML. 

1Q2011 Earnings.  The first quarter’s earnings results have exceeded EPS and revenue expectations.  Of the 498 S&P500 companies that reported earnings to date, 72% (358 of the 498) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat by an average of +7.0% (versus a historical average of +2%).  EPS is up +19.6% over the prior year.  Though challenged in the current operating environment, 372 companies (75%) reported increased revenues and 335 companies (67%) beat revenue estimates.  In the second quarter of 2011, analysts estimate the SPX will earn $24.36 per share, compared to $23.06 and $21.17 per share in 1Q11 and 2Q10, a +5.6% and +15.1% increase, respectively.   

With all 24 BKX members reporting, 75% (18 out of 24) beat operating EPS estimates.  Bank revenues disappointed slightly (by -0.78% on average), with 58% of BKX members missing estimates.  Eleven banks (46%) reported increased revenues over the prior year’s quarter.  For the second quarter of 2011, analysts estimate the BKX will earn $0.97 per share, compared to $0.96 and $0.61 per share in 1Q11 and 2Q10, a +1.0% and +59% increase, respectively.

 Tuesday’s equity markets.  On mixed volume, the equity markets closed mixed. The Nasdaq ended higher, up +0.35%, while the NYSE, SPX, and DJI closed down -0.25%, -0.13%, and -0.10%, respectively.  Markets ended a five-day streak of gains, but losses were slight despite, trading was within tight ranges throughout the day, and markets shrugged off the adverse Moody’s news.  The intraday SPX move was only 0.5 percent, its smallest since April 29th, when the index peaked year to date.  Markets were indicated down slightly and sold lower at the open.  At 10:00, May factory orders came in slightly fellow expectation.  Markets gained and then sold off sharply.  Indexes recovered back to breakeven at mid-day, and were gaining strength when the Moody’s Portugal downgrade spurred a sharp sell-off.  Markets shook off the news and again traded back to positive territory, only to give back most of those gains in the last hour. Trading desks indicated a very quiet day following the three-day holiday weekend.  The VIX finished the day at 16.06, up +1.20%.

Technical indicators are generally positive. The major indexes traded around their respective pivot points, and resistance and support levels were never in tested.  For the SPX, resistance remains at 1347 and then 1355, support is 1324 and then 1310. All the major indices finished above their 50-, 100-, and 200-day moving averages. The Bloomberg NYSE new net highs were +162 versus Friday’s +160. The relative strength indicator fell to 61.23 from Friday’s reading of 62.56, in the high end of a neutral range.

Market segment were mixed. Oil and gas, consumer services, and technology were the leaders, while industrials, utilities, and financials were the laggards.

Financials were the worst market segment.  The BKX, KRX, and XLF were all lower, off -1.16%, -1.01%, and -0.90%, respectively. The BKX began the day lower and fell further after the release of May factory orders.  The BKX gained back some of its loss through midday, but fell again on the Moody’s  downgrade.  The BKX recovered some into the last hour and finished lower than Friday, but up from the intraday lows.  The BKX had 2 names higher and 22 lower.  Leaders included COF and PBCT, while laggards were RF, STI and CMA.  The KRX finished the day with 8 names higher and 42 lower. Leaders included UMBF, TCBI, and SBNY. Laggards were SNV, SBIB, and ASBC. The BKX and XLF finished below the 50-, 100-, and 200-day moving average. The KRX finished above the 50- and 200-day, but below the 100-day. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -16.05% below its April 2010 high and -41.07% below its best level of 82.565 in September 2008.

NYSE Indicators.  Volume rose +4.84% to 906.95 million shares, from 865.08 million shares Friday, and 0.93x the 973.88 million share 50-day moving average.  Market breadth was slightly negative, and up volume lagged down volume.  Advancing stocks trailed decliners by -39 (compared to +1973 Friday), or 0.97:1.  Up volume lagged down volume by 0.62:1.

SPX.  On higher volume, the SPX fell -1.79 points, or -0.13%, to 1337.88.  Volume rose +6.19% to 677.83 million shares, up from 638.34 million shares Friday, but below the 755.68 million share 50-day moving average.  For the 176th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1317.29 vs. 1269.24, respectively).  The SPX closed above its 200-week moving average (1162.48).

The SPX opened flat at 1339 and quickly fell to the 1335 level by 9:40.  By 10:15, the index rallied back to the break-even line before momentum quickly reversed again, sending the index back to the 1335 level by 10:25.  At 10:45, a small rally to the 1337 level was sold down to the intra-day low of 1334.30 at 11:05.  Through 2:00, the index rallied consistently, retaking the break-even line at 1;45 and reaching the intra-day high of 1340.89 at 2:00.  At 2:00, Moody’s downgraded Portugal’s sovereign debt to junk status, sending markets sharply lower.  The SPX returned to the 1334 level by 2:25.  Buyers stepped in on the dip, and again lifted the index back to its break-even line by 3:25.  The SPX sold off into the close and finished in the middle of the day’s range.    

Technical indicators are turning positive.  The index’s reversal in June’s second half returned markets to a confirmed uptrend on July 1st.  For the third straight session, the SPX closed above all major moving averages.  The 50-day average remains above the 100-day moving average by a narrow margin as the 50-day average resumed its uptrend last Tuesday.  The SPX closed above 1300 for the fourth straight session.  The index closed above its April 2010 highs for the 147th straight session.  The SPX closed (by +3.78%) above its 20-day moving average (1289.20) for the fifth straight session.  The index closed (by +1.56%) above its 50-day moving average for the third straight session.  The index closed (by +1.63%) above its 100-day moving average (1316.43) for the third straight session.  The SPX closed +5.41% above its 200-day moving average.  All moving averages increased.  The directional momentum indicator is positive for the fourth straight session, and the trend is moderate and increasing.  Relative strength declined to 62.98 from 63.76, in the higher end of a neutral range.  Next resistance is at 1341.08; next support is at 1334.49.

BKX.  On lower volume, the KBW bank index fell -0.57 points, or -1.16%, to 48.65.  Volume fell -5.17% to 59.51 million shares, down from 62.76 million shares Friday and below the 84.08 million share 50-day average.  The BKX closed +13.19% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -16.05% and -12.55% below its April 23, 2010, and February 14, 2011 closing highs, respectively. 

Financials were the market’s worst performing segment, and large-cap banks underperformed regionals.  The BKX opened lower to the 49.10 level, setting the intra-day high immediately.  By 9:45, the index fell to the 48.60 level and continued to decline.  By 11:10, the index reached its intra-day low of 48.31.  Following the broader markets, the BKX rallied through 2:00, reaching 48.80.  After Moody’s 2:00 downgrade of Portugal’s debt, the BKX retraced to the 48.50 level by 2:30.  Financials attempted a weak rally into the close but finished towards the lower end of the day’s range. 

Technical indicators are mostly negative.  Bank stocks significantly underperformed the broader market during the recent correction, but led other sectors during the market’s recent rebound.  The 20-day moving average (47.31) is below the 50- and 100-day moving averages (48.94 and 50.69, respectively).  The 50-day average is below the 100-day moving average and has been below the 200-day moving average since June 15th.  The index closed above its 20-day moving average for fourth straight session.  The BKX closed back below its 50-day moving average for the first consecutive session.  The index closed below the 100- and 200-day moving averages for the 57th and 24th consecutive sessions, respectively.  The index closed below the 50.00 level for the 23rd straight session.  The 50- and 100-day moving averages fell.  The 20-day closed (by -1.63 points) below the 50-day for the 78th straight day, but the gap narrowed.  The 50-day moving average closed (by -1.08 points) below the 200-day moving average for the 13th straight session, and the gap expanded.  The 100-day moving average closed (by +0.67 points) above the 200-day moving average for the 101st straight session, but the gap narrowed.  The directional movement indicator is positive for the second consecutive session, and the trend is strong and declining.  Relative strength decreased to 55.07 from 60.03, a neutral rangeNext resistance is 49.10; next support at 48.25.