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Chinese, Eurozone PMIs Show Weakness, Push Equities, U.S. Futures Lower

|Includes: SunTrust Banks, Inc. (STI)

This morning. U.S. equity markets are in correction. All the major indexes closed below their respective 20-day moving average. The DJI closed above it 50-day moving average. The SPX closed -2.85% below its recent April 2nd 1419.04 high. All major indices are above their respective 100- and 200-day moving averages. Most moving averages are trending higher, though the SPX 20-day moving average fell for a 9th consecutive day. Shorter-term averages remain above longer term averages. The SPX is in bull market territory, closing up +28.3% above the 1074.77 October 4th intraday low. Financial stocks have outperformed, with the BKX up +46.1% in the same period.

In Asia, equity markets closed lower, with Hong Kong significantly lower, but a modest loss in Tokyo. In Europe, equity markets are selling off after the 1st round of French national elections and a weaker than expected April PMI, which showed contraction in both industrials and services sectors. Additional commentary focuses on earnings, the likelihood of Chinese policy easing, and Eurozone sovereign debt developments. The French election run-off is scheduled for May 6th. Also, Greek parliamentary elections are on May 6th. The dollar is mixed. U.S. options markets suggest a neutral short-term outlook. Commodities prices are mostly lower. U.S. Treasury yields are lower, with the 10-year at 1.916%, down from 1.963% the prior day. U.S. repo rates are at 12 bps.

After a fair value adjustment of -0.92 points, June SPX equity futures are at 1362.30, down -11.98 points. The SPX opens at 1378.53, -0.97% below and -0.07% below its respective 20- and 50-day moving averages, and +3.83% and +8.27% above its respective 100- and 200-day moving averages. Next resistance is at 1384.97. First support is at 1374.53.

Friday. On light economic news, but with continued better than expected 1Q2011 earnings reports, equity markets opened higher, but for a 2nd consecutive day, reversed and moved lower through the afternoon session. Indexes closed mixed, but near their intraday lows. The DJI posted a +0.51% gain, followed by the NYSE composite and SPX, which rose +0.37% and +0.12%, respectively, while the Nasdaq closed off -0.24%, lower for a 3rd consecutive day. From its prior 1376.92 close, the SPX opened just below 1382, and by mid-morning reached its 1387.40 intraday high. After a briefly trading back to 1385, the index unsuccessfully retested resistance as it moved into the afternoon session. Selling pressure built somewhat as buyers stepped away ahead of the weekend, and the index drifted lower into the close. The SPX closed -0.97% and -0.07% below its 20- and 50-day moving averages. NYSE volume rose +17.4% to 1.21x the 50-day moving average. Market breadth was positive. Most market segments closed higher. Leaders were utilities, industrials, and consumer goods, which closed up at least +0.73%. Laggards were basic materials, financials, and technology, which fell at least -0.18%.

DJ transports underperformed the industrials, rising +0.11% to close at 5234.25, up from 5228.72 the prior day, and -2.51% below its 5368.93 February 3rd closing high. The index closed -0.19% below and +0.19% above its respective 20- and 50-day moving averages. The TRAN has not confirmed multiple DJI new highs subsequent to February 3rd. The DJI closed -1.17% below its recent April 2nd high.

Technical indicators were mixed. The DJI recaptured it 50-day moving average. All other major indexes closed below their respective 20- and 50-day moving averages. All closed above their respective 100- and 200-day moving averages. Volatility fell -5.01% with the VIX at 17.44 at the close. The CBOE put/call skew rose to 118.05, up +0.38% from 117.60 the prior session, within a 115-120 neutral range.

Immediate support is 1375, then 1353 (a -38.2% Fibonacci retrace), 1343 (the March low), 1325 (the February low), 1312 (a 61.8% Fibonacci retrace), 1297 (the January 12th high), and 1293 (the October 27th high). Immediate resistance is 1380 (the 50-day moving average), then 1385, 1392 (the 20-day moving average), then 1402, and 1419 (the April high).

Trading desks reported a continuation of recent themes, i.e., the absence of much conviction and reluctance of participants to expand risk positions despite stronger than expected corporate earnings.

The distribution day count was unchanged at 11 on the NYSE composite, 7 on the DJI and Nasdaq and 6 on the SPX. The BKX count rose to 8.

In Asia, equity markets closed lower, with greater weakness in China. Volumes were mixed. Commentary focused on today's HSBC flash Chinese manufacturing report for April, which at 49.1 (compared to 48.3 prior) showed contraction for a 6th consecutive month, which strengthened views China will ease monetary and other economic policies. In Tokyo, the NKY closed down -0.20% on a -7.56% volume decrease. The index closed below 10,000 for the 14th consecutive day. In Hong Kong, the HSI closed down -1.84% on a +10.5% volume increase. In Shanghai, the SHCOMP fell -0.76% on a +5.20% increase in volume.

In Japan, the NKY closed at 9,542.17, down from 9,561.36 at the prior close. The index gapped higher to open at 9,600 and rose in early trading to an intraday high of 9,643.27, but immediately sold off to a late morning 9,520.98 intraday low before finding support and grinding higher through the rest of the session to narrow losses. The index closed -6.95% below its recent March 27th high, and -2.41% and -1.797% below its respective 20- and 50-day moving averages. Market segments closed mixed. Leaders were oil and gas, health care, and telecommunications, which closed up at least +0.88%. Laggards were financials, utilities, and consumer services, which fell at least -0.69%.

In China, the Hang Seng closed at 20,624.39, down from 21,010.64 at the prior close. The index closed -4.87% below its February 29th high. Volatility rose +06.72% as the VHSI closed +1.15% above its 20-day moving average. The index opened lower, trending gradually lower, but accelerating to the downside in the final hour. The index closed at its intraday low. The HSI closed -0.27% and -1.80% below its respective 20- and 50-day moving averages. Most market segments ended lower. Leaders were technology, which rose +1.11%, and utilities and consumer goods, which fell at least -1.19%. Financials lost -1.96%. Laggards were basic materials, industrials, and telecommunications, which closed down at least -2.03%.

In Shanghai, the SHCOMP closed at 2,388.59, down from 2,406.86 at Friday's close. The SHCOMP traded narrowly through earning afternoon, sold off in mid-afternoon to its 2,383.07 intraday low, and rallied modestly in the final hour. The index closed -3.46% below its recent 2,474.07 March 14th high. The index closed +2.34% and +0.64% above its respective 20- and 50-day moving averages. Most market segments closed lower. Leaders were telecommunications, which rose +1.36%, and industrials and utilities, which fell at least -0.06%. Financials lost -0.76%. Laggards were consumer goods, consumer services, and basic materials, which lost at least -1.16%.

In Europe, equities are selling off and trade near their intraday lows. Commentary focuses on better than expected German confidence. The Euro Stoxx 50, FTSE 100, and DAX are down -2.26%, -1.71%, and -2.66%, respectively. All trade below their 20- and 50-day moving averages. The FTSE 100 also trades below its respective 100-day moving average. The Euro Stoxx 50 and CAC also trade below their 100- and 200-day moving averages. Compared to the prior day's 2,311.27 close, the Euro Stoxx 50 trades at 2,258.90, compared to the 2,255.66 intraday low. The index is -6.26% and -8.94% below its respective 20- and 50-day moving averages. All market segments are at least -1.27% lower. Leaders are telecommunications, consumer goods, and technology. Laggards are oil and gas, financials, and basic materials, which are down at least -2.64%.

Libor, LOIS, Currencies, Treasuries, Commodities:
 

  • USD LIBOR is 0.14700%, down from 0.14800% the prior day. The recent low was 0.13850% on March 1st, down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.46565%, unchanged from 0.46565% the prior day, and down from the January 4th peak of 0.58250%.
  • The US Libor-OIS (LOIS) spread is 33.17 bps, up from 33.01 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS is 39.32 bps, down from 39.40 the prior day and the December 27th high of 98.80 bps. Moves in the LOIS indicate changes in intra-bank lending risk premiums.
  • The Euro 3-month basis swap is -47.50, unchanged from -47.50 bps the prior day, but up from a trough of -147.00 bps on December 14th. A normal range is between -10 bps and -40 bps.
  • The U.S. government overnight repo rate is 12 bps, compared to an August 2nd high of 33 bps.
  • U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.254% and 1.916%, respectively, compared to 0.264% and 1.963% Friday. The yield curve narrowed to +1.662%, from +1.699% the prior day. In the past year, the 2- and 10-year spread varied from a low of +1.520% on September 22, 2011, to a high of +2.73% on April 25, 2011.
  • The U.S. dollar is weaker compared to the euro and British pound, but weaker compared to the Japanese yen. The dollar trades at US$79.509, compared to a US$79.531 intraday high and US$79.194 the prior day, and mixed compared to its US$79.441 50-day, US$79.655 100-day, and US$78.020 200-day averages. The euro trades at US$1.3140, compared to an intraday low of US$1.3127 and its US$1.3219 close the prior day. The euro compares to its US$1.3204 50-day and $1.3121 100-day averages. In Japan, the dollar trades at ¥81.10, compared to ¥81.52 the day prior. The yen trades better than its 50-day moving average ¥81.55.
  • Commodities prices are mostly lower, with lower energy and precious metals, higher aluminum and copper, and mixed agriculture prices.


Volatility, Skew:
 

  • The VIX ended at 17.44, down -5.01% from 18.36 at the prior close. The VIX is +1.40% above its 17.20 20-day moving average.
  • The Euro Stoxx 50 volatility index (V2X) is up +12.5% to 29.52, compared to 26.23 at the prior day's close. The V2X index trades +16.2% above its 25.40 20-day moving average, -4.84% below the 31.02 30-day high, and +71.0 above the 17.26 30-day low.
  • The Hang Seng volatility index (VHSI) closed at 20.50, up +6.72% from 19.21 the prior day. The VHSI index trades +1.15% above its 20.27 20-day moving average.
  • CBOE skew rose +0.38% to 118.05 from 117.60 at the prior day's close, and within a neutral (115-120) range. Spikes in excess of 130 (as on March 12, 15, and 16) correlate well with short-term market tops. The index tracks market tail risks, the cost of buying out-of-the-money, long-dated options, i.e., options not affected by expirations. A rise suggests that investors are buying more puts than calls, a bearish signal.


U.S. news and economic reporting:

· There are no scheduled U.S. economic reports.

Overseas News. Yesterday, French President Sarkozy placed second in the presidential election's first round to Socialist candidate Francois Hollande, putting both candidates in a runoff election on May 6th. In April, European purchasing managers indices fell short of estimates and showed the fastest pace of contraction since November, with the composite, manufacturing, and services indices recording 47.3, 46.0, and 47.9, respectively, compared to estimates of 49.3, 48.1, and 49.3. In April, China's preliminary PMI rose to 49.1 from 48.3 in March but still showing contraction.

Company News:

· STI reports 1Q12 GAAP and continuing operating EPS of $0.46 and $0.48, beating estimates of $0.33

1Q2012 Earnings.

The first quarter's earnings reports have so far exceeded expectations. Of the 95 S&P500 companies that reported earnings to date, 85% (81 out of 95) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +8.6% (versus a historical average of +2%). Aggregate EPS is up +6.5% over the prior year. Though challenged in the current operating environment, 73% of companies reported increased revenues over the prior year and 76% beat revenue estimates. In the first quarter, analysts estimate the SPX will earn $23.88 per share, compared to $24.68 and $23.03 per share in 4Q11 and 1Q11, a -3.2% and +3.7% change, respectively.

With 20 of the 24 BKX members reporting first quarter earnings, 75% beat operating EPS estimates while 80% beat revenue estimates. In the first quarter, analysts estimate the BKX will earn $0.97 per share, compared to $1.20 and $0.96 per share in 4Q11 and 1Q11, a -19.2% and +1.0% change, respectively.

Valuation. The SPX trades at 13.1x estimated 2012 earnings ($104.90) and 11.7x estimated 2013 earnings ($118.12), compared to 13.1x and 11.7x respective 2011-12 earnings Friday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of 2012, analysts changed 2012 and 2013 earnings estimates by -3.5%, and +0.3%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.5% and +24.4%, respectively.

Large-cap banks trade at a median 1.37x tangible book value, and 11.4x and 9.9x 2012and 2013 consensus earnings, respectively, compared to 1.37x tangible book value and 11.4x/9.9x 2012/2013 earnings Friday. These compare to the 10-year average median multiples of 2.90x tangible book value and 15.9x earnings. In 2012, analysts expect the BKX to earn $4.31 per share, compared to $4.30 and $2.96 in 2011 and 2010, a +0.2% and +45.5% increase, respectively.

Options. Options markets are neutral. Composite options markets are neutral, index options markets are neutral, and equity options markets are neutral. The composite put/call ratio closed at 0.87, compared to 0.99 the prior day and below its 5- and 10-period moving averages of 0.94 and 0.96 respectively. The index put/call ratio closed at 1.24, compared to 1.42 the prior day, below the 5- and 10-period moving averages of 1.35 and 1.36, respectively. The equity put/call ratio closed the day at 0.65, compared to 0.67 the prior day, above its 5- and 10-period moving averages of 0.64 and 0.65, respectively.

Price Exhaustion/Trend Reversal. On a daily timeframe, technical price exhaustion metrics show the SPX and S&P futures began reaching potential upward price exhaustion levels as early as January 18th, the first such signals since April 2011, and repeatedly through February with the most recent reading on March 26st on the SPX and March 21st and 16th on the BKX. The SPX recorded a weekly price exhaustion signal during the week of its 2012 high in early April. On April 4th, the SPX closed below the lowest level in the previous four days and followed through with lower trading the next day, signaling a potential reversal's initiation. April 11th's rebound in the SPX and BKX came off important support levels near 1350 and 46.80, respectively. A breakdown below those support levels may accelerate the reversal. Short term resistance rests near 1395 and 50.25, respectively.

NYSE Indicators. Volume rose +17.4% to 965.98 million shares, 1.21x the 50-day moving average, from 8222.92 million shares Thursday. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +947 (compared to -530 the prior day), or 1.92:1. Up volume led down volume by 1.36:1.

SPX. On higher volume, the SPX rose +1.61 points, or +0.12%, to 1378.53, the 65th straight close above 1300 but the 12th straight close below 1400. Volume rose +31.27% on options expiration to 869.19 million shares, up from 662.13 million shares Thursday and above the 618.07 million share 50-day moving average. For the second straight session, the SPX closed below its 50-day moving average (1379.50)but remained above its 200-day moving average (1273.19) for the 79th time in the past 80 sessions. The SPX closed above its 200-week moving average (1133.46) for the 135th straight session.

From its prior close at 13.78.53, the SPX opened higher to 1382 and rose to the intra-day high of 1387.40 at 10:40. The index traded sideways at 1386 through 1:15 when a sell-off took hold that persisted through the close. The index set the intra-day low at the bell, but remained positive during the entire day.

Technical indicators are mostly positive. The SPX closed above 1200 for the 98th straight session, above 1300 for the 64th session, but below 1400 for the 12th straight session. The 50-day moving average crossed above the 100-day moving average on December 6th, having been below that average since July 11th, and climbed above the 200-day moving average on January 31st, having been below that average since August 11th. The 100-day moving average crossed above the 200-day moving average February 23rd, having been below that average since September 7, 2011. The 20-day moving average declined. For the 12th straight session, the SPX closed (by -0.97%) below its 20-day moving average (1392.06). The index closed (by -0.07%) below its 50-day moving average for the second straight session. The index closed (by +3.83%) above its 100-day moving average (1327.67) for the 98th straight session. The SPX closed +8.27% above its 200-day moving average for the 79th time in the past 80 sessions. The directional momentum indicator is negative for the eighth time in nine sessions, and the trend is weak and declining. Relative strength rose to 47.71 from 47.05, a neutral range. Next resistance is at 1384.97; next support is at 1374.53.

BKX. On higher volume, the KBW bank index fell -0.27 points, or -0.56%, to 47.56, its 72nd straight close above 40 but its 13th straight close below 50. Volume rose +11.68% to 97.02 million shares, up from 86.87 million shares Thursday and above the 80.61 million share 50-day average. The BKX closed +10.66% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -17.93% and -14.51% below its April 23, 2010 (the post-2008 high point), and February 14, 2011 (the most recent high point) respective closes.

Financials underperformed the market, and large-cap banks' losses underperformed regional banks' gains. From its prior close of 47.83, the BKX opened higher to 48.09, immediately setting the intra-day high. Through 1:00, the index tested support at the break-even level before falling -1.0% at 2:30 to the intra-day low of 47.49. Two rally attempts were sold and the index closed near the day's low.

Technical indicators are mostly positive. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +46.1% from the 32.56 October 4th intra-day low compared to a +28.4% rebound in the SPX. However, the BKX has yet to recapture its 2011 high, whereas the SPX did so in February 2012. Moving average alignment is fully bullish, as shorter term moving averages are above longer term moving averages and are increasing more rapidly. On February 22nd, the 50-day moving average crossed above the 200-day moving average for the first time since June 15th. On March 20th, the 100-day moving average crossed above the 200-day moving average for the first time since July 18th, 2011. For the 77th straight session, the 20-day closed (by +1.54 points) above the 50-day, but the gap shrank. The 50-day moving average closed (by +5.38 points) above the 200-day moving average for the 42nd straight session, and the gap widened. The 100-day moving average closed (by +2.20 points) above the 200-day moving average for the 24th straight session, and the gap widened. The BKX closed -2.42% below its 20-day moving average for the 11th straight session. The index closed (by +0.77%) above its 50-day moving average for the 82st straight session. The index closed (by +8.06%) above the 100-day moving average for the 83rd straight session. The index closed (by +13.74%) above its 200-day moving average for the 65th time in 66 sessions. The directional movement indicator is negative, and the trend is weak and declining. Relative strength fell to 47.04 from 48.57, a neutral range. Next resistance is 47.94; next support at 47.34.