Opening View: Anxieties High on Fears of European Contagion, Debt Ceiling

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U.S. stocks are trading lower this morning, as anxieties over a European debt contagion continue to cast a shadow over the Street. Rumors that Italy's debt rating is likely to be downgraded are causing tensions in Italian bond markets, fueling fears that the Greek debt dilemma is spreading across Europe -- and the global economy. Back in the U.S., investors have their own problems, with worries about a stalled economic recovery -- and the infamous "debt ceiling" -- continuing to weigh on sentiment. In fact, a mixed earnings report from Dow bigwig Alcoa Inc. (AA - 15.91) seems to have simply provided more fuel for the bearish fire -- and futures on the blue-chip barometer are nearly 40 points lower in pre-market activity. Looking ahead, data on the May trade balance will be released at 8:30 a.m. Eastern, and the minutes from the last meeting of the Federal Open Market Committee (FOMC) will hit the Street later this afternoon.

Dow, S&P and Nasdaq futures

AA banked a second-quarter profit of $322 million, or 28 cents per share, more than doubling its year-ago earnings of $136 million, or 13 cents per share. On an adjusted basis, AA raked in a profit of 32 cents per share, while revenue increased 27% to $6.59 billion. Analysts, on average, were looking for a profit of 32 cents per share on $6.31 billion in revenue. "Although the economic recovery is uneven, the overall outlook for Alcoa -- and for aluminum -- remains positive," said Chairman and CEO Klaus Kleinfeld in a statement. "Demand for aluminum continues to rise and so does growth in our major markets. These factors support our projection that aluminum demand will grow 12 percent this year and will double by 2020." AA is down 0.4% ahead of the open.

Novellus Systems (NVLS - 35.77) announced that its second-quarter profit rose just 2.3% to $64.7 million, or 79 cents per share, while revenue edged up 9% to $350.2 million. The company's bottom line was pressured by rising costs; research and development expenses climbed 16% for the quarter, with overhead jumping 10%. Wall Street was looking for a slimmer profit of 76 cents per share, but revenue was expected to weigh in at a more substantial $352.3 million.

Infosys Technologies Ltd. (INFY - 65.10) reported that its fiscal second-quarter profit increased 16% -- but the tech stock is down over 5.5% this morning on a disappointing outlook. For the quarter, the company posted a profit of INR17.22 billion on revenue of INR74.85 billion. Analysts, on average, were expecting a profit of INR17.26 billion on revenue of INR74.96 billion. The tech firm reiterated its outlook, but warned that spending by U.S. and European clients on technology contracts may remain weak. "This is an environment in which you have to be cautious," said Chief Operating Officer S.D. Shibulal "We are seeing instability in the environment," the COO added.

Finally, shares of ReneSola Ltd. (SOL - 4.68) are down 11.3% this morning as a result of a downwardly revised outlook. More specifically, the alternative energy firm said it now expects second-quarter revenue of $235 million to $245 million on shipments of 290 megawatts to 300 megawatts -- dramatically lower than its April view for sales of $280 million to $300 million and shipments of 330 megawatts to 350 megawatts. Chief Executive Xianshou Li said the company expects that its continued efforts to reduce costs will help ease margin pressures; nevertheless, ReneSola now predicts gross margins of 17% to 19% -- down 8 percentage points from its earlier view.

Earnings Preview

Today's earnings docket will feature reports from Fastenal ( FAST ) and Wolverine World Wide ( WWW ). Keep your browser at SchaeffersResearch.com for more news as it breaks.

Economic Calendar

The May trade balance hits the Street today. On Wednesday, we'll hear reports on import/export prices for June, the Treasury budget, and weekly crude inventories. The afternoon features the minutes from the latest meeting of the Federal Open Market Committee (FOMC). A round of inflation data kicks off on Thursday, with the producer price index (PPI) and core PPI for June. The weekly update on jobless claims will also be released, along with retail sales for June and May's business inventories. The economic calendar wraps up on Friday with the consumer price index ( CPI ) and core CPI for June, the preliminary Reuters/University of Michigan consumer sentiment index for July, the Empire State manufacturing index, and reports on industrial production and capacity utilization.

Market Statistics

Equity option activity on the Chicago Board Options Exchange ( CBOE ) saw 867,179 call contracts traded on Monday, compared to 635,991 put contracts. The resultant single-session put/call ratio docked at 0.73, while the 21-day moving average was perched at 0.71.

NYSE and Nasdaq summary

Volatility indices

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Overseas Trading

Sovereign debt remains the key focus this morning, with stocks in Asia taking a hit amid ongoing uncertainty regarding the scope of the European crisis. Rising risk aversion provided a boost of safe-haven support for the yen, which pressured major Japanese exporters like Toyota. Meanwhile, Chinese equities were battered by a Moody's report detailing various red flags at dozens of corporations, including such concerns as high-risk business models and auditing missteps. By the close, Hong Kong's Hang Seng shed 3.1%, South Korea's Kospi fell 2.2%, China's Shanghai Composite declined 1.7%, and Japan's Nikkei dipped 1.4%.

Contagion fears are also sinking stocks in Europe, after Dutch Finance Minister Jan Kees de Jager said a selective Greek debt default "is not excluded anymore" from the list of options being considered by top euro-zone officials. Italy also remains a point of concern today, with regulators unveiling new restrictions on short selling in an attempt to rein in market volatility. Against this backdrop, a gloomy note from B of A-Merrill Lynch isn't helping matters. "As the third largest bond market in the world, after Japan and the U.S., Italy could be systemic... the latest trend in the Italian bond market could potentially snowball into a major crisis for the global economy," warned analyst Athanasios Vamvakidis in a research note. At last check, the French CAC 40 is off 1.1%, the German DAX has dropped 1.3%, and London's FTSE 100 is down 1%.

Overseas markets

Currencies and Commodities

Crude futures have continued their retreat this morning, despite positive news from the Organization of Petroleum Exporting Countries (OPEC). The organization said in its monthly report today that its oil production increased to 29.6 million barrels a day in June -- 0.5 million barrels a day higher than May, as Saudi Arabia and other Arab members in the Gulf region raised their output. Nevertheless, crude futures are down 1 point, or 1.1%, in pre-market trading. Conversely, the dollar has edged higher this morning, with the U.S. dollar index trading 0.3 point, of 0.4%, higher. Finally, gold futures are trading lower, down 2 points, or 0.1%, at last check.

Currencies and commodities

Unusual Put and Call Activity:

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Unusual options activity - puts

Unusual options activity - calls

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This article appears in: Investing , Options

Referenced Stocks: CBOE , CPI , FAST , SOL , WWW

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