US & World Daily Markets Financial Briefing 01-07-2009

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After seeing a strong upward move at the open, stocks have continued higher over the course of morning trading on Wednesday, as traders react positively to the morning’s influx of economic data. The major averages are all in positive territory by hefty margins, offsetting yesterday’s losses.

While the Institute for Supply Management released a report showing a continued contraction in manufacturing activity in the month of June, the pace of contraction slowed from the previous month amid some encouraging signs for the sector.

The ISM said its index of activity in the manufacturing rose to 44.8 in June from 42.8 in May, with a reading below 50 indicating a contraction in the sector. The index came roughly in line with the expectations of economists, who forecast a reading of 44.6.

A separate report from the National Association of Realtors indicated that pending home sales increased for the fourth consecutive month in May, with favorable housing affordability and a first-time buyer tax credit contributing to the continued increase.

NAR said its pending home sales index rose 0.1 percent to 90.7 in May from an upwardly revised reading of 90.6 in April. Economists had been expecting the index to come in unchanged compared to the 90.3 originally reported for the previous month.

More economic data came from the U.S. Commerce Department, which revealed that construction spending fell 0.9 percent in May, following a revised 0.6 percent rise in the previous month. Economists had expected construction spending to fall by 0.6 percent following a rise of 0.8 percent that was originally reported for April.

Earlier, a report from private payroll processor Automatic Data Processing revealed that private sector employment fell by more than economists had been expecting in the month of June, although the report also showed a slowdown in the pace of job losses.

ADP said that non-farm private employment fell by 473,000 jobs in June following a revised decrease of 485,000 jobs in May. Economists had expected a decrease of 394,000 jobs compared to the loss of 532,000 jobs originally reported for the previous month.

In earnings news, Constellation Brands (STZ) reported first-quarter net income of $0.33, down from $0.34 in the same quarter a year earlier. On average, Wall Street analysts expected the company to earn $0.32 per share. The stock is moving higher in mid-morning trading.

General Mills (GIS) reported adjusted fourth-quarter net income of $0.86, up 18 percent from $0.73 in the same period last year. Analysts expected the firm to report earnings of $0.80 per share. Shares of the consumer foods manufacturer are also seeing some strength in mid-morning dealing.

The major averages have moved roughly sideways in recent trading, hovering near their best levels of the day. The Dow is currently up 125.23 at 8,572.23, the Nasdaq is up 25.68 at 1,860.72 and the S&P 500 is up 11.58 at 930.90.

Sector News

Following a weak outing in the previous session, resource stocks have moved back to the upside, with significant strength visible among gold, steel and oil stocks. The NYSE Arca Gold Bugs Index and the NYSE Arca Steel Index are up by 4.2 percent and 3.0 percent, respectively, while the Philadelphia Oil Service Index is up 1.8 percent.

The gains by resource stocks come amid an increase in most major commodities prices, with the standout gains by gold prices coming as the price of the precious metal is up more than $10 an ounce.

Shares of Quanex Building Products (NX) are helping to boost the steel sector, climbing by 7 percent. The day’s gain is continuing to propel the stock away from the one-month closing low set in late June.

Further strength is visible among transportation stocks, with the Dow Jones Transportation Average up by 3 percent in mid-morning trading. Despite the day’s strong upward move, the index continues to move within a two month trading range.

Networking, healthcare provider, electronic storage and housing stocks are also posting notable gains, reflecting the broad advance in the markets on the day.

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Crude Oil Surges Above $71 Ahead Of EIA Report

Oil prices moved higher on Wednesday as traders bet on another decline in weekly crude inventories. A weaker U.S. dollar also boosted oil's hedge value.

Light sweet crude oil for August delivery rose to $71.60 per barrel, up $1.71 on the session. Prices touched as high as $71.75 after dipping below $69 in the previous session.

The Energy Information Administration data on petroleum inventories will be announced at 10:30 a.m. ET. Experts are forecasting a decline of about 2.2 million barrels.

Yesterday afternoon, American Petroleum Institute data showed crude stockpiles declined 6.8 million barrels. Participation in the API data is voluntary, but mandatory for the EIA report. The reports move in the same direction about 75% of the time.
 
The dollar fell against other majors, giving back modest gains from yesterday. The greenback moved toward a three-week low against the euro and also headed lower versus the pound and yen.

In economic news, Automatic Data Processing said that non-farm private employment fell by 473,000 jobs in June following a revised decrease of 485,000 jobs in May. Economists had expected a decrease of 394,000 jobs compared to the loss of 532,000 jobs originally reported for the previous month.

More economic data is on the schedule at 10 a.m. ET, including the the Institute for Supply Management manufacturing index report, construction spending data and pending home sales data.

Gasoline prices averaged $2.63 per regular unleaded gallon, according to AAA data. This is higher than the $2.512 a month ago, but well-below the $4.087 a year ago. Prices reached a record $4.087 per barrel last July 17.

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The major Asian markets ended Wednesday’s session on a mixed note, with the Japanese, Australian and New Zealand markets closing lower, while the others closed on an upbeat note. The Hong Kong market was closed for a public holiday.

After opening weaker, Japan’s Nikkei 225 average recovered by the mid-session following the release of a positive Tankan survey report.

The market saw some buoyancy in the afternoon before selling pressure dragged the index lower in late trading. The index closed down 18.51 points or 0.19% at 9,940.

The Bank of Japan’s quarterly Tankan survey revealed that confidence among Japan's large manufacturers improved in the second quarter for the first time since December 2006.

The diffusion index for big manufacturers posted a score of -48, which was up from the record low -58 in the previous quarter but shy of forecasts for -43. The outlook for the third quarter showed a reading of -30 versus expectations for –34.

Reports of stock offerings generated significant selling pressure. All Nippon Airways slumped about 6% in reaction to speculation of share issue. Commodity stocks also saw weakness.

Trading houses retreated despite the strength of the yen. On the other hand, property stocks advanced.

The Indian market ended a highly volatile session notably higher, as encouraging Markit Economics’ Purchasing Managers’ report on the manufacturing sector more than offset dismal May export data.

The BSE Sensex rose to a high of 14,727 in the afternoon before it snapped back some of its gains and finished at 14,645, up 152 points or 1.05%.

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The major European averages are advancing strongly, with commodity and financial stocks providing good support, especially after yesterday’s pullback. The French CAC 40 Index, the U.K. FTSE 100 Index and the German DAX Index are all up over 1% each.

In corporate news, Germany’s Linde said it has signed a 2 year euro-denominated forward start revolving credit facility, providing about 1.6 billion euros from 2011 onwards. U.K. department store Marks & Spencer said its first quarter group sales rose 2.9%, with U.K. sales rising 1.7% year-over-year. Reports suggested that Lloyds Banking Group is wooing former Citi Chairman Sir Win Bischoff for the post of Chairman.

On the economic front, the German Federal Statistical Office reported that retail sales dropped 2.9% year-over-year in real terms in May compared with a 0.3% drop in April. Economists were looking for a decline of 1.5%. On a month-on-month basis, retail sales increased 0.4% in May after rising 0.5% in April.

U.S. Economic Reports

On the economic front, the Mortgage Bankers’ Association reported that the index of mortgage applications volume fell 18.9% in the week ended June 26th, marking the steepest decline since February.

The ADP National Employment report, which sheds light on non-farm private employment, showed that non-farm private employment fell 473,000 in June from May. Economists had estimated a loss of 394,000 jobs for the month.

ADP revised the estimated change of employment from April to May by 47,000 to a decline of 485,000 from the originally estimated job losses of 532,000. In June, employment in the goods producing sector declined 250,000, with the manufacturing sector reporting job losses of 146,000.

The results of the Institute for Supply Management’s manufacturing survey, which are based on data compiled from purchasing and supply executives nationwide, are due out at 10 AM ET. Economists expect the index to show a reading of 44.6 for June.

In May, the index rose to 42.8 from 40.1 in April, with the May reading edging past the estimates at 42.3. Although it represented the highest reading since September 2008, it still suggests a contraction in activity. On a very positive note, new orders rose above 50 to 51.1 in May from 47.2 in April, while the order backlog index climbed 7.5 points to 48. However, the employment index remained almost unchanged at 34.3. At the same time, the prices paid index soared 11.5 points to its highest level since September.

The Commerce Department's construction spending report to be released at 10 AM ET is expected to show a 0.6% decline in spending for May.

Construction spending rose 0.8% month-over-month in April, according to a report released by the Commerce Department. Private non-residential construction rose 1.8%, helping to offset weakness in single-family and multi-family housing construction spending, which fell 6.7% and 2.6%, respectively. Public construction spending was down 0.3% in April.

Data on Pending Home Sales, which is a leading indicator of housing market activity released by the National Association of Realtors, is due out at 10 AM ET. A pending sale is one in which a contract was signed but not yet closed. Normally, it takes four to six weeks to close a contracted sale. Pending home sales are expected to remain unchanged in May.

The pending home sales index rose 6.7% month-over-month in April, while economists had expected a mere 0.5% increase. The increase came on the back of a 3.2% monthly gain in March and a 2% increase in February. The Northeast and the Midwest led the gains, showing increases of 32.6% and 9.8%, respectively. On an annual basis, the pending home sales index rose 3.3%.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET.

The inventory report for the week ended June 19th showed that crude oil inventories declined by 3.8 million barrels to 353.9 million barrels, but they were still above the upper boundary of the average range.

Gasoline and gasoline stockpiles increased by 3.9 million barrels and 2.1 million barrels, respectively. While gasoline inventories were in the lower half of the average range, distillate inventories were above the upper boundary of the average range. Refinery capacity utilization averaged 86.3% over the four-weeks ended June 19th compared to 85.8% in the previous week.

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Pfizer may come under selling pressure after it said it discontinued a late-stage study of its cancer drug Sutent for the treatment of metastatic colorectal cancer, as the addition of the drug to the chemotherapy regimen did not demonstrate a statistically significant improvement in the primary endpoint of progression-free survival.

Oracle is likely to be in focus after it announced the pricing of its sale of notes with three maturity periods, worth $4.5 billion. The company intends to use the proceeds for general corporate purpose and future acquisitions, including the acquisition of Sun Microsystems.

Kroger could be in focus after it said it is recalling some of its seasonings sold at its retail stores due to possible salmonella contamination. The recall comes after the company was alerted by its supplier regarding the problem.

Royal Caribbean Cruises is also likely to react to its announcement that it has priced an offering of $300 million aggregate principal amount of senior notes due 2015. The company said the notes have been priced at 97.399% of the principal amount.

Albany International may be in focus after it announced that it would close a manufacturing plant at its operations in Gosford, New South Wales, Australia. The production at the plant will be transferred to Albany International’s St. Stephen, South Carolina, manufacturing facility. The closure will result in the elimination of 61 jobs.

Oshkosh Corp. could gain ground after it said the U.S. Department of Defense has awarded the truck maker a contract to supply MARP All Terrain Vehicles for its fighting forces. The initial delivery order for 2,244 M-ATVs is valued at $1.05 billion.

Myriad Genetics is likely to recede after the company lowered its full year total molecular diagnostic revenue guidance to be $326 million from its earlier estimate of $330 million, citing the economic recession that is increasing unemployment levels, resulting in the loss of insurance coverage and patients delaying or canceling doctor visits.

Morgan Stanley and Mitsubishi UFJ may be in focus after they announced that they are expanding the scope of their previously announced strategic alliance to include a global alliance in corporate and investment banking, a commodity-specific initiative and secondment of personnel for sharing of best practices and expertise.

Earnings

General Mills reported fourth quarter adjusted earnings of 86 cents per share compared to 73 cents per share in the year-ago period. Net sales rose 5% to $3.65 billion. Analysts estimated earnings of 80 cents per share on revenues of $3.69 billion. The company expects fiscal year 2010 earnings to be $4.20-$4.25 per share compared to the consensus estimate of $4.18 per share.

Constellation Brands’ first quarter comparable earnings per share rose to 3 cents per its Class A share, lower than 20 cents per share last year. On an adjusted basis, earnings were 33 cents per share. Consolidated net sales fell 15% to $792 million. The consensus estimates had called for earnings of 32 cents per share on revenues of $780.86 million. For 2010, the company expects comparable earnings per share of $1.60-$1.70 per share compared to the consensus estimate of $1.62 per share

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