US & World Daily Markets Financial Briefing 02-08-2010

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Stocks Posting Notable Gains After ISM Number

Stocks are sharply higher in mid-morning trading on Monday, as traders are digesting a better than expected reading on national manufacturing activity and some solid quarterly earnings. The major averages are all in positive territory, extending their initial upside after the day's data.

A short time ago, the Institute for Supply Management reported that manufacturing activity continued to expand in July, with the pace of growth in the sector slowing by a more modest margin than economists had expected.

The ISM said its manufacturing index fell to a reading of 55.5 in July from 56.2 in June, with a reading above 50 indicating continued growth in the sector. Economists had expected the index to show a more notable decrease to a reading of 54.2.

Separately, the Commerce Department said that construction spending edged up 0.1 percent to an annual rate of $836.0 billion in June from the revised May estimate of $834.8 billion. The increase came as a surprise to economists, who had expected spending to decrease by 0.8 percent.

Earlier upside was driven by solid quarterly earnings results, as HSBC reported a six-month profit of $0.38 per share, well above the $0.21 per share reported for the same period last year. The firm benefited from a decline in loan impairments, as charges fell to $7.52 billion compared to $13.93 billion recorded a year earlier.

Also on an upbeat note from the banking sector, French banking giant BNP Paribas reported a 31 percent increase in its second quarter profits on a near 12 percent increase in revenues, as its cost of risk declined about 54 percent from last year.

Humana Inc.'s second-quarter net income grew to $2.00 per share, firmly topping expectations for $1.67 per share. Total revenues for the second quarter increased 9.5 percent to $8.65 billion, while analysts estimated revenues of $8.61 billion for the quarter.

The major averages have seen further upside in recent dealing, setting fresh session highs. The Dow is up 183.92 points or 1.8 percent at 10,649.86, the Nasdaq is up 40.42 points or 1.8 percent at 2,295.12 and the S&P 500 is up 20.74 points or 1.9 percent at 1,122.34.

Sector News

Oil service stocks are among the morning's best performers, with the Philadelphia Oil Service Sector Index posting a gain of 3.7 percent. With the upward move, the index has climbed to its best intraday level in two and a half months.

The buying interest in the oil service sector comes as the price of crude oil has surged up by $1.93 to $80.88 a barrel.

Steel, housing, health insurance and banking stocks are also sharply higher, further fueling the upside by the major averages. Notably, the NYSE Arca Steel Index is up by 3.6 percent after reaching its highest level in nearly three months in earlier trading.

Stocks Driven By Analyst Comments

SeaBright Holdings is trading higher after FBR Capital Markets raised its rating on the stock from Perform to Outperform. Shares are currently up by 1.3 percent, bouncing off of Friday's fourteen-month closing low.

Gentiva Health Services is also on the upside after analysts at Stifel Nicolaus upgraded the stock from Hold to Buy. The stock is up by 2.5 percent, moving further off of the yearly low set late last month.

On the other hand, Fairchild Semiconductor International Inc. is under pressure after Robert W. Baird downgraded the stock from Outperform to Neutral. The stock is down by 0.9 percent after setting a three-week intraday low.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region kicked off the week on an upbeat note. Japan's benchmark Nikkei 225 inched gained 0.4 percent, while Hong Kong's Hang Seng Index surged up by 1.8 percent.

The major European markets are also higher. The German DAX Index and the U.K.'s FTSE 100 Index are up by 2.3 percent and 2.5 percent, respectively, while the French CAC 40 Index is up by 2.9 percent.

In the bond markets, treasuries are moderately weaker. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, is trading at 2.957 percent, posting a gain of 5 basis points.

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No Cure For The Dollar's Summertime Blues

The dollar began the new month right where it left off in July, under heavy pressure as stocks pushed higher on optimism about corporate earnings and economic growth overseas.

With the US appearing to be in paralysis mode due to lingering weakness in the housing and jobs sectors, traders have flocked back into European currencies.

And with commodities prices on the rise, resource-linked counterparts such as Canada's loonie have also battered the dollar.

The buck fell to 1.5829 versus the sterling, hitting its lowest since late January. Its been a brutal two month stretch for the dollar, which hit a yearly high near 1.4200 back in May.

An indicator of health in the British manufacturing sector decreased to a 5-month low in July but remained well above the survey average, indicating continuing recovery in the manufacturing sector.

Against the loonie, the dollar slumped to a 7-week low of C$1.0220 as the price of oil challenged $80 a barrel.

The dollar held steady versus the euro after losing significant ground in July. The buck was near 1.3100, having touched a 2 1/2 month low of 1.3106 last week.

Eurozone manufacturing activity showed strong momentum in July, a survey from Markit Economics revealed Monday.

The final Purchasing Managers' Index rose to a 3-month high of 56.7 in July, up from 55.6 in June and above the earlier flash estimate of 56.5. The reading signaled the tenth successive monthly improvement in overall operating conditions.

The U.S. Department of Commerce reports on construction spending for June at 10 am ET. Economists expect a drop of 0.5% from the previous month.

At the same time, the Institute of Supply Management reports on its US manufacturing index for July. Economists expect a reading of 54, down from 56.2 in June.

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Asian Markets End In Positive Territory

The markets in Asia ended the trading session on Monday, the first trading day of the week and the month, in positive territory, on speculation that the Chinese authorities will not tighten the monetary norms further as their economy shows definite signs of slowing down. Speculation that tame inflation data and improved manufacturing reports in Australia might force the Reserve Bank of Australia to keep interest rates unchanged for this month also impacted market sentiment. Optimism about earnings also lifted market sentiment even as disturbing economic condition in the US continues to be a cause of concern.

In Japan, the benchmark Nikkei 225 Index gained 33.01 points, or 0.35%, to 9,570, while the broader Topix index of all First Section issues was up 1.19 points, or 0.14%, to 851.

On the economic front, a statement released by the Ministry of Health, Labor and Welfare in Japan revealed that cash earnings of laborers at Japanese companies 1.5% year-over-year to JPY 437,677 in July. The statement further noted that contractual cash earnings rose 0.4% annually to JPY 263,826 in July. Further, scheduled earnings were down 0.2%, while non-scheduled earnings rose 11.6%. Special cash earnings increased 3.3%.

Airliner All Nippon Airways is the major gainer, having gained 2.39%. Tire maker Bridgestone Co. ended in positive territory with a gain of 1.49%. Tokyo Electron climbed 2.37% after reporting better than expected results for the recent quarter.

Trading companies ended in positive territory on optimism about earnings. Sumitomo Corp. surged up 6.64%, Mitsubishi Corp. added 0.80%, Marubeni Corp., climbed 2.37%, Itochu Corp. gained 1.34%, Toyota Tsusho Corp. advanced 0.88% and Mitsui & Co., edged up 0.09%.

Mixed trading was witnessed among automotive stocks. Honda Motor surged up 4.02%, Toyota Motor advanced 1.80%, Suzuki Motor was up 0.88% and Hino Motors climbed 1.58%. However, Nissan Motor Co., edged down 0.15%, Isuzu Motors slipped 0.79% and Mazda Motors ended in negative territory with a loss of 1.44%.

Shipping stocks ended in negative territory on stronger yen and concerns about sustaining global economic recovery. Kawasaki Kisen Kaisha declined 1.63%, Mitsui OSK Lines slipped 0.85% and Nippon Yusen was down 1.37%.

In Australia, the benchmark S&P/ASX200 Index gained 48.10 points, or 1.07%, and closed at 4542 points, while the All-Ordinaries Index ended at 4,554, representing a gain of 47.00 points, or 1.04%.

On the economic front, a statement released by the Australian Industry Group in association with PriceWaterhouseCoopers in Australia revealed that the manufacturing sector in the country rose in July, on the back of stronger levels of production, new orders and deliveries. The Australian Industry Group / PricewaterhouseCoopers performance of manufacturing index rose to 54.4 from 52.9 in the previous month. A reading above 50 indicates expansion while one below suggests contraction.

A separate report released by TD Securities in association with Melbourne Institute revealed that an estimate of consumer inflation in the country slowed sharply in July from the previous month. As per the report, the TD Securities/Melbourne Institute inflation gauge rose 2.8% year-on-year in July, slower than the 3.6% increase registered in the previous month. On a monthly basis, the gauge increased 0.1% in July.

Banks ended in positive territory on speculation that the RBA will not raise interest rates this month. ANZ Bank advanced 1.17%, Commonwealth Bank gained 1.62%, National Australia Bank added 0.82% and Westpac Banking was up 0.88%. Investment banker Macquarie Group rose 1.26%.

Metals and mining stocks also advanced higher. BHP Billiton added 0.45%, Rio Tinto advanced 0.76%, Fortescue Metals climbed 2.56%, Gindalbie Metals surged 3.09%, Macarthur Coal rose 1.92%, Minara Resources was up 3.05%, Murchison Metals gained 1.64% and Oz Minerals remained unchanged from previous close.

Gold stocks also surged up on higher gold prices in the international market. Lihir Gold gained 2.70% and Newcrest Mining climbed 2.78%.

In Hongkong, the Hang Seng Index ended in positive territory with a sharp gain of 383 points, or 1.82%, at 21,413, following weaker than expected PMI data from mainland China for July that confirmed the Chinese economy is showing signs of slowdown. Speculation that the Chinese central bank will not tighten monetary policy measures anytime soon lifted market sentiment. Record results reported by HSBC Bank also lifted market sentiment.

The Indian market ended the trading session in positive territory, lifted by banks, metals, energy and real estate stocks, taking cues from other markets in the region after China reported economic data that confirmed slowdown in the world's second largest economy. Speculation that the Chinese authorities might not impose tighter monetary measures in the near future also lifted market sentiment, despite mixed closing on Wall Street on Friday, and continuing concerns about the health of the US economy. The benchmark Nifty-50 index gained 1.19%, or 64.05 points, to close at 5432, while the BSE Sensex ended at 18,081, a gain of 213 points, or 1.19%.

All the other major markets open for trading also ended in negative territory. China's Shanghai Composite Index gained 35.01 points, or 1.33% to 2,673, Taiwan's Weighted Index surged up 151.05 points, or 1.95%, to close at 7,912, and Singapore's Strait Times Index gained 37.34 points, or 1.25% to close at 3,025. However, Indonesia's Jakarta Composite Index bucked the overall trend and ended in negative territory with a loss of 10.30 points, or 0.34%, at 3,059.

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The major European markets are also trading higher on Monday. The French CAC 40 Index and the German DAX Index are rising 2.03% and 1.74%, respectively, while the U.K.’s FTSE 100 Index is advancing 1.98%.

French banking giant BNP Paris reported that its second quarter net profit rose 31% to 2.1 billion euros. However, sequentially, profits were down 7.8%.

On the economic front, the Markit/Chartered Institute of Purchasing & Supply purchasing managers' index for the manufacturing sector in the U.K. fell to 57.3 from 57.6 in the previous month, survey results showed Monday. Economists had forecast the indicator to fall to 57.

Meanwhile, Markit’s survey showed that the final manufacturing purchasing managers’ index for the euro zone region rose to a three-month high of 56.7 in July from 55.6 in June, and also came in above the flash estimate of 56.5.

U.S. Economic News

The manufacturing sector, which performed fairly well throughout the current recovery, but has recently showing some signs of a slowdown, and the job market, which is yet to show signs of a sustained pick up, will be on the radar in the unfolding week. Traders may focus on the monthly non-farms payroll report to be released on Friday, the results of the Institute for Supply Management's manufacturing as well as non-manufacturing surveys and the National Association of Realtors' pending home sales index to get further clarity on the economic environment.

The Commerce Department's construction spending report, ADP's private sector employment report, the Bureau of Economic Analysis' personal income and spending report and the weekly jobless claims report are also among the closely watched reports. Announcements concerning the treasury auctions of 3-year and 10-year notes and 30-year bonds, the factory goods orders report and the Federal Reserve's consumer credit report for June round out the other economic events of the week.

The monthly non-farm payrolls report is expected to show a contraction in employment in July, as temporary census jobs continue to be trimmed. However, private sector payrolls are likely to see another month of improvement. Since temporary layoffs associated with plant closings for retooling in the auto sector did not occur this year, it is possible that the employment data may surprise to the upside. At the same time, the unemployment rate is likely to remain elevated.

Activity in the manufacturing sector may have slowed for the third straight month in July, with two out of the three major regional surveys showing slackening activity. The Beige Book also revealed a moderation in manufacturing activity in most Fed districts. However, this weakness is anticipated, given the notable improvement seen over the past year and a half.

The personal income and spending report may show that personal spending rose at an anemic pace, as core retail sales saw only modest growth and auto sales were weak. With unemployment remaining at elevated levels, one cannot expect a big pick up in spending anytime soon. Personal income is also likely to be held down by census layoffs.

The results of the manufacturing survey of the Institute for Supply Management, 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 54.2 for July.

In June, the purchasing managers’ index declined to 56.2 from 59.7 in May, trailing the consensus estimate of 59. The headline index is now at its lowest level of the year, although it is still above its 10-year average of 51. The new orders index fell 7 points to 58.5 and the order backlogs index slipped 2.5 points to 57. Meanwhile, the employment index, despite declining 2 points, remains elevated at 57.8. The prices paid index declined a steep 20 points to settle at its lowest level since November 2009.

The Commerce Department's construction spending report to be released at 10 AM ET is expected to show a 0.8% decline in spending for June.

Construction spending fell 0.2% month-over-month in May following strong advances in March and April. Private construction spending declined 0.5%, offsetting a 0.4% increase in spending on public construction projects. In the private category, private non-residential construction spending slipped 0.6% and multi-family housing construction spending declined 6.3%. Although spending on single-family housing construction edged up 0.8%, it marked the weakest gain in about a year.

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Barnes Group (B) reported second quarter net sales of $282 million, up 10.5% year-over-year. The company’s earnings rose to 26 cents per share from 19 cents per share last year. Analysts estimated earnings of 25 cents per share on revenues of $286.56 million.

HealthSouth (HLS) said its second quarter adjusted income from continuing operations of 44 cents per share, up 12.8% from 39 cents per share last year. The company’s net operating revenues rose 3.2% to $481.6 million. Analysts estimated earnings of 43 cents per share on revenues of $505.51 million. The company raised its 2010 adjusted income from continuing operations guidance to $1.66-$1.74 per share from $1.60-$1.70 per share, while the Street estimates earnings of $1.74 per share.

Humana’s (HUM) second quarter earnings rose to $2 per share from $1.67 per share last year. Revenues rose 10% to $8.65 billion. The consensus estimates had called for earnings of $1.67 per share on revenues of $8.61 billion. The company also raised its 2010 earnings per share guidance to $5.65-$5.75 from its previous estimate of $5.55-$5.65 per share. Analysts estimate earnings of $5.71 per share.

Gold Slips Below $1,180 As Risk Appetite Improves

The price of gold eased back below $1,180 Monday morning amid recovering stock markets. Most Asian markets ended higher and European stocks were positive.

Gold for October delivery, the most actively traded contract, was down $3.80 to $1,178.60 an ounce.

Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, were unchanged at 1,282.28 tons. SPDR's holdings advanced to a record high of 1,320.44 tons on June 30.

Meanwhile, the U.S. dollar continued to linger near its 3-month low versus the euro and hit a fresh 6-month low against the British pound. The buck was ticking higher versus the yen.

Elsewhere, the prices of silver and platinum ticked higher in morning deals.

Traders will look to the data on Construction Spending for June and ISM Manufacturing for July from the U.S., due out later today, to get clues on the strength in the recovery of the economy.

Friday, gold recovered $13 after data revealed that U.S. economy expanded more slowly than forecast.

The U.S. Commerce Department said gross domestic product increased at an annual rate of 2.4% in the second quarter, belying economists' expectations for an increase by 2.5%.

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