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

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Stocks Treading In The Red In Mid-Morning Trading

After initially moving modestly lower, stocks have seen some further downside over the course of morning trading on Tuesday. The major averages have moved more firmly into negative territory amid another low volume trading day, characteristic of the summer season.

Traders are doing some profit taking, positioning themselves for what is expected to be a dismal earnings season, set to be kicked off by Alcoa (AA) tomorrow. The firm is expected to incur a loss of $0.34 per share on revenues of $3.94 billion for the second quarter. In the prior year period, the company posted earnings of $0.66 per share on revenues of $7.62 billion.

Aside from fresh earnings figures, a series of reports on employment, international trade and consumer sentiment will also help to guide the equity markets later this week.

Today, some traders may focus on the Treasury Department's $35.0 billion auction of three-year notes amid interest rate concerns in the broader markets. The auction will take place at 1 p.m. ET.

Yesterday, an auction of 10-year Treasury Inflation Protect Securities, or TIPS, by the Treasury drew a yield of 1.92 percent and saw strong demand, posting a bid-to-cover ratio of 2.51, its highest in nine years.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold.

The government has continued its bond selling spree to fund its accelerated stimulus spending. Recently, Vice President Joe Biden confessed that the Obama administration misread the state of the economy, while other members of the administration have not ruled out the possibility of a second stimulus package.

In recent trading, the major averages have moved off their worst levels of the day, although they remain stuck in the red. The Dow is currently down 70.13 at 8,254.74, the Nasdaq is down 13.70 at 1,773.70 and the S&P 500 is down 6.16 at 892.56.

Sector News

Some of the day’s weakest performances are being turned in by housing stocks, as reflected by the 2.4 percent decline being shown by the Philadelphia Housing Sector Index. The decline dragged the index down to its worst intraday level in three months earlier in the session.

Notably, KB Home (KBH) is down by 3.1 percent, adding to it recent losses. The stock is now down to its worst level in well over three months.

Resource stocks are also extending their recent weakness, with oil service and natural gas stocks posting notable losses. The Philadelphia Oil Service Index and the NYSE Arca Natural Index are down by 2 percent and 1.7 percent, respectively.

The move in resource stock comes as commodity prices continue to retreat on the NYMEX, with oil for August delivery down $1.16 at $62.89 a barrel. With the loss, the price of oil is moving lower for the fifth consecutive session.

While airline, brokerage, utilities and commercial real estate stocks are also under pressure, strong gains have emerged among healthcare provider and health insurance stocks. The Morgan Stanley Healthcare Payor Index and the Morgan Stanley Healthcare Provider index are up by 4.2 percent and 2.5 percent, respectively, partly offsetting recent losses.

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TSX Falls Again, Dips Below 10,000 Mark

Canadian stocks are lower again on Tuesday morning, extending its sharp decline from the previous session. Weakness in the utilities and industrial sectors has led the decline.

The S&P/TSX Composite Index has dropped 73.77 points or 0.73% to move at 9,953.78. The index fell nearly 2.5% yesterday.

Industrial stocks are down 2% to lead the decliners. Canadian Pacific Railway has dropped 4% and Canadian National Railway is down 2.6%.

Utility stocks are down 1.9%. Fortis has lost 2.4%, Transalta is down 1.8% and Canadian Utilities has dropped 1.7%.

In corporate news, Air Canada has dropped 7.7% after the airliner said it flew 4.17 billion revenue passenger miles and 5.15 billion available seat miles, on a consolidated basis with Jazz, in June 2009, resulting in a traffic decrease of 9.1% and capacity decrease of 7.6% as compared to June 2008.
 
The Jean Coutu Group has added 3.4% after the company reported a first-quarter profit of C$10.3 million or C$0.04 per share versus a loss of C$20.2 million or C$0.08 per share in the prior year period.

Thallion Pharmaceuticals has plunged 9.1% after the company said that it has suspended patient enrollment in its Phase II trial evaluating TLN-232 as a treatment for metastatic melanoma, due to an ongoing dispute with the licensor.

Genworth MI Canada is down 47 cents on its first day on the TSX after pricing its initial public offering of 44.7 million common shares at $19

On the economic front, building permits in May surpassed the $5.0-billion mark for the first time since October 2008, according to data released by Statistics Canada.

Meanwhile, the Office of the Superintendent of insolvency Canada reported Canadian bankruptcies rose 31% year-over-year in the month of May.

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The Asian markets closed Tuesday’s session on a mixed note. While the South Korean and Indian markets closed higher, the Chinese, Japanese Hong Kong and Australian markets closed lower.

Japan’s Nikkei 225 average opened sharply higher, although selling pressure dragged it lower in early trading. After being confined below the unchanged line, the index staged a short-lived recovery in early afternoon trading only to squander its gains and closed down 33.08 points or 0.34% at 9,648.

Weakness in the commodity space and the strength of the yen impacted the resource and export spaces, respectively. Shipping and bank stocks also saw weakness.

Australia’s All Ordinaries opened unchanged from its previous close at 3,784 and drifted into negative territory amid mixed cues from Wall Street and softness in commodity prices. The index remained in negative territory throughout the session before ending with a loss of 16.40 points or 0.43%, at 3,768.

The Reserve Bank of Australia said it is retaining its cash rate at 3% for the third straight month. In its assessment of the economy, the Central Bank said that economic conditions in the country were not as weak as expected earlier. However, the bank foresees further decline due to sluggish capacity utilization and output coupled with weak demand for labor. In a separate report, the Australian Industry Group revealed that the construction sector contracted for the 16th straight month in June.

After holding above the unchanged line in the morning session, Hong Kong’s Hang Seng Index retreated in late trading. The index closed down 117.14 points or 0.65% at 17,862.

Resource, property and China-related stocks came under selling pressure. Financial stocks also declined, with the exception of HSBC Holdings, which rose modestly. On the other hand, Cathay Pacific jumped over 6%.

South Korea’s Kospi, which bucked the declining trend on Monday, also held firm on Tuesday, as it survived a late morning collapse and advanced throughout the rest of the session. The index closed up 5.26 points or 0.37% at 1,434.

The Indian market rebounded a little after fairly high expectations on investments, taxes and policy impetus in the run-up to the budget led to a steep fall in the previous session. In a significant development, Moody's Investors Service said on Tuesday that the FY10 budget is clearly a growth-oriented budget and is broadly consistent with a stable outlook on its sovereign ratings. After trading choppily in a range of 14,252-14,001, the BSE Sensex finished at 14,170, up 127 points or 0.90%.

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The major European markets are rebounding on Tuesday following yesterday’s sharp declines, as a rebound in commodity prices is supporting the resource space. While the the French CAC 40 Index is trading up 0.29% compared to a 0.37% gain by the German DAX Index, the U.K.’s FTSE Index is gaining 0.66%. Mining and energy stocks are behind bulk of the optimism.

On the economic front, the U.K.’s industrial production unexpectedly dropped 0.6% in May from April, a report from the Office for National Statistics showed. At the same time, manufacturing output decreased 0.5% compared to previous month. Economists were looking for a 0.2% monthly growth for industrial as well as manufacturing output. Annually, industrial production and manufacturing output declined 11.9% and 12.7%, respectively.

Meanwhile, a government report showed that Germany’s factory goods orders rose 4.4% in May compared to the 0.5% increase expected by economists. In April, the increase was 0.1%. On a year-over-year basis, factory goods orders were down 29.4%.

U.S. Economic Reports

A lack of clarity on the economic outlook is doing a lot of damage, as traders sway to the confounding economic evidence. The fate of the second quarter is sealed as of now. Inventory reduction is likely to have sapped most of the economy’s energy, as wary corporations battle to bring inventories in line with sagging demand. First Trust Advisors forecasts that second quarter real GDP fell at a 2.5% annual rate, as the debilitating effect of weak home building and business investment is likely to be partly offset by an increase in net exports and government spending.

The number of hours worked fell at a 7.9% annual rate in the second quarter, which in turn has propped up productivity. Therefore, job losses should not be a grave concern from the point of view of output. The drumbeat of a second-half recovery is primarily based on expectations that inventory replenishment will stimulate growth, with the build up particularly strong in the auto sector.

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Kennametal is likely to be in focus after it announced that it has amended its $500 million revolving bank credit agreement. The company indicated that the amendment provides additional flexibility with respect to financial covenants.

AT&T (T) and Verizon may react to a Wall Street Journal report that said that the Department of Justice is contemplating initiating an anti-trust probe against major telecommunications companies. The report said the probe would explore the exclusive agreement between phone companies and handset makers or whether phone operators are unduly restricting services third parties companies can offer on their networks.

Discover Financial Services could come under selling pressure after it said it has commenced an underwritten public offering of $500 million of its common stock. The company expects to use the net proceeds for general corporate purposes, which may include capital contributions to the company’s subsidiary, Discover Bank, possible investments in the company’s businesses or possible repurchase of stocks issued by the company to the Treasury.

UAL Corp. could react to its announcement that its load factor rose 0.5 percentage points to 85.9%. Traffic fell 7.5% and capacity declined by 8%.

Currency, Commodity Futures

Crude oil futures are rising $0.41 at $64.46 after declining $2.68 to $64.05 a barrel in Monday’s session. After rallying since mid-February on the back of optimism that the economy will turn around soon, oil began to see weakness with the recent depletion in crude stockpiles used as reasons for selling-off oil futures. Inventories are declining, as refinery output is being increased to meet the demands of the summer driving season.

Commerzbank expects prices to correct close to $60-a-barrel in the near term. Additionally, until more clarity emerges on the economic outlook, safe haven assets like the dollar should see strength, resulting in the weakness of commodities such as oil and gold denominated in dollars. Despite talks of an alternate reserve currency, there is unlikely to be any solid move away from the currency- a development that could be dollar positive.

Gold futures, which fell $6.70 to $924.30 an ounce in the previous session, are advancing $5 at $929.30 an ounce.

Among currencies, the U.S. dollar is trading at 95.2870 yen, stronger than the 95.35 yen it fetched at the close of New York trading on Monday. Against the euro, the dollar is currently valued at $1.403.

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