US & World Daily Markets Financial Briefing 08-05-2009

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Better Than Expected Jobs Data May Help Extend Uptrend

The major averages are currently stuck on opposites of the unchanged line, with the Nasdaq posting a modest loss. While the Nasdaq is currently down 2.12 at 1,714.12, the Dow is up 64.60 at 8,474.45 and the S&P 500 is up 6.76 at 914.15.

The major U.S. index futures are pointing to a higher opening on Friday, with traders reacting positively to the Labor Department’s monthly employment report as well as the release of the official results of the government’s financial stress tests. While the employment report showed a continued decrease in jobs, the drop in employment was smaller than expected. Some traders may also use the weakness seen in the previous session as an opportunity to get into the markets.

U.S. stocks opened Thursday’s session higher, encouraged by an unexpected decline in weekly jobless claims. However, profit taking ahead of the release of the stress test results dragged the major averages sharply lower in early trading. The major averages saw some further downside over the course of the trading day, with the weakness more pronounced in the technology and financial spaces.

The Dow Industrials ended the session down 102.43 points or 1.2% at 8,410 and the Nasdaq Composite Index fell 42.86 points or 2.4% to close at 1,716, while the S&P 500 Index ended down 12.14 points or 1.3% at 907.

Twenty-one of the Dow components ended the session lower, with Alcoa (down 6.19%), American Express (up 4.31%), Caterpillar (down 5.20%), General Motors (down 3.61%), Hewlett-Packard (down 5.32%) and AT&T (down 4.65%) leading slide. On the other hand, Bank of America rallied 6.46%, while General Electric, Merck and Pfizer rose about 2% each.

Among the sector indexes, the KBW Bank Index fell 3.46% and the Amex Securities Broker/Dealer Index ended down 3.62%. The Philadelphia Housing Sector Index moved down 6.26%. While the Dow Jones Transportation Average slid 2.82%, the Amex Airline Index receded 3.90%. Notwithstanding a modest uptick in the price of oil, the Philadelphia Oil Service Index lost close to 3%.

In the technology space, the Philadelphia Semiconductor Index tumbled 5.93% and the Amex Disk Drive Index fell 5.08%. The Amex Computer Hardware Index declined 4.21% compared to a nearly 3% decline by the Amex Software Index. The Amex Networking Index closed down about 5%.

On the economic front, the U.S. Labor Department said initial jobless claims unexpectedly fell to 601,000 in the week ended May 2 from the previous week's revised figure of 635,000. Economists had expected jobless claims to show a modest increase. However, the report also showed a continued increase in continuing claims, which rose to a new record high of 6.351 million in the week ended April 25.

A separate Labor Department showed that non-farm productivity rose 0.8% in the first quarter following a 0.6% drop in the fourth quarter. The improvement in productivity reflected a 9% drop in hours, which more than offset the 8.2% decline in output. Hourly compensation rose 4.1% quarter-over-quarter compared to a 3.3% increase in unit labor costs.

Meanwhile, speaking at a conference via satellite, Federal Reserve Chairman Ben Bernanke called on banks to overhaul pay policies and risk management. He emphasized that banks must assess the unintended impacts of new products while also calling for vesting of adequate power with supervisors.

In another economic release, the Federal Reserve said consumer credit fell by $11.1 billion, much bigger than the expected decline of $4 billion. Consumer credit has been on the decline for six of the past eight months.

The stress test results revealed that nearly all of the 19 banks have enough Tier 1 capital to absorb the higher losses even under a hypothetical adverse scenario. However, it was found that roughly half of the firms need to enhance their capital structure to put emphasis on common equity. The government’s tests showed a cumulative $74.6 billion in capital would have to be raised for the ten banks that need to raise money.

About nine banks were found to have adequate capital and those banks that need capital were given the option to convert the preferred shares held by the Treasury to common shares to satisfy the additional capital requirements. Despite the view that the stress test results did not paint a bleak picture, as the additional capital requirement specified do not appear particularly burdensome, IHS Global Insight noted that credit markets still remain under severe pressure and are a long way from functioning normally.

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Canadian stocks look to end another positive week on high note

Canadian stocks will look to end what has been a positive week on a high note Friday morning after pulling back in the previous session.

Bay Street will be keeping a close eye on the monthly US employment report, while mulling over the results on the jobs situation released by Statistics Canada earlier this morning.

On Thursday, the S&P/TSX Composite Index surrendered 176.38 points or 1.73% to 9,967.05. The index had ended Wednesday's session above 10,000 for the first time since November.

Friday's outlook is sunnier after the release of data showing Canadian employment grew by 36,000 in April, the result of an increase in self-employment.

Financials will be in play after the tests performed by US regulators showed half of the country's biggest financial institutions need to improve their capital positions in order to ensure that they can weather a further downturn in the economy.

The results of the US government's "stress test" showed that 10 of the 19 banks tested need to raise a total of $74.6 billion. The banks involved in the exercise account for two-thirds of the assets and more than half the loans in the U.S. banking system.

The biggest requirement comes for Bank of America , which regulators say needs to raise nearly $34 billion. Wells Fargo, GMAC and Citigroup are other big-name financial institutions that need to improve their capital position, the stress test results show.
 
In Canadian news, gold producer Eldorado Gold Corp. posted first quarter net income of US$13.1 million or US$0.04 per share, compared to US$20.7 million or US$0.06 per share in the prior year quarter.

Revenue for the quarter decreased to US$52.4 million from US$72.4 million in the year-ago quarter.

Credit Suisse downgraded Kinross Gold Corp. shares to Neutral from Outperform and lowered its price target to C$20 from C$21. The brokerage reduced its 2009 EPS estimate to C$0.50 from C$0.61, and its 2010 estimate to C$0.51 from C$0.71.

Kingsway Financial Services Inc. reported first quarter net loss of US$58.3 million or $1.06 per share, compared with a net loss of $34.4 million or $0.62 per share in the first quarter of 2008.

The loonie continued its assault on the dollar, trading near a 6-month high of $1.1600 as the price of oil held above $57 a barre

All eyes are on the US government's monthly jobs report, set for release at 8:30 am ET. The employment report is expected to show a decrease of about 600,000 jobs.

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The major European markets are seeing considerable strength, with the U.K.’s FTSE 100 Index advancing 1.4 percent, while the French CAC 40 Index and the German DAX Index are up 1.9 percent and 3 percent, respectively.

On the economic front, the German trade surplus rose to 11.3 billion euros in March from 8.6 billion euros on February, a report from the Federal Statistical Office showed Friday. The increase came as a surprise to economists, who were largely looking for a lower figure of 8 billion euros.

A separate report released by the German Ministry of Economics and Technology showed that Germany's industrial production remained flat on a monthly basis in March compared to a revised 3.4% decline in February. Economists had expected a decline of 1.3%.

Meanwhile, the U.K.'s annual output price inflation slowed to 1.2% in April, marking the lowest annual rate since April 2004, the Office for National Statistics reported Friday. Economists were expecting the annual inflation to ease to 0.7% from March's 2%. Between March and April, output prices were up 0.6%, which is the highest monthly growth since June 2008, when it grew 0.8%. The consensus forecast for April was 0.2%.

U.S. Economic Reports

While a report released by the Labor Department on Friday showed a continued decrease in employment in the month of April, the report showed that economy lost far fewer jobs than economists had been anticipating.

The report showed that non-farm payroll employment fell by 539,000 jobs in April following a revised decrease of 699,000 jobs in March. Economists had expected a decrease of about 600,000 jobs compared to the decrease of 663,000 originally reported for the previous month.

With the smaller than expected decrease, the total number of jobs lost since the recession began in December 2007 rose to 5.7 million.

The continued decrease in jobs reflected notable declines in employment in both the good-producing and service-providing sectors. While goods-producing sectors lost 270,000 jobs, service-providing sectors lost 269,000 jobs.

At the same time, the Labor Department said that the unemployment rate rose to 8.9 percent in April from 8.5 percent in March. The increase, which lifted the unemployment rate to a new 25-year high, came in line with economist estimates.

The Commerce Department is due to release its wholesale inventories report at 10 AM ET. Economists expect wholesale inventories at the end of March to show a 1% decline.

Wholesale inventories, which make up a quarter of business inventories, showed a bigger-than-expected monthly drop of 1.5% in February. Economists had expected a mere 0.7% monthly decline. Meanwhile, wholesale sales rose by 0.6%, resulting in a wholesale inventories to sales ratio of 1.31 compared to a revised 1.34 in January.

Richmond Federal Reserve Bank President Jeffrey Lacker is due to present a keynote address to the DC Chamber of Commerce Business Summit in Washington at 1 PM ET.

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Most of the Asian markets closed modestly higher on Friday after the results of much-awaited stress tests on 19 U.S. banks dispelled uncertainty and speculation surrounding the health of the U.S. banking sector. Investors were relieved that there were no nasty surprises. Upbeat readings on the job market and sales at major retailers in the United States also offered some support ahead of the weekend.

The Japanese market rose for the fourth session in a row, helped by easing concerns over U.S. banks' financial standing after the stress test results. While banking, brokerage and insurance stocks closed stronger, stocks of auto, nonferrous metals and rubber products companies ended deep in the red.

The benchmark Nikkei 225 index rose 47 points or 0.5% to 9,433, a fresh six-month high. The broader Topix index of all First Section issues on the Tokyo Stock Exchange closed at 895, up 9 points or 1.06%.

In the banking sector, Mitsubishi UFJ Financial Group surged up 6.16%, Sumitomo Mitsui Financial Group advanced 4.08%, Mizuho Financial Group rallied 5.13% and Resona Holdings added 3.52%.

Insurer Mitsui Sumitomo Insurance gained 4.32%, Sompo Japan Insurance climbed 9.47% and T&D Holdings soared 6.48%. Among brokerages, Nomura Holdings rose 4.60% and Daiwa Securities Group surged up 7.09%.

After the close of trading, Toyota Motor (TM), the world's largest automaker, reported a net loss of 436.9 billion yen ($4.4 billion) for the year to March and warned that it would plunge deeper into the red this year because of the global economic downturn. The stock closed down 1.49%. Honda fell 3.28% and Suzuki declined 3.66%, but Nissan rose 0.57% and Mazda added 1.14%.

On the economic front, the Bank of Japan board members predicted that the Japanese economy is likely to continue to deteriorate through the end of 2009, minutes from the monetary policy meeting revealed on Friday. Some of the board members said that additional steps may be required to assist corporate financing and that the purchase of corporate bonds was acting as a safety net for the near term, although they didn't want the bank to get overly involved in the process.

The Australian market closed modestly higher, helped by late buying in the last couple of hours. The benchmark S&P/ASX200 closed at 3,942, up 3 points or a mere 0.08%, while the broader All Ordinaries Index rose 7 points or 0.2% to 3920.

Banks closed mostly higher. National Australia Bank rose 2.98%, Commonwealth Bank gained 1.83%, Westpac Banking added 1.43% and investment bank Macquarie Group closed up 0.85%, although ANZ slipped 0.84%.

Big miners closed mostly lower after copper prices fell from a three-week high in New York on Thursday. BHP Billiton moved down 1.06% and Iluka Resources fell 1.42%, but Rio Tinto rose 0.79%.

Rail and port infrastructure company Asciano Group surged up 26.57% on reports about receiving a bid from Global Infrastructure Partners, a New York-based fund. ResMed rallied 4.21% on reporting net income for the third quarter of $39.19 million or $0.51 per share, compared to $29.68 million or $0.38 per share in the year-ago quarter.

In economic news, Australia's short-term visitor arrivals fell a seasonally adjusted 1% month-over- month in March following a 6.1% increase in February, the Australian Bureau of Statistics said Friday. Tourist arrivals totaled 473,600 in March. On the basis of the original estimates, about 488,600 tourists arrived into the country in March.

Meanwhile, the short-term departures by residents from Australia dropped a seasonally adjusted 2.5% in March after a 3.5% increase in February. Resident departures numbered 464,900 on an adjusted basis and 430,100 on the basis of original estimates in March.

The South Korean market finished a choppy session modestly higher. The benchmark KOSPI closed at 1,412, up 11 points or 0.79%. Volume was significant at 705.8 million shares worth 7.29 trillion won (US$5.84 billion) and gainers outnumbered losers by 468 to 338.

Among notable gainers, market heavyweight Samsung Electronics closed up 0.53%, steel maker POSCO rose 0.81%, oil stock SK rose 1.23%, S-Oil gained 0.64%, telecom stock KT moved up 1.66%, Asiana Airlines added 0.67%, Korean Air Lines added 1.66%, LG Display LCD moved up 1.29%, banker Woori Finance gained 2.70% and Korea Exchange Bank surged up 6.39%.

Technology stock Hynix Semiconductor moved down 1.07% and LG Electronics ended down 0.49%, weighed down by a stronger won. Automaker Hyundai Motor declined 1.65% and Ssangyong Motor closed down 0.99%, but Kia Motors rose 1.80%.

Among Shipbuilders, Daewoo Shipbuilding gained 3.64%, while Hyundai Heavy slipped 0.4% and Samsung Heavy Industries fell 1.44%. Telecom stock SK Telecom closed down 0.82% and KB Financial, the holding firm of Kookmin Bank, fell 1.62%

Among the other markets in the region, China's Shanghai Composite index rose 1.09%, Hong Kong's Hang Seng index closed up 1% and Taiwan's TWII Weighed index ended up 0.17%. Meanwhile, Singapore's STI Straits Times index moved down 0.15% and India's BSE Sensex fell 1.98%.

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Gold Slips Slightly In Early Trading, Remains Notably Higher On Week

Gold was slightly lower in early trading on Friday, but retained most of the gains from its recent rally. The metal closed higher in each of the last four sessions.

June-dated gold fell to $913.50, down $1.20 on the session. Prices earlier touched as high as $921.00 and as low as $916.00.

The metal remains up more than $25 on the week, erasing last week's decline. Gold seemed likely headed for its second weekly gain in three after dropping in four straight weeks.

Gold gave back its early gains as the dollar fell to a fresh monthly low against the euro, and also saw weakness against the sterling. The metal usually moves opposite the dollar because of its hedge appeal.
 
On the economic front, the Labor Department report showed that non-farm payroll employment fell by 539,000 jobs in April following a revised decrease of 699,000 jobs in March. Economists had expected a decrease of about 600,000 jobs compared to the decrease of 663,000 originally reported for the previous month.

At the same time, the Labor Department said that the unemployment rate rose to 8.9 percent in April from 8.5 percent in March. The increase, which lifted the unemployment rate to a new 25-year high, came in line with economist estimates.

Additionally, the Commerce Department is due to release its wholesale inventories report at 10 am ET. Economists expect wholesale inventories at the end of March to show a 1 percent decline.

Traders also had their first chance to react to the official results of the U.S. government's stress tests of the nation's 19 largest financial institutions, which were released late Thursday afternoon. The showed that 10 of the 19 banks tested need to raise a total of $74.6 billion. The banks involved in the exercise account for two-thirds of the assets and more than half of the loans in the U.S. banking system.

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AIG  could react to its announcement that its first quarter loss narrowed to $1.98 per share from $3.09 per share in the year-ago period. On an adjusted basis, the operating loss was 97 cents per share, wider than the loss of $1.41 per share in the year-ago period.

Nvidia Corp. could be in focus after it reported a first quarter loss of 37 cents per share compared to a loss of 30 cents per share last year. The recent quarter’s results included $140.2 million in charges related to a cash tender offer to buy back stock options. On an adjusted basis, the company reported a loss of 9 cents per share. Revenues fell to $664.2 million from $1.15 billion last year. The consensus estimates called for a loss of 10 cents per share on revenues of $514.7 million.

Activision Blizzard is likely to trade higher after it reported first quarter adjusted earnings of 8 cents per share, ahead of the consensus estimate of 5 cents per share. Adjusted sales were $724 million, also exceeding the mean analysts’ estimate of $593.3 million.

Live Nation may move in reaction to its announcement that its first quarter loss widened to $1.29 per share compared to a year-ago loss of 50 cents per share, which included 42 cents per share from the sale of its North American theatrical business. Revenues were down 6% to $499.3 million. Analysts estimated a loss of 74 cents per share on revenues of $561.8 million.

Wells Fargo & Company is likely to show weakness after it said it will offer $6 billion in common stock. Meanwhile, Citigroup  revealed that it would raise $5.5 billion in deficit capital identified by the stress tests through the conversion of additional preferred stock into common stock. The stress tests revealed that Bank of America needs $33.9 billion in capital, GMAC $11.5 billion, Wells Fargo $13.7 billion and Morgan Stanley $1.8 billion.

California Pizza Kitchen could gain ground after it reported that its first quarter earnings rose to 11 cents per share from 9 cents per share last year. Revenues fell 2% to $161.1 million. Analysts estimated earnings of 10 cents per share on revenues of $161.1 million. For the second quarter, the company expects earnings of 18-20 cents per share and a 5.5%-6.5% drop in restaurant sales.

CBS receded sharply in Thursday’s after hours session after it reported a first quarter loss of 8 cents per share on a 13% drop in revenue to $3.16 billion. The consensus estimates had called for a profit of 7 cents per share on revenues of $3.26 billion.

CROCS could see significant selling pressure after it reported a loss of 27 cents per share for its first quarter. Excluding a foreign currency exchange, the company reported a loss of 23 cents per share. Revenues declined 32% to $134.9 million. Analysts estimated a loss of 27 cents per share on revenues of $114.44 million. The company expects a loss of 15-31 cents per share for the second quarter, while analysts estimate a loss of 17 cents per share.

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