US & World Daily Markets Financial Briefing 11-06-2009

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Surging Bond Yields May Result in Markets Extending Lackluster Phase

The major U.S. index futures are pointing to a lower opening on Thursday. Retail sales for April rose in line with expectations and jobless claims dropped by much more than what analysts had expected, according to two separate reports released earlier in the day. Oil is still trading near its recent high, primarily reflecting the decline in risk aversion. However, interest rates concerns are likely to weigh down on the markets. The yield on the 10-year old bond is continuing to surge higher, causing anxiety among traders over the unhealthy impact it can have on growth.

That said, the markers may attempt to shake off the lackluster phase witnessed in the past four sessions. Sustenance in the commodity price gains could just provide the right catalysts to drive stocks higher.

While a commodity rally spurred stocks at the open on Wednesday, the initial buying momentum faded as the session progressed. A report released earlier in the day, showing a sharp drop in mortgage applications stirred up concerns over a housing market recovery, while the yield on the 10-year bond also surged higher in the day, rising 2.02% to 3.94%, its highest level since October 31st, 2008.

The selling pressure that emerged dragged the major averages from the day’s high hit in early trading and below the unchanged line, with the selling reaching a crescendo by late afternoon trading. Thereafter, some buying emerged, helping the markets recoup some of their losses.

The Dow Industrials ended down 24.04 points or 0.27% at 8,739, the S&P 500 Index receded 3.28 points or 0.35% to end at 939 and the Nasdaq Composite Index moved down 7.05 points or 0.38% to 1,853.

Twenty of the thirty Dow components ended lower, with Wal-Mart (WMT), McDonald’s (MCD), Coca-Cola (KO), Kraft Foods (KFT), JP Morgan Chase (JPM), General Electric (GE) and Caterpillar (CAT) receding by more than 1%. On the other hand, Alcoa (AA) rallied 3.05%, Microsoft (MSFT) moved up 2.13% and Exxon Mobil (XOM) gained close to a percentage.

Among the sector indexes, the Amex Securities Broker/Dealer Index receded 1.77% and the KBW Bank Index fell 1.27%. The Amex Biotechnology Index declined 1.54% compared to a 2.26% drop by the Amex Airline Index. The S&P Retail Index and the Philadelphia Housing Sector Index were off about 1% each. On the other hand, the Philadelphia Oil Service Index gained 1.36% and the Dow Jones Utility Average ended up 1.54%.

On the economic front, the Commerce Department’s trade balance report showed a widening of the trade deficit, as expected. The trade deficit widened to $29.2 billion in April, with both imports and exports declining. The decline in exports was broad based, but in small magnitudes. On an inflation adjusted basis, the trade deficit was $40.5 billion, which is better than the year-ago’s deficit of $57.5 billion. With the inflation-adjusted trade deficit being smaller than the average for the first quarter, trade may add about 1 percentage point to GDP in the second quarter.

The Fed’s Beige Book released yesterday showed that the twelve Federal District Banks said economic conditions remained weak or deteriorated further from the period from mid-April through May. That said, five of the districts noted moderation in the downward trend. The report also highlighted the improvement in expectations, although there is little hope that economic activity will improve significantly through the end of the year.

Manufacturing activity was reported as declining or remaining at low levels in most districts, although the outlook has improved. The Beige Book also noted that retail spending remained soft and new car purchases remained at depressed levels. That said, home sales were reported to have improved, while home constructions appears to be stabilizing. The labor market conditions also remained weak, with wages generally flat or falling.

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Toronto stocks will look to build on its modest rally from the prior session on Thursday, with early gains possible from the key energy and technology sectors.

Crude oil prices added to a recent gains, which will provide a spark for energy stocks. Light sweet crude for July rallied to $71.91, up 58 cents, in electronic trading.

The Information Technology Index could get a boost from Research in Motion (RIM.TO). The Blackberry maker saw its first quarter and full year estimates increased by JPMorgan Chase & Co. RIM is now expected to earn $0.96 per share in the quarter, up from $0.88, according to Bloomberg. Full-year expectations jumped to $4.06, up from $3.71.

Telecommunications carrier Telus Corp. announced a 2009 capital plan investing more than $250 mln in Quebec. The investment is focused primarily on advanced wireless and wireline broadband infrastructure and includes healthcare related technology and applications. The company said that this investment is supporting more than 750 jobs.

lululemon athletica reported first-quarter net income of $6.52 mln or $0.09 per share, compared to $8.48 mln or $0.12 per share last year.

MDS reported a second quarter net loss of US$17 mln or US$0.15 per share, compared to profit of US$13 mln or US$0.11 per share in the year ago quarter.
 
Transat A.T. Inc. reported second-quarter net income of C$42.19 mln or C$1.27 per share, compared to C$41.72 mln or C$1.25 per share last year.

Xceed Mortgage Corp. reported second quarter net income of C$46,000 or breakeven per share, compared to a loss of C$16.67 mln or C$0.60 per share in the same quarter of last year. Revenues for the quarter were C$3.76 mln, compared to C$4.82 mln in the prior year quarter.

On the economic front, Statistics Canada reported industries operated at 69.3% of production capacity, down 5.6 percentage points from the previous quarter. It was the first time that industrial capacity use fell below the 70% level since the start of the data series in 1987.

Meanwhile, the U.S. Labor Department revealed that initial jobless claims, a closely-watched gauge of layoffs, came in at 601,000 for the week ended at June 6th. This was down 24,000 from the previous week's revised level of 625,000.

Meanwhile, a Commerce Department report showed that retail sales rose 0.5 percent in May following a revised 0.2 percent decrease in April. Economists had expected sales to increased by 0.5 percent compared to the 0.4 percent decrease originally reported for the previous month.

Crude oil futures are trading up $0.63 at $71.96 a barrel after advancing $1.32 to $71.33 a barrel on Wednesday. Oil futures, which topped the $71-a-barrel mark in the Asian session, moved from strength to strength after the Energy Information Administration said in its weekly report that crude oil inventories fell by 4.4 mln barrels in the week ended June 8th to 361.6 mln barrels. Despite the decline, stockpiles were still above the average range.

Distillate inventories edged down 0.3 mln barrels and remained above the upper bound of the average range. Gasoline stockpiles declined by 1.6 mln barrels and were below the lower limit of the average range. Refinery capacity utilization averaged 84.8% in the four weeks ended June 5th compared to 84.2% in the previous week.

At present, market sentiment is supposedly having a greater impact on prices than market fundamentals. The fundamental picture has not altered much, as revealed by the EIA’s monthly report, where the agency did not downwardly revise its global oil demand estimate.

Gold futures are currently down $3.50 at $951.20 an ounce. In the previous session, the precious metal ended unchanged at $954.70 an ounce. The commodity saw a run up close to $1,000-an ounce in early June as the euro breached the $1.40 level. Since then, as risk preference increased, gold, being a safe haven investment, is seeing weakness.

On the currency front, the U.S. dollar is trading at 98.30 yen, weaker than the 97.4225 yen it fetched at the close of New York trading on Wednesday. Against the euro, the dollar is trading at $1.3977.

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Asian markets closed mixed on Thursday, as investors weighed the impact of higher oil prices and commodities on inflation and an economic recovery. Profit taking after recent gains and negative cues from Wall Street overnight also affected investor sentiment.

After briefly breaking above the 10,000-mark for the first time in eight months, the benchmark for the Japanese market, the Nikkei 225 index, closed at 9,981, down 10 points or a modest 0.1%. Meanwhile, the broader Topix index of all First Section issues on the Tokyo Stock Exchange rose 4 points or 0.39% to 941, its highest closing since November 5. While iron and steel, precision machinery and securities stocks ended with notable gains, insurance, pulp and paper and mining stocks led the decliners.

Steel maker Kobe Steel and Nippon Steel jumped over 5% each and JFE Holdings advanced 3.72% on hopes of improved demand in China and other emerging markets. Defensive stocks in the telecom, railways and insurance sectors such as KDDI, Softbank Corp, Tokio Marine and East Japan Railway Co. ended in the red, as investors shifted their portfolios in favor of cyclical stocks. Trend Micro, a maker of computer anti-virus software, tumbled 4.72% after Microsoft said on Wednesday that it was getting ready to unveil a free anti-virus service for personal computers.

In economic news, the gross domestic product in Japan contracted by 3.8 percent in the first quarter compared to the previous three months, the Cabinet Office said on Thursday in its final report. That was slightly better than the record preliminary reading of -4.0 percent, at which analysts expected GDP to hold steady. GDP saw a 3.8 percent quarterly decline in Q4 of 2008.

China's Shanghai Composite index snapped a 3-day rally to finish at 2,797, down 19 points or 0.67% amid profit taking and mixed economic reports. Decliners in the Shanghai market outnumbered gainers by 528 to 282, while 44 closed unchanged. While banking, auto and property stocks ended with notable gains, stocks of securities firms and property developers ended lower.

On the economic front, China posted a trade surplus of $13.39 billion in May, the General Administration of Customs said on Thursday, below expectations for a surplus of $14.9 billion.

The Australian market closed at a fresh 2009 high, led by miners and energy stocks. The benchmark S&P/ASX200 index closed at 4,047, up 23 points 0.57% and the broader All Ordinaries index rose 31 points or 0.8% to 4,047.

Among big miners, Rio Tinto jumped 5.67%, its rival BHP Billiton rose 1.46% and Illuka Resources surged up 6.84%. Fortescue Metals Group climbed 19.22% amid speculation of Chinese buying interest, even as the iron ore miner said it cannot explain why its shares have almost doubled since early this month. OZ Minerals was in a trading halt and BlueScope Steel gained 2.18%. Gold and banking stocks ended mixed.

Australia's unemployment rate increased in May to 5.7 percent, according to data released Thursday by the Australian Bureau of Statistics. The figure was an increase of 0.2 percentage points compared to the April jobless rate.

South Korea's benchmark KOSPI ended a volatile session up by 5 points or a modest 0.32% at 1,419 amid the simultaneous expiry of June futures and options contracts. Volume was at 478.3 million shares worth 6.88 trillion won and advancers outnumbered decliners by 433 to 361.

Steel makers rose after Brazilian mining giant Vale agreed to cut iron ore prices and construction and engineering stocks advanced on reports about new order receipts, while airline stocks fell due to higher crude oil prices.

The Indian market was in a consolidation mode after a 2-day rally, as investors took profits following a massive 90% rise in the benchmark indexes since its March lows. The BSE Sensex ended at 15,411, down 55 points or 0.36%.

Among the other markets in the region, while Singapore's STI Straits Times index fell 0.39%, Taiwan's TWII Weighed index rose 1.63% and Hong Kong's Hang Seng index ended up 0.03%.

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The major European markets are showing mixed sentiment on Thursday after the strong rally witnessed yesterday on higher commodity prices. The French CAC 40 Index is currently down 0.16%, while the German DAX Index is advancing 0.42% and 0.17%, respectively. The U.K.’s FTSE 100 Index is moving up 0.18%.

In corporate news, the U.K.’s Home Retail reported in its interim update for the 13-week period from March 1st to May 30th that its total sales at Agros rose by 0.9% compared to a 5.8% increase in sales at Homebase. Like-for-like sales at Agros and Homebase fell by 2.8% and 3.8%, respectively. Rexam announced that it has refinanced its 775 million revolving credit facility and a number of smaller bilateral facilities due to mature in 2010.

U.S. Economic Reports

On the economic front, retail sales showed a notable increase in the month of May, according to a report released by the Commerce Department on Thursday, although the increase was due in large part to an increase in gasoline prices that drove up sales at gas stations.

The report showed that retail sales rose 0.5 percent in May following a revised 0.2 percent decrease in April. Economists had expected sales to increased by 0.5 percent compared to the 0.4 percent decrease originally reported for the previous month.

The U.S. Labor Department revealed that initial jobless claims, a closely-watched gauge of layoffs, came in at 601,000 for the week ended at June 6th. This was down 24,000 from the previous week's revised level of 625,000.

The 4-week moving average for initial claims, a statistic that flattens out week-to-week fluctuations in the data, dipped to 621,750. Continuing claims, which measures people receiving ongoing unemployment help, pushed further higher, setting yet another record by rising 59,000 to 6.816 million.

The Commerce Department is scheduled to release its business inventories report for April at 10 AM ET. The report summarizes the results from the monthly retail trade, wholesale trade and factory goods orders surveys. The report is expected to show a 1% decline in business inventories for the month.

Business inventories fell 1% month-over-month in March. Annually, inventories were down 4.8%. Meanwhile, business sales moved down 1.6% month-over-month and receded 15.6% compared to the previous year. Consequently, the business inventories to sales ratio was steady at 1.44, although it was higher than the 1.28 in the year-ago period.

Atlanta Federal Reserve Bank President Dennis Lockhart is due to deliver a speech on the economy before the National Association of Securities Professionals annual conference in Atlanta at 1:05 PM ET.

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Jones Lang, Lasalle could be in focus after it announced the pricing of a public offering of 6.5 million shares at a price of $35 per share. The company expects the offering to close on or about June 16, 2009. The net proceeds are to be used to repay outstanding indebtedness and for general corporate purposes.

Microsoft receded in Wednesday’s after hours session despite announcing a dividend of 13 cents per share payable on August 20th to shareholders of record as of September 10th, 2009. The company also passed a resolution that recommends that shareholders representing 25% or more of outstanding share be granted the right to call special shareholder meetings.

Arthur J. Gallagher & Co. may be in focus after it said it has acquired Walker Taylor Agency. The company did not divulge the terms of the transaction.

Palm is likely to react to its announcement that it has appointed Jon Rubinstein as its Chairman and CEO, effective June 12th. Rubinstein, a former Apple engineer, will replace Ed Colligan, who is scheduled to depart after 16 years of leadership at the company.

R.R. Donnelley may also be in focus after it said it has decided to end its $1.5 billion offer to buy Quebecor World following the rejection of its June 8th proposal by Quebecor.

Vulcan Materials is likely to come under selling pressure after it announced that it would cut its dividend by half to 25 cents per share beginning in its third quarter. The company noted the decision would help increase its available cash by about $100 million. Separately, the company also said it would offer 11.5 million shares of its stock to raise about $500 million in gross proceeds.

Cadence Design Systems may also be in focus after it said it has commenced restructuring initiatives that will help the company save $30 million in operating expenses annually. The restructuring initiatives include the elimination of about 225 full time positions, representing 5% of its global employee base. The company expects to record a pre-tax charge of $20 million to $35 million related to these actions.

Plexus and Coca-Cola are likely to react to their announcement that they have forged a partnership to manufacture Coca-Cola Freestyle. Coca-Cola will use Plexus’ global supply chain, manufacturing solutions and engineering services to bring the product to the market.

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