US & World Daily Markets Financial Briefing 16-02-2011

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Stocks See Initial Strength On Mixed Data

With traders reacting positively to another mixed batch of economic data, stocks have shown a notable move to the upside in early trading on Wednesday. The major averages have all climbed into positive territory after ending the previous session moderately lower.

Housing stocks are helping to lead the way higher following the release of a report from the Commerce Department showing a substantial increase in housing starts in the month of January. The Philadelphia Housing Sector Index is rising by 1.4 percent after closing lower in the two previous sessions.

The Commerce Department reported that housing starts jumped 14.6 percent to an annual rate of 596,000 in January from the revised December estimate of 520,000. Economists had expected housing starts to edge up to 540,000 from the 529,000 originally reported for the previous month.

However, the report also showed that building permits, an indicator of future housing demand, fell 10.4 percent to an annual rate of 562,000 in January from the revised December rate of 627,000.

Better than expected earnings from Dell (DELL) are also contributing to some strength among computer hardware stocks, while transportation, healthcare provider, and brokerage stocks are also posting notable gains in early trading.

In other economic news, the Labor Department released a report showing that its producer price index rose by 0.8 percent in January following a revised 0.9 percent increase in December. Economists had expected prices to increase by about 0.7 percent.

Core producer prices, which exclude food and energy prices, rose by 0.5 percent in January after edging up by 0.2 percent in the previous month. The increase in core prices exceeded economist estimates for a more modest increase of about 0.2 percent.

The bigger than expected increase in core prices, which was largely due to a 1.4 percent jump in prescription drug prices, marked the biggest increase in core prices since October of 2008.

With more normal temperatures in the U.S. leading to a decrease in utilities output, the Federal Reserve also released a report showing an unexpected drop in industrial production in the month of January.

The Fed said industrial production edged down by 0.1 percent in January following an upwardly revised 1.2 percent increase in December. The drop surprised economists, who had expected production to increase by 0.5 percent.

In the afternoon, the Fed is scheduled to release the minutes of its January Federal Open Market Committee meeting at 2:00 p.m. ET.

The major averages are currently hovering near their highs for the young session. The Dow is up 42.04 points or 0.3 percent at 12,268.68, the Nasdaq is up 12.74 points or 0.5 percent at 2,817.09 and the S&P 500 is up 5.49 points or 0.4 percent at 1,333.50.

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Early Signals Point To Marginal Gains For TSX

Bay Street stocks may edge up at open Wednesday amid firm commodities prices and a mixed batch of economic data from both sides of the border. Traders were also digesting a slew of corporate reports, that came in mixed.

U.S. stock futures were pointing to a higher open.

On Tuesday, the S&P/TSX Composite Index added 18.58 points or 0.13 percent to 13,929.35

The price of crude oil edged up as traders await cues from the official inventories report from the EIA. Analysts expect crude oil inventories to climb 2 million barrels and gasoline stocks to increase 1.85 million barrels last week. Crude for March was up $0.39 to $84.71 a barrel.

The price of gold was steady above $1,370 amid inflation concerns. Gold for April edged down $0.10 to $1,374.00 an ounce.

In corporate news from Canada, communications and media company Rogers Communications aid its fourth-quarter net income grew to C$327 million or C$0.58 per share from C$310 million or C$0.51 per share last year. However, adjusted net income slipped 3% to C$359 million from C$370 million in the prior-year quarter, while adjusted earnings per share improved to C$0.64 from C$0.61 a year earlier. The company upped its dividend by 11 percent to C$1.42 per Class A Voting and Class B Non-Voting share.

Communications technologies company Aastra Technologies reported lower fourth-quarter net income of C$14.37 million or C$1.02 per share compared to C$15.31 million or C$1.09 per share in the year ago quarter. The company declared a dividend of C$0.20 per share.

Oil and gas firm Talisman Energy reported a wider fourth quarter net loss of C$313 million or C$0.31 per share versus loss of C$181 million C$0.18 per share year ago. Adjusted earnings per share from continuing operations were C$0.08 compared to earnings of C$0.07 per share prior year. Analysts were expecting the company to report earnings of C$0.15 per share for the quarter.

Pan American Silver Corp. declared a quarterly dividend of $0.025 per share.

Real estate services company FirstService Corp. reported a narrower fourth quarter loss of $3.68 million or $0.12 per share versus loss from $9.35 million or $0.40 per share in the year ago quarter. Adjusted net earnings amounted to $11.41 million or $0.37 per share compared to $7.94 million or $0.27 per share year ago. Analysts were expecting the company to report earnings of $0.43 per share for the quarter.

In economic news, Statistics Canada said manufacturing sales advanced 0.4 percent to C$45.4 billion in December, but the increase fell short of market estimates as demand for aerospace products waned. Economists expected a rise of 2.5 percent from the previous month. Total manufacturing sales were up 6.2 percent compared to same month a year ago.

Separately, the agency said leading composite index rose 0.3 percent in January, after increasing 0.4 percent in the final two months of 2010. The housing index rose 1.3 percent, recording its third straight gain as strength in existing home sales outweighed a dip in housing starts.

Statistics Canada said non-residents added a further C$9.6 billion of Canadian debt and equity instruments to their holdings in December for an annual investment of C$116.2 billion in 2010. Meanwhile, Canadians sold C$1.5 billion of foreign stocks in December, a third consecutive monthly divestment.

From south of the border, the U.S. Labor Department said its producer price index rose by 0.8 percent in January following a revised 0.9 percent increase in December. Economists were expecting prices to increase by about 0.7 percent compared to the 1.1 percent growth originally reported for the previous month. Meanwhile, core producer prices, which exclude food and energy prices, rose by 0.5 percent in January after edging up by 0.2 percent in the previous month.

Separately, the U.S. Commerce Department said housing starts jumped 14.6 percent to an annual rate of 596,000 in January from the revised December estimate of 520,000. Economists had expected housing starts to edge up to 540,000 from the 529,000 originally reported for the previous month. Meanwhile, building permits fell 10.4 percent to an annual rate of 562,000 in January from the revised December rate of 627,000.

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French Market Advances, Led By Banks

The French market is advancing in afternoon trading Wednesday, as sentiment was influenced by positive earnings report from lender Societe Generale and a long-awaited acquisition announcement from drugmaker Sanofi-Aventis.

On the economic front, the Conference Board leading economic index, a leading indicator of the French economy, rose in December by 0.8 percent over the month to 111.9, rebounding from a 0.3 percent fall in the previous month. Five of the seven components of the leading index contributed positively, led by the yield spread, industrial new orders and production expectations.

UK's jobless claims increased by 2,400 in January, in contrast to an expected fall of 3,000, latest data from the Office for National Statistics showed. Meanwhile, the Bank of England said in its latest Inflation Report that UK inflation is likely to range between 4 percent and 5 percent in the near term, well above the target of 2 percent.

Research indicated earlier in the day that UK consumer confidence slumped sharply in January following the government's VAT sales tax rate hike. The Nationwide consumer confidence index dropped by seven points to 47, reversing almost completely the previous month's again and just a touch above November's 20-month low of 46.

The CAC 40 opened higher at 4,124, up from the prior close of 4,110, and rose sharply in early trade. The index is currently adding 0.98%.

Following its stellar performance in the fourth quarter, Societe Generale is leading the gainers by adding 4.7%. Credit Agricole, BNP Paribas and Natixis are advancing between 3.5% and 2.8%.

Pharmaceutical firm Sanofi-Aventis is surging 2.9% after clinching announcing a deal to acquire U.S. Biotechnology company Genzyme Corp.

Those making notable gains include Alcatel Lucent, STMicroelectronics, Cap Gemini, Axa and EADS.

However, department stores operator PPR is losing 2.1% and commodity chemicals company Air Liquide is dropping 1.1%. Luxury goods conglomerate LVMH is sliding 1%.

Elsewhere in Europe, the UK's FTSE 100 is adding 0.67 percent and the German DAX is climbing 0.10 percent .

Across Asia/Pacific, most major markets ended above the flat line. China's Shanghai Composite Index added 0.86 percent and India's BSE Sensex rose 0.15 percent. Japan's Nikkei 225 and Hong Kong's Hang Sang advanced 0.57 percent and 1.12 percent, respectively. However, Australia's All Ordinaries was down 0.02 percent.

In the U.S., futures point to a higher open on Wall Street. In the previous session, the Dow fell 0.3 percent, the Nasdaq declined 0.5 percent and the S&P 500 slid 0.3 percent.

In commodities, crude for March delivery is gaining $0.47 to $84.79 per barrel and gold is adding $1 to $1375.1 a troy ounce.

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Indian Market Ends Up For Fourth Day

The Indian market managed to end in the green on Wednesday albeit with modest gains, lifted by steel, technology and infrastructure stocks. The market traded in a narrow range for most part of the session, consolidating the recent gains in the past three trading sessions following sharp sell-off since the beginning of the calendar year.

The benchmark BSE Sensex closed at 18,300.9, up just 27.10 points and the 50-share NSE Nifty settled at 5,481.70, up 0.7 points.

The interview by the Prime Minister to the television editors failed to provide any fresh impetus or direction ahead of the Budget and the Parliament session. However, the reiteration by the Prime Minister to strike a balance between growth and inflation with a realistic target of 7% for inflation and 8.5% for growth lifted the broader sentiment.

Infrastructure stocks which had been battered the most in the past few sessions made a smart recovery. JP Associates gained 6.56 percent while Unitech surged up 9.30 percent.

Tata Steel led the list of gainers among the steel stocks with a solid gain of 4.47 percent following by gains in Jindal Steel. Metal stocks also ended in the green led by Sterlite, Hindalco and Sesagoa.

Banks also remained in the green with modest gains led by SBI and Axis Bank.

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Bank Of England Lifts Inflation Outlook

The UK economy is set for above target inflation this year and next amid an uncertain growth outlook, the Bank of England said in a report.

Releasing the latest quarterly Inflation Report on Wednesday, the UK central bank chief Mervyn King said the recovery will not be smooth.

The central bank projects inflation ranging between 4% and 5% in the near term. The bank expects inflation to remain well above the 2% target over the next year or so, reflecting in part the higher Value Added Tax. The near-term inflation profile is markedly higher than in November, the report said.

Further ahead, inflation is set to fall back, as effects of increases in commodity prices and import prices diminish and downward pressure from spare capacity persists, the bank said.

"But both the timing and extent of that decline in inflation are uncertain," the report said.

The central bank projects inflation to ease to near 1.7% in early 2013, which is below the target. The bank judged that the chances of inflation being either above or below the target in the medium term are broadly balanced, provided the interest rate moves as markets expect.

While the central bank's new inflation forecasts suggest that interest rates will have to rise, they indicate that the market may be over-pricing in the speed and extent of the interest rate hikes, said IHS Global Insight economist Howard Archer.

Official figures from the Office for National Statistics on Tuesday showed 4% inflation for January, the highest since 2008, and twice the 2% target. Inflation has been staying above the target for 14 consecutive months.

King reiterated today that the spike in inflation was driven by temporary factors. It is likely to fall back when the temporary factors wane, he said.

Explaining the reasons why inflation has increased to such an extent, King wrote his first open letter this year to the Chancellor yesterday after sending four such letters in 2010. Chancellor George Osborne welcomed the determination of the Monetary Policy Committee to bring inflation back to the target.

According to preliminary estimates from ONS, the economy shrank for the first time in more than a year in the fourth quarter of 2010. Gross domestic product fell 0.5% sequentially, following a 0.7% expansion in the third quarter.

Today, the Inflation Report said output was temporarily affected by the heavy snowfall at the end of 2010 and growth is likely to resume.

The recovery will be maintained by expansionary monetary policy coupled with growth in global demand and the past depreciation of sterling, the bank noted. But ongoing fiscal consolidation and squeeze on households' purchasing power are set to act as a brake.

There is a wider than usual range of views among Committee members about the outlook for growth, the central bank admitted.

The projection for growth implies a somewhat lower level of output throughout the forecast than was judged likely in November, the central bank revealed. The bank estimates around 3% economic growth in the near term.

At press conference, the Governor hinted that the central bank never announces rate decisions in advance.

In the rate-setting meeting in January, policymakers Martin Weale and Andrew Sentance called for a quarter point rate hike. Adam Posen sought an increase in the quantitative easing by GBP 50 billion to GBP 250 billion.

"Some people are running ahead of themselves and saying that we are pre-announcing or laying the ground for a rate rise," King told reporters. "That decision has not been taken and won't be taken until we get to the next meeting or the following meeting, or it may be many quarters."

Given concerns on the growth story, ING Bank NV economist James Knightley still believes that rates will not rise as much as the market anticipates.

Daiwa Capital Markets Europe's economist Hetal Mehta says a move as early as May is less likely than one in the second half of 2011 as the Bank will be keen to assess, for example, what impact the aggressive fiscal retrenchment will have on activity before it tightens monetary policy.

"On balance, we now feel the first rate hike is most likely to come in August," Mehta said.

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