US & World Daily Markets Financial Briefing 20-07-2009

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Markets Focusing on Positives Following Recent Recovery

The major U.S. index futures are pointing to a higher opening on Monday. The commodity rally is likely to encourage traders by offering hopes that the end of the downturn may be near. Additionally, traders have been encouraged by the coompanies’ outperformance on the bottom-line, although a more careful analysis revealed that much of it was achieved due to cost control rather than top-line growth. Markets may also look upon the deal CIT Group has reportedly clinched with its bondholders as a positive development.

The Conference Board’s leading indicators index to be released shortly after the markets open may also have an impact on the markets. All and said and done, the recent gains keep the markets on track of profit taking even at the hint of the slightest of negative news.

U.S. stocks advanced solidly in the week ended July 17th, with positive earnings the driving force behind the recent optimism. The major averages had ended lower for two straight weeks and closed mixed before that. Earnings from technology and financial firms offered comfort by reassuring investors that the economy may be on a mend, with the corporate profit outlook suggesting an improvement in the outlook for spending.

Last Monday, the major averages shrugged off some early uncertainty and rose solidly, ending the day up more than 2% on encouraging comments on the earnings outlook of brokerages. While the markets witnessing volatility in Tuesday’s session, Goldman Sachs’ (GS) earnings encouraged traders and consequently, the major averaged ended moderately higher.

The buying momentum intensified in Wednesday’s session, as strong results from chipmakers and an upward revision to the Fed’s growth forecast brought traders into the markets on the belief that things may start looking up. The major averages rose again on Thursday, although there were nervous moments as well following speculation that CIT Group (CIT) may file for insolvency protection due to its inability to strike a deal with the government over financing.

Amid some mixed earnings news and a positive housing market report, the major averages moved about with a lack of conviction on Friday, finishing the session mixed. The Dow Industrials and the Nasdaq Composite rose in the session, while the S&P 500 Index ended slightly lower.

For the week, the Dow Industrials was up 7.33% and the Nasdaq Composite Index gained 7.44%, while the S&P 500 Index advanced 6.97%.

Among the sector indexes, the Philadelphia Semiconductor Index jumped 12.14% and the Philadelphia Housing Sector Index gained 11.33% for the week. The NYSE Arca Gold Bugs Index rose 10.87% compared to a 9.91% advance by the Philadelphia Oil Service Index and a 7.55% gain by the NYSE Arca Oil Index. The NYSE Arca Airline Index posted a weekly gain of 8.63%, while the NYSE Arca Securities Broker/Dealer Index and the KBW Bank Index moved up 5.86% and 8.17%, respectively. The NYSE Arca Biotechnology gained 5.95%.

The CBOE Volatility Index has receded notably from around 80 in October 2008 and is trading below the ‘30’ level, which suggests that the market is relatively stable. The index is currently at a 10-month low. Meanwhile, the major averages are back closer to their mid-June highs after the hiccup witnessed in the intervening period.

The market action reflects the skepticism or a lack of conviction among traders, as they continue to fret over the shaky fundamentals. While the increase in the personal savings rate speaks well from the point of view of providence, it does not bode well for consumer spending. The limping job market is unlikely to straighten out in a jiffy, as the construction and real estate markets, which were once huge job creators, continue to sink deeper into the abyss.

The rally that lifted the markets from their March lows was based on indicators that turned out to be less bad and not the ones that were good. With no definitive signs of a recovery, we may be resigned to more sideways movement before the markets can really take off.

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Toronto Stocks Look For Sixth Straight Daily Gain

Bay Street stocks will look to build on a recent rally in early Monday morning trading. The market has risen in five straight sessions.

Investors mulled over data revealing Canadian wholesale sales fell less than forecast in May to its lowest level since December 2005.

U.S. futures pointed slightly higher as some worries over the insolvency of CIT Group was cooled as the lending giant secured $3 billion in financing from some of its largest bondholders.

Energy stocks could see strength as crude oil gained again on the NYMEX. Light sweet crude for August has added 79 cents to $64.35 per barrel in electronic trading.

TransAlta Corp. announced that it intends to make an all-cash offer to acquire Calgary-based Canadian Hydro Developers at a price of C$4.55 per share. The proposed transaction has an enterprise value of approximately C$1.5 billion.
 
National Fuel Gas announced that it has purchased Ivanhoe Energy's oil and gas operations for about US$40 million.

In metals, gold is up $14.80 to $952.30 per ounce, silver has gained 29.7 cents to $13.70 per ounce and copper is up 4 cents to $2.463 a pound.

In other corporate news, Boliden said its second-quarter earnings per share rose to SEK 1.58 from SEK 0.95 a year ago. Operating profit for the recent quarter increased to SEK 654 million from SEK 406 million last year.

In economic news, Stats Canada said wholesale sales in current dollars fell 0.3% to $40.1 billion in May, following a revised drop of 0.7% in April. In volume terms, wholesale sales were unchanged in May. Economists were looking for a drop of 2.5% from a month earlier.

Friday, the S&P/TSX Composite Index gained 65 points or 0.63% to finish at 10,369.42. The close is the highest for Toronto's main index since June 29.

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The major Asian markets that were open on Monday closed higher, with Japan and Indonesia closed on account of public holidays. Optimism following the fairly positive close on Wall Street last Friday and reports that CIT may have found a life buoy positively impacted markets in the region. Most markets in the region ended higher for the fifth straight session.

Australia’s All Ordinaries opened unchanged, but it rose sharply in early trading. The index climbed steadily thereafter, although buying momentum slowed and it traded almost flat in the final hour of trading. The All Ordinaries ended up 51.30 points or 1.28% at 4,044.

Almost all sectors, with the exception of real estate stocks, showed buying interest, with material and energy stocks spearheading the rally. Miners Rio Tinto, BHP Billiton, Newcrest Mining and Lihir Gold advanced. Oil stocks Woodside, Oil Search and Santos also rose. Most major bank stocks moved up, with the exception of Westpac, which dipped modestly.

Hong Kong’s Hang Seng Index opened higher and continued to move to the upside throughout the session to close up 696.71 points or 3.70% at 19,502. Thirty-nine of the index components ended higher, with stocks across sectors witnessing firm buying interest. Insurer Ping An and Cosco Pacific were among the top gainers in the session.

South Korea’s Kospi opened modestly higher and showed a steady advance for the rest of the session. The index ended up 38.41 points or 2.67% at 1,479. Analysts attributed the buoyancy in the market to expectations of higher corporate profit growth.

Technology stocks Samsung Electronics, Hynix Semiconductor and LG Electronics ended up 3%, 7.1% and 4.3%, respectively. Financial stocks also advanced, with KB Financial Group and Hana Financial Group rising solidly. Auto stocks ended higher for the day.

Currency, Commodity Futures

Crude oil futures are rising $0.82 to $64.38 a barrel after the commodity reversed course and advanced in the week ended July 17th, when it gained $3.68 or 6.14% to $63.56 a barrel. The commodity began the week on a somber note, dipping modestly, and fell modestly yet again on Tuesday.

On Wednesday, oil surged up more than $2-a-barrel on the dual impact of the weekly inventory report that showed a decline in crude oil stockpiles and positive earnings. Crude futures rose again, although modestly, on Thursday, as they reacted to a positive job market report. Latching onto the housing starts report, oil rallied on Friday to close higher for the week.

Gold futures, which rose $25 to $937.50 an ounce in the week ended July 17th, are rising $13.60 to $951.10 an ounce.

In the week ended July 17th, the U.S. dollar advanced against the yen, while it declined against the euro. The greenback rose 1.78% against the yen to 94.195 yen after the equity market rally drove people away from yen to the dollar. Although both the dollar and the yen are considered as safe havens due to their relatively low yield, risk averse investors prefer the yen to the dollar. The dollar’s strength came despite the Cabinet Office of Japan as well as the Bank of Japan upgrading their respective assessments of the economy. Meanwhile, the dollar gained 1.01% against the euro to $1.4102.

Currently, the U.S. dollar is trading at 94.49 yen and is valued at $1.4224 versus the euro.

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The major European markets opened higher and after some initial volatility are uniformly in positive territory. Rising commodity prices and higher U.S. index futures following reports of a knight in shinning armor emerging for CIT is keeping sentiment upbeat in Europe.

The French CAC 40 Index and the German DAX Index are rising over 1.40% each, while the U.K.’s FTSE 100 Index is gaining 1.36%.

On the economic front, house prices in the U.K. increased in July as buyer activity remained strong on rising confidence that the market has moved off the bottom, according to property website Rightmove. House prices rose 0.6% in July from the previous month compared to the 0.4% drop in June. This was the fifth month of growth in 2009. On an annual basis, house prices were down 3.1%, slower than the 5.5% decrease seen in June.

The German Federal Statistical Office reported that German producer prices continued to drop for the fourth month in June. The producer price index fell 4.6% year-on-year in June, the fastest fall since December 1968, when producer prices dropped 5%. Economists had expected the index to drop 4.2% in June. On a monthly basis, producer prices fell 0.1% in June after recording zero growth in May.

U.S. Economic Reports

There appears to be a lull after the storm. The unfolding week's economic calendar is very light compared to the previous week, which saw the release of several market moving numbers. The spotlight is likely to be on the existing home sales report to be released on Thursday, the weekly jobless claims report and the Conference Board's leading indicators index for June.

Additionally, traders may also keep an eye on the revised consumer sentiment report from Reuters/University of Michigan. The focus is also likely to be on comments from Federal Reserve Chairman Ben Bernanke, who is due to testify before Congress twice during the week.

Existing home sales are likely to increase slightly, lending credence to thoughts of some economists concerning stabilization in the housing market. The expectation is supported by the fact that pending home sales have been rising for four consecutive months. That said, FTN Financial cautions of the blurring relationship between pending home sales and existing home sales due to stricter credit standards, falling income levels and increasing mortgage rates.

Distressed sales and to some extent improving affordability should offer some support to sales, while the still fluid demand environment is likely to drive sales lower. With the jobless rate expected to climb further even after a recovery begins, existing home sales are unlikely to see a solid rebound any time soon.

The Conference Board is scheduled to release a report on the U.S. leading index for June at 10 AM ET. The consensus estimate calls for a 0.5% increase in the leading indicators index for the month.

The leading indicators index rose 1.2% in May, more than the 1% increase estimated by economists. However, the coincident as well as the lagging indicators indexes fell by 0.2% each. The index of supplier deliveries, interest rate spread, stock prices, real money supply, the index of consumer expectations, building permits and manufacturers' new orders for non-defense capital goods were the components that contributed positively to growth, whereas weekly manufacturing hours, average weekly initial claims for unemployment insurance and manufacturers' new orders for consumer goods and materials acted as drags.

Atlanta Federal Reserve Bank President Dennis Lockhart is due to deliver a speech on the economic outlook in Nashville, Tennessee to the Rotary Club of Nashville at 1:30 PM ET.

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Georgia Gulf receded in Friday’s after hours session after it announced that it has extended the expiration date for its private offers to exchange three issues of outstanding senior notes totaling $800 million until July 23rd.

RedHat is likely to gain ground after Standard & Poor’s announced that the company would replace CIT Group in the S&P 500 Index after the close of trading on July 24th.

Earnings

Hasbro’s second quarter net revenues rose to $792.2 million from $784.3 million last year. The company’s net earnings were 26 cents per share compared to 25 cents per share last year. The second quarter results included a 6 cents per share dilutive impact from its joint venture with Discovery Communications. The consensus estimates called for earnings of 23 cents per share on revenues of $797.08 million.

Eaton reported second quarter adjusted earnings were 23 cents per share compared to $2.10 per share last year. Sales fell 32% to $2.90 billion. The company expects third quarter adjusted net income of 90 cents-$1per share. The company lowered its full year earnings guidance to $2-$2.20 per share, citing a further reduction in market growth expectations.

Halliburton’s second quarter net income was 29 cents per share compared to 55 cents per share last year. The company noted that the quarter’s results were impacted by a steep downturn in drilling activity. On an adjusted basis, the company reported earnings of 30 cents per share. Consolidated revenues fell to $3.5 billion from the year-ago’s $3.9 billion. Analysts estimated earnings of 27 cents per share on revenues of $3.43 billion.

Johnson Controls announced that its third quarter earnings were 26 cents per share compared to 73 cents per share in the year-ago quarter. Net sales fell to $7 billion from $9.9 billion last year. The consensus estimated had called for earnings of 19 cents per share on revenues of $7.40 billion.

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