US & World Daily Markets Financial Briefing 01-06-2010

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Stocks Turn Higher As Economic Data Boosts Sentiment

Stocks have been able to recover from early losses and are showing moderate strength in mid-morning trading on Tuesday after the day's mostly encouraging economic reports on manufacturing activity and construction spending. The major averages are now all in positive territory after a lower open.

A short time ago, the Institute for Supply Management released a report showing that activity in the manufacturing sector increased for the tenth consecutive month in May, although the data indicated a modest slowdown in the pace of growth compared to the previous month.

The ISM said its index of activity in the manufacturing sector edged down to 59.7 in May from 60.4 in April, but a reading above 50 indicates continued growth in the sector. Economists had expected the index to slip to a reading of 59.4.

The Commerce Department also reported that construction spending surged up by 2.7 percent to an annual rate of $869.1 billion in April from the revised March estimate of $845.9 billion. Economists had expected a much more modest increase in spending of about 0.1 percent.

Despite the largely upbeat data, the stability of European finances remains in focus after Spain's credit rating downgrade on Friday and the wobbly euro zone currency. The euro is currently valued at $1.2281 against the U.S. dollar after being as low as $1.2111 earlier.

On the corporate front, BP Plc (BP) will attempt to mount a cap to stop the flow of oil from the leaking oil well in the Gulf after its "top-kill" operation failed over the weekend.

AIG (AIG) said that it will not consider revisions to the agreement terms it reached earlier with Prudential Plc (PUK) for Prudential to acquire the Asian insurance unit, American International Assurance Co. Ltd. or AIA. The deal is set to be made for $35.5 billion in cash and stock.

In the past few minutes, the major averages have pulled back off their session highs, although they remain in positive territory. The Dow is up 45.65 points or 0.5 percent at 10,182.28, the Nasdaq is up 13.14 points or 0.6 percent at 2,270.18 and the S&P 500 is up 2.35 points or 0.2 percent at 1,091.76.

Sector News

Gold stocks are some of the morning's best performers, with the NYSE Arca Gold Bugs Index up by 2.7 percent, further offsetting recent losses. The advance comes as the price of gold for June delivery has jumped by $13.00 to $1,225.20 an ounce.

Software, railroad and health insurance stocks are also moving notably higher, helping the markets to recover from the initial weakness.

Meanwhile, oil service stocks remain under pressure amid the unclear solution to the historic oil spill in the Gulf of Mexico. The Philadelphia Oil Service Sector index is down by 3.6 percent after setting a nine and a half month intraday low in earlier trading.

Natural gas, healthcare provider and housing stocks are also down, limiting the upward move by the broader markets.

Stocks Driven By Analyst Comments

Goodrich (GR) is lower after being downgraded at Oppenheimer from Outperform to Perform amid questions over traffic recovery for the business. The stock is down by 1.1 percent and is on pace for a three-month closing low.

On the other hand Genzyme (GENZ) is advancing after receiving an upgrade from JP Morgan Chase. The broker raised the stock to Neutral from Underweight and boosted the price target to $50 from $40. The stock has gained 1.5 percent, moving further away from last week's four and a half month closing low.

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TSX Looks For Direction As BoC Hikes Key Interest Rate

Bay Street stocks may witness a volatile session Tuesday amid mixed cues from the commodities markets and as traders were digesting the just released interest rate decision by the Bank of Canada. Today, BOC hiked its target for the overnight rate to 0.50%, as widely expected.

Moreover, cues from the global stock markets were also not encouraging with the European market dipping nearly 2%. Oil giant BP Plc. plummeted around 15%, shedding nearly $23 billion of its market capitalization, after a failed attempt to plug its oil spill.

Meanwhile, unemployment in the euro zone climbed to a record high of 10.1% in April, from 10% in March.

On Monday, the S&P/TSX Composite Index gained 91.54 points or 0.78% to 11,762.99.

The price of crude oil moved down for a second session amid lingering worries over the growth in the global economy. Earlier today, the state-affiliated China Federation of Logistics and Purchasing said its purchasing managers index, or PMI, fell to 53.9 in May from 55.7 in April and 55.1 in March. Economists were expecting a reading of 54.5. Crude for July delivery dipped $1.60 to $72.37 a barrel.

Meanwhile, the price of gold moved up on safe haven buying, with gold for August delivery adding $13.0 to $1,228.0 an ounce.

In corporate news, Canada's third-largest lender by asset Scotiabank said its second-quarter net income jumped to C$1.02 per share from C$0.81 per share in the year ago quarter. Net interest income for the quarter declined to C$2.05 billion from C$2.08 billion in the comparable period, while total revenue for the quarter grew to C$3.87 billion from C$3.59 billion in the earlier period.

Excluding one-time items, Scotiabank's net income were at C$1.04 per share that came in much higher than the consensus estimates for a net income of C$0.93 per share.

Integrated energy company Husky Energy said its subsidiary Husky Oil China Ltd. has completed drilling and successful testing of the first appraisal well in the South China Sea with encouraging results. The company said the first appraisal well tested natural gas at an equipment restricted rate of 55 million cubic feet per day with indications that the well's future deliverability could be 60 -70 million cubic feet per day.

Energy sector focused investment trust Zargon Energy Trust said it acquired about 6.9 thousand net acres of undeveloped land in southern Alberta, consisting of medium and heavy gravity oil pools with about 350 barrels of oil equivalent per day, for $25 million.

Book retailer Indigo Books & Music reported improved fiscal 2010 net earnings of C$1.39 per share compared to C$1.21 per share last year.

Diamond mining company Rockwell Diamonds reported a narrower fiscal 2010 net loss of C$0.03 per share compared to a loss of C$0.05 per share in fiscal 2009.

Gold and silver explorer Genco Resources said that it move to back to full mining production at La Guitarra mine as it has now been granted authority to purchase explosives for mining operations.

In economic news, Bank of Canada hiked its target for the overnight rate by 0.25% to 0.50%. The bank rate was correspondingly raised to 0.75%, while deposit rate was kept at 0.25%. Economists were expecting the bank to raise its target rate for overnight loans between commercial banks to 0.50% from 0.25%

Yesterday, data from Statistics Canada revealed that the country's GDP grew 6.1% at an annualized pace in the first quarter 2010, beating economists expectations for a 5.9% expansion.

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Asian Markets End In Negative Territory On Europe Concerns

The markets across Asia open for trading on the first day of June ended in negative territory following weaker than expected manufacturing data in China, political crisis in Japan and weak cues from overseas futures market. Commodity related stocks were the major decliners. Lack of cues from overseas markets following holiday on the NYSE on Monday also impacted market sentiment as traders preferred to adopt a cautious approach.

In Japan, the benchmark Nikkei 225 Index dropped 56.87 points, or 0.58%, to 9,712, while the broader Topix index of all First Section issues was down 0.42 point, or 0.05%, at 880.

Cautious trading was witnessed during the session with most of the traders preferring to adopt a wait-and-watch attitude due to lack of overseas cues and the crisis in Euro region.

Shipping related stocks led the declines amid concerns about economic recovery following weaker than expected manufacturing data from China. Mitsui OSK Lines lost 1.70%, Nippon Yusen edged down 0.31% and Kawasaki Kishen Kaisa plunged 3.24%.

Non-ferrous metals were also among the decliners. SUMCO Corp. fell 2.42%, Sumitomo Metal Mining Co., lost 1.93%, Fujikura Ltd plunged 4.02%, Toho Zinc Ltd shed 2.70%, DOWA Holdings Co. slipped 1.84%, Mitsubishi declined 2.01% and Mitsui Mining & Smelting was down by 1.53%.


Trading companies also ended weaker on stronger local currency. Mitsui & Co. fell 1.70%, Toyota Tsusho lost 1.16%, Mitsubishi Corp. slipped 0.97%, Itochu Corp. declined 1.46% and Sumitomo Corp. was down 0.61%.

Automotive stocks also ended in negative territory with minor losses. Toyota Motor slipped 0.46%, Honda Motor edged down 0.22%, Isuzu Motors fell 3.19%, and Nissan Motor Co., fell 1.36%.

In Australia, the benchmark S&P/ASX200 Index slipped 16.60 points, or 0.37% and closed at 4,413, while the All-Ordinaries Index ended at 4,438, representing a loss of 16.90 points, or 0.38%.

On the economic front, the Reserve Bank of Australia left its key interest rate unchanged as expected. After hiking the rate for three successive months, the Board decided to retain the cash rate at 4.5%. With the high level of the terms of trade expected to add to incomes and demand, Australia's output growth over the coming year is likely to be about trend, even though the effects of earlier expansionary policy measures will be diminishing, Governor Glenn Stevens said in a statement. Stevens said inflation appears likely to be in the upper half of the target zone over the next year.

A report released by the Australian Bureau of Statistics revealed that retail sales in the country continued to increase in April, but at a slower pace. As per the report, retail sales rose a seasonally adjusted 0.6% on a monthly basis in April, slower than the 0.8% growth in the previous month. Economists had expected an increase of 0.3%. The retail trade turnover increased 0.9% on an annual basis in April, while the turnover fell 2.4% in original terms.

In a separate report, the Statistics Bureau revealed that approvals for dwelling units in the country decreased in April compared to the previous month. As per the report, the seasonally adjusted total dwelling units approvals dropped 14.8% on a monthly basis in April, in contrast to the 16.8% growth in the previous month, revised from 15.3% reported initially. Economists had expected a decline of 5%. Building approvals for private sector houses slipped 13.5% and private sector other dwellings fell 5.4%.

A report released by the Australian Industry Group and PriceWaterhouseCoopers revealed that the performance of manufacturing index of PMI in the country fell 3.5 points, to 56.3 in May, suggesting a slowdown in the manufacturing sector. The easing in the overall manufacturing growth rate reflected slower, though still strong, growth in manufacturing production, combined with an easing to more moderate rates of growth in new orders, inventories and supplier deliveries.

Banks ended in negative territory with minor losses after the RBA decided to keep the interest rates unchanged, as widely anticipated. ANZ Bank slipped 0.04%, Commonwealth Bank of Australia shed 0.74%, National Australia Bank fell 1.18% and Westpac Banking lost 0.87%. Investment banker Macquarie Group also ended in negative territory with a loss of 1.55%.


Mining and metal stocks also ended weaker following unexpected decline in China manufacturing and domestic PMI data. BHP Billiton edged down 0.13%, Rio Tinto slipped 0.39%, Gindalbie Metals fell 2.80%, Macarthur Coal lost 2.10%, Mincor Resources declined 0.91%, Murchison Metals slumped 3.32% and Oz Minerals was down 1.40%.

Mixed trading was witnessed among oil related stocks Woodside Petroleum gained 1.49%, Santos rose 1.77%, Oil Search advanced 1.08% and Origin Energy increased 0.80%. However, ROC Oil Co. ended in negative territory with a loss of 1.41%.

Gold stocks ended in positive territory. Lihir Gold added 0.25% and Newcrest Mining rose 0.87%.

In Hong Kong, the benchmark Hang Sang Index ended in negative territory with a loss of 268.24 points, or 1.36%, at 19,497, taking cues from other markets in the region which were trading in negative territory on concerns about the sovereign debt crisis in the Euro region with Spain also joining the list of countries that were downgraded by rating agencies. Weaker than expected manufacturing data from mainland China also impacted market sentiment. Traders were cautious awaiting more cues from the US market which were closed for trading on Monday.

A sell-off across Asian and European markets amid concerns that a slowdown in China and Europe's efforts to reduce budget deficits may impede global economic recovery dragged the Indian market sharply lower on Tuesday after four sessions of gains. The 30-share Sensex average saw range-bound movement until the mid-session before plunging almost 4% on broad-based selling. However, the Sensex closed the session off the day's low at 16,572, down 373 points or 2.20% and the 50-share Nifty ended down 116 points or 2.28% at 4,970.

Among the other major markets open for trading, China's Shanghai Composite Index declined 23.86 points, or 0.92% to close at 2,568, Indonesia's Jakarta Composite Index fell 72.34 points, or 2.59% to close at 2,725, Singapore's Strait Times Index slipped 37.16 points, or 1.35% to close at 2,715 and Taiwan's Weighted Index plunged 84.65 points or 1.15% and closed at 7,289.

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The major European markets are declining sharply on Tuesday, with the key averages in the region opening modestly lower and seeing further losses in the session. The French CAC 40 Index and the German DAX Index are receding 2.01% and 1.72%, respectively, while the U.K.’s FTSE 100 Index is down 1.96%.

Oil giant BP is trading sharply lower after its ‘Top Kill’ operation to plug the leaking oil well in the Gulf of Mexico region failed. The company is reportedly trying a new method to stall the spill.

On the economic front, Eurostat reported that the jobless rate in the euro zone region rose 0.1 points to 10.1% in April, while economists had expected the rate to hold steady at 10%.

Meanwhile, Germany’s Federal Labor Agency said the number of unemployed individuals in Germany fell 45,000 in May, while economists estimated a more modest drop of 18,000. The jobless rate fell to 7.7% on a seasonally adjusted basis from 7.8% in the previous month. Additionally, the ILO unemployment rate harmonized across the European Union slid to 7.1% from 7.6%.

German retail sales rose 1% month-over-month in April in real terms, according to a report released by the German Federal Statistical Office. The retail sales growth was in line with expectations. However, retail sales fell 3.1% in real terms, reversing the 3.7% increase in the previous month.

The results of a private sector manufacturing survey showed that the manufacturing purchasing managers’ index for the euro area fell to 55.8 in May, lower than the flash estimate of 55.9 and the month-ago reading of 57.6, which represented the highest level in four years. All member countries showed deterioration in output and new order growth.

The Markit/CADF French manufacturing purchasing managers’ index fell to 55.8 in May from 56.6 in April. At the same time, the German BME manufacturing purchasing managers’ index was upwardly revised to 58.4 in May from the flash estimate of 58.3. In April, the index was at 61.6. However, the Markit/CIPS Purchasing Managers' Index for the U.K. signaled a continuation of the solid rebound in the manufacturing sector. The index stood at 58 in May, in line with April's reading. Economists had expected the index to fall to 57.9 in May.

U.S. Economic Reports

With the euro zone crisis leading to some uncertainty over the sustainability of the recovery that is underway in the U.S., all eyes are likely to be trained on the jobs report to be released during the upcoming week. The monthly non-farm payrolls report for May, the ADP’s private sector employment report, the weekly jobless claims report and the results of the Institute for Supply Management’s manufacturing and non-manufacturing surveys for May are likely to be on most traders’ radar.

The construction spending report for April, auto sales for May, the pending home sales index for April, the factory goods orders for April and the Fed speeches scheduled for the week round up the other Main Street events of the week. Given the lackluster results of the Treasury auctions held in the week ended May 28th, announcements concerning the auctions of 6-year, 3-year and 10-year, all due on Thursday, may also generate some interest.

The ISM’s survey is expected to show a decline in the manufacturing index below the ’60’ level it had topped in April, given the weak results of the regional manufacturing surveys for May. That said, the softness represents only a slight loss of momentum, with the manufacturing sector still in expansion mode. BMO Capital Markets expects the employment index to show that manufacturers are still hiring, while the export orders index may see some downside due to the recent rally in the U.S. dollar.

At the same time, the non-manufacturing index compiled by the Institute may show an uptick, with the employment index of the survey likely to rise above 50 for the first time since December 2007.

Hiring related to census 2010 should give a solid boost to non-farm payrolls in May. In April, payroll employment rose for the fourth straight month, with April’s increase primarily reflecting private sector hiring. A census-related hiring boost could pull the unemployment rate down in May even if the labor force continues to expand due to previously discouraged workers coming into the labor market.

Individual automakers are also scheduled to release their monthly U.S. sales results for May. The data will reveal the unit sales of domestically produced cars and light duty trucks, including sports utility vehicles and mini-vans, during the month.

Auto sales should benefit from month-end Memorial Day incentives. Consequently, sales are expected to edge up to a seasonally adjusted annual rare of 11.3 million units in May from 11.2 million units in April.

The results of the manufacturing survey of the Institute for Supply Management, which are based on data compiled from purchasing and supply executives nationwide, are due out at 10 AM ET. Economists expect the index to show a reading of 59.4 for May.

In April, conditions in the manufacturing sector continued to improve. The headline purchasing managers index rose to 60.4 in April from 59.6 in March and was also higher than the consensus estimate of 60. The new orders index rose 4.2 points to 65.7 and the production index increased 5.8 points to 66.9, but the order backlogs index eased 0.5 points to 57.5. Signaling that the job market is strengthening, the employment index rose 3.4 points to 58.5.

The Commerce Department's construction spending report to be released at 10 AM ET is expected to show 0.1% growth in spending for May.

Construction spending rose 0.2% month-over-month in April, with the increase aided by a 2.3% jump in spending on public construction. On the other hand, private construction spending declined 0.9%. The weakness in private construction was centered on multi-family construction spending and private non-residential construction spending, while fell by 6.3% and 0.7%, respectively.

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City National (CYN) is likely to be in focus after it announced that its wholly subsidiary City National Bank has acquired the banking operations of Las Vegas-based Sun West Bank in a purchase agreement with the FDIC. City National will buy 7 banking offices and approximately $352 million in assets.

Covidien (COV) may react to its announcement that it has signed an agreement to buy all outstanding shares of ev3, Inc. (EVVV) for $22.50 per share in cash for a total of $2.6 billion, net of cash acquired. Covidien expects the deal to dilute earnings in 2010 and 2011 on a GAAP basis.

Hewlett-Packard (HPQ) is expected to move in reaction to its announcement that it will invest $1 billion in the next generation of its enterprise services business. To fund the investment, the company said it would take about $1 billion in charges over a multi-year period in its GAAP results. The investment is expected to result in annualized gross savings of about $1 billion and net savings after reinvestment in a range between $500 million and $700 million. In connection with the move, the company expects to eliminate about 9,000 positions over a multi-year period.

Currency, Commodity Markets

Crude oil futures are currently moving down $1.46 to $72.51 a barrel after advancing $3.93 or 5.6% to $73.97 a barrel in the week ended May 28th. Last Monday, crude oil edged up modestly only to decline moderately on Tuesday.

Helped by positive economic data, crude oil futures ignored data showing another weekly build in crude oil stockpiles on Wednesday. Oil rose by more than $1.50-a-barrel in the session. On Thursday, oil rose by more than $3-a-barrel, riding on China’s confidence in its euro investments. However, the price of black gold pulled back on Friday following news of the downgrade of Spain’s debt rating.

Gold futures, which rose $38.90 or 3.31% to $1,215 an ounce in the previous week, are currently rising $14.50 to $1,229.50 an ounce.

On the currency front, the U.S. dollar reversed course, advancing against the yen and the euro in the week ended May 28th. The greenback rose 1.18% against the yen to 91.0585 yen, while it advanced 2.40% against the euro to $1.2269.

The U.S. dollar is trading at 90.874 yen and is valued at $1.2162 versus the euro.

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