US & World Daily Markets Financial Briefing 04-02-2009

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US Stocks Post Gains After Better-Than-Expected ISM Data

Stocks bounced Wednesday morning after a report showed a smaller-than-expected contraction in the services sector.

The Dow Jones Industrial Average was recently up 53 points at 8131. It was lifted by gains for American Express, which advanced 5.4%, Citigroup, up 8.4%, and J.P. Morgan Chase, which rose 4.4%. Nonfinancial stocks including Alcoa, up 3.9%, and Caterpillar, 3.5%, also contributed to the measure's gains. Walt Disney, off 5.3%, and Kraft Foods, off 7.6%, fell after weak earnings reports.

The Nasdaq Composite Index was up 1.9% to 1545, while the S&P 500 was up 1.2% at 849. Its basic materials sector performed best, while consumer staples shares were weakest.

The market's gains picked up speed after the Institute for Supply Management said its non-manufacturing index registered at 42.9 in January. A reading below 50 indicates contraction, but the report was a better than economists expected, and a rise from December, when the index stood at 40.1.

The report appeared to outweigh a precursor to the government's employment report, due Friday, which suggested that the job market remains in dire shape. Automatic Data Processing estimated that 522,000 private-sector jobs were lost in January. The report was marginally better than economists expected.

But on the trading floor, most attention remained focused on Washington and the various rescue measures under discussion, including a stimulus package and a "bad bank" to buy soured assets from financial institutions.

"We have something that's distracting the market, which is that Wall Street in the past has led Washington and now Washington is leading Wall Street," said Steven Grasso, managing director at Stuart Frankel & Co. "The market has gone to a trading range, distracted by politics."

Grasso said that the trillions of dollars in money-market accounts - that is, money on the sidelines - will likely stay there until investors feel that the government has clarified its plans to assist the financial sector. "If you don't give them clarity, you spook even long-term investors," he said.

Among stocks to watch, Time Warner posted a $16 billion loss and said this year's earnings would be about flat compared to 2008. The company's shares fell 0.6%. Costco Wholesale lost 8.1% after warning that its fiscal second-quarter earnings would be substantially below analyst estimates and that it won't provide new estimates for the rest of the year.

Shares of Textron fell 21% after the company said it has drawn the balance of the $3 billion committed credit line available to it and its finance unit as the helicopter and jet maker looks to repay all of its commercial paper outstanding and boost liquidity.

Oil futures held over $41 a barrel ahead of weekly energy inventories, and gold futures climbed back over the $900 an ounce mark.

Treasurys prices were lower after the Treasury Department announced a $67 billion refunding, the largest on record, which included a return of the seven-year note. The two-year note fell 2/32 to yield 0.994%, while the 10-year note fell 14/32, yielding 2.934%.

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Euro Gains Ground Vs Dlr After Non-Mfg ISM

After retreating in overnight trading on increased risk aversion, the euro regained ground in mid-morning trading on Wednesday after a stronger-than-expected report on the U.S. service sector.

The euro pushed to a North American high of $1.2937 after news that Institute for Supply Management's non-manufacturing index for January was 42.9 from 40.1 in December and stronger than the expected 39.0.

It was still lower on the session as a whole. The euro had dropped to a sessional low at $1.2813 in earlier trading as stock market futures came under pressure.

A stronger performance in equities as North American trading progressed also contributed to a reduction in risk aversion and buoyed the euro. The dollar rallied against the yen after the data release, although its net change from Tuesday was small.

Wednesday morning, the euro was at $1.2913 from $1.3039 late Tuesday, while the dollar was at Y89.54 from Y89.30, according to EBS. The euro was at Y115.64 from Y116.45. The U.K. pound was at $1.4551 from $1.4458, while the dollar was at CHF1.1568 from CHF1.1428 late Tuesday.

The dollar showed only a muted reaction to earlier news that private sector jobs fell 522,000 in the U.S. in January, according to a revamped national employment report published Wednesday by payroll giant Automatic Data Processing Inc. and consultancy Macroeconomic Advisers.

It also didn't budge after news that the U.S. Treasury will sell $67.00 billion of new securities in its quarterly refunding next week to refund $36.3 billion in maturing issues and raise about $30.7 billion.

Equity market fluctuations remained the key underlying theme in currency markets Wednesday, said Adam Cole, chief currency strategist at RBC Capital Markets in London. "It's almost wholly being driven by the direction of the stock futures, I'm afraid, once again," he said.

Cole said the euro was also pressured in earlier trading by news that Fitch Ratings lowered its currency ratings on Russia one notch closer to junk territory.

Fitch said ailing commodities prices and foreign-exchange reserves will make it more difficult for corporations, as well as the government, to refinance their foreign debt. "The financial system in Western Europe is more leveraged to Eastern Europe than to the rest of the world," Cole said.

Shaun Osborne, chief currency strategist at TD Securities in Toronto, said trading remains light in currency markets. "Liquidity is very thin overall. It just makes for very erratic kind of moves," he said. Model-driven traders are among the few active players in the market, Osborne said.

The yen benefited in cross trading against non-U.S. currencies after the Fitch downgraded Russia, he said. In European trading, a late withdrawal by Japanese investors from high-risk currencies also lifted the dollar against most majors in Europe.

However, a continued positive performance by European equity markets suggested some risk appetite remains following better liquidity and housing market news out of the U.S. on Tuesday.
 
Canada Morning
 
The Canadian dollar higher in choppy trading Wednesday, and movements in the currency continue to reflect general market attitudes toward risk.

The currency has drawn some support from stronger commodity prices and a more constructive tone for stock prices and futures so far Wednesday. The Canadian dollar is trading at C$1.2233, from C$1.2307 late Tuesday.

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European Stocks Higher, Earnings Help Markets

European stocks have traded mostly higher Wednesday, with a number of positive earnings announcements putting to bed global economic fears, if only momentarily.

At 0905 GMT, the European Stoxx 600 increased 0.4% to 190.4. London's FTSE 100 index traded in a choppy manner, but stood 0.3% higher to 4175.3. Frankfurt's DAX index points rose 0.2% to 4385.37, and Paris's CAC-40 index was 0.8% higher at 3006.28.

However, it's probably too early though to say market volatility was subsiding, said Henk Potts, equity strategist at Barclays Stockbrokers.

"It is too early to call a turnaround, particularly as management teams remain cautious. I suspect that equity markets will continue to be volatile in the first quarter," Potts said.

His stance is to remain focussed on the defensives in this period, and wait until the second-half of the year, "when risk appetite looks like it could increase."

The cautious tone was certainly played out in Wednesday's corporate releases.

Shares in BHP Billiton increased 2.9% after the company reported strong underlying earnings for 1H "09 although the outlook looked a little grim. European Natural Resources was one of the biggest blue-chip gainers in London, rising 7.8% following its production report. Again, its outlook was gloomy, but this was as expected by the market.

The Stoxx Europe basic resources sector outperformed the Stoxx 600, rising 2.8%.

Elsewhere, Shares in Alcatel-Lucent were up 5.2% on its fourth-quarter results which were overall ahead of expectations.

However, the good news didn't extend as far as Switzerland, as shares in Roche Holding slumped 7.9% after an earnings miss.

Wall St. managed to recover from a shaky start predominantly on the back of stronger-than-expected earnings from Merck and a surprise gain in pending home sales, the first rise since Aug. "08. In response, shares of construction firms jumped on the increase in contracts, a trend being replicated in Europe, Wednesday. Shares in Wolseley climbed 3.8% and Compagnie de Saint Gobain rose 2.0%.

Additionally, the toxic-asset guarantee plan has gained momentum in the U.S., with reports the debate is now refocusing on an effort to guarantee illiquid assets against losses without taking them off banks' balance sheets. Progress will be closely watched by traders and investors.

In foreign exchange news, the dollar has bounced against most of the major currencies in Asia, Wednesday, after its fall overnight in New York.

At 0925 GMT, the dollar was slightly off its highs and stood at Y89.14 compared with the Y88.80 low hit Wednesday. The euro stood at $1.2935 compared with a high of $1.3074.

Market commentators warned though the greenback could fall again if upcoming U.S. economic data disappoints and sours market sentiment.

European credit derivative indexes moved tighter in early trading Wednesday, following the gains overnight on Wall Street and on Asian stock markets.

At 0800 GMT, the Markit iTraxx Crossover index, which measures the cost of insuring the debt of 50 mostly sub-investment-grade European corporate borrowers against default, was quoted at 1,058 basis points mid-level, tighter than Tuesday's close of 1,065 basis points.

On the economic calendar, December's euro zone services sector was barely changed rising to 42.2 from December's 42.1, with little impact on equity markets, Wednesday. The euro-zone retail sales release is due at 1000 GMT.

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Asian Shares End Mostly Up; Tokyo, Shanghai Lead Advance

Most Asian markets advanced Wednesday after a positive lead from Wall Street, with exporters helping Japanese stocks snap a three-session losing streak and mainland Chinese shares extending gains on hopes of further government action to support the economy.

Australia and New Zealand markets ended lower, weighed down by disappointing corporate news.

Japan's Nikkei 225 Stock Average ended up 2.7% at 8,038.94, with car makers such as Toyota Motor Corp. and Honda Motor Co. rising sharply even after they reported weak U.S. sales for January, as they outperformed the Big Three U.S. automakers.

"Today's buying is mainly due to dip-buying" of shares that have recently fallen such as car makers and precision-equipment makers, said Yumi Nishimura, market analyst at Daiwa Securities SMBC. She said investors are still cautious ahead of Japanese companies' October-December earnings and U.S. jobs data due this week.

Shares of Honda Motor jumped 6.3% and Toyota added 4.5%.

Auto stocks also lifted the South Korean market, after Hyundai Motor Co. and Kia Motors Corp. reported an increase in U.S. sales, defying the weak trend. The Kospi climbed 2.8% to 1,195.37, with Hyundai gaining 8% and Kia surging 11.7%.

Hong Kong's Hang Seng Index ended up 2.3% to 13,063.89 and Taiwan's Taiex gained 0.4% to 4,389.97.

In afternoon trading, India's Sensex rose 0.6% to 9,201.85 and Singapore's Straits Times was down 0.3% to 1,707.39.

Risk appetite in some markets was fueled by an unexpected increase in U.S. pending-home sales data overnight and by the Federal Reserve's announcement that it will continue several liquidity-boosting programs to support financial markets, as well as currency-swap agreements with other central banks until the fall.

"It seems the abyss is now a little smaller," said Greg Gibbs, senior FX strategist at ABN AMRO.

Still, some Asian corporations' precariousness was evident. In Australia, the S&P/ASX 200 lost 2% as Westfield Group dropped 12.4% after an A$2.9 billion equity-raising.

Banks were mostly lower after Tuesday's strong gains and U.S. peers' weakness overnight, with National Australia Bank down 0.5%. Mining giant BHP Billiton ended flat after reporting lower-than-expected half-yearly profit.

China's Shanghai Composite ended up 2.3% to 2,107.75 for its third advance this week.

Banks were higher after the China Securities Journal reported strong growth in new yuan-denominated loans in January, with Industrial & Commercial Bank of China climbing 3% and Shanghai Pudong Development Bank rising 5%.

Technology shares rose in Seoul on hopes the chip and LCD panel industries may have seen the worst of their demand cycle, with Samsung Electronics 5.7% higher and Hynix up 4.5%.

"Investors seem to have shifted their focus to the potential improvement in fundamentals from past negative economic data," said Seo Jeong-kwang at LIG Investment & Securities.

Malaysia's main index was down 0.3% and Philippine shares advanced 1.2%.

In the foreign-currency markets, the euro was recently at 115.66 yen, down from 116.45 yen Tuesday afternoon in New York, weighed down by exporter sales, while the dollar was lower at 88.97 yen from 89.30 yen. The euro was down against the dollar at $1.2994 from $1.3039 and the U.K. pound was also weaker, at $1.4403 from $1.4458.

The Australian dollar came off its early highs in late trading after the opposition said it won't support the government's A$41.5 billion ($27 billion) economic stimulus package. The Aussie was recently buying 57.13 yen, after rising as high as 58.50 yen earlier. Against the dollar, it was trading at $0.6415.

March crude-oil futures declined nine cents to $40.69 a barrel in electronic trading after rising 70 cents to $40.78 a barrel on the New York Mercantile Exchange.

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Nymex Crude Rises On OPEC Cuts, Eyes Stock Data

Crude oil futures rose Wednesday on evidence of high OPEC compliance with production cuts, but an expected surge in U.S. oil inventories put the brakes on any rally.

Light, sweet crude for March delivery recently traded $1.02, or 2.5%, higher at $41.80 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange traded 40 cents higher at $44.48 a barrel.

Organization of Petroleum Exporting Countries members have cut production by about 75% of the 4.2 million barrels a day promised in the final months of 2008, according to a Dow Jones Newswires survey. That compliance rate is higher than seen in past cuts, but still 1.1 million barrels a day short of the promised reduction.

Reduced OPEC output is seen as key to preventing further declines in oil prices, as global demand has declined during the economic downturn. Some analysts see even the full 4.2 million barrels as too small to counter weakening demand, though higher compliance is being taken as a positive sign by the market. Several OPEC members have also talked of a fresh cut when the group meets in March.

"It seems that the markets are giving the cartel the benefit of the doubt that they will achieve their overall target," wrote Ed Meir with MF Global.

Gains were mild, however, as the market is preparing for what is likely to be a report of considerable increases in U.S. oil and fuel inventories from the Department of Energy later Wednesday morning. The American Petroleum Institute released figures Tuesday showing an 8.1 million-barrel jump in oil stocks for the week ended Jan. 30, far more than the average 2.9 million barrels forecasted in a Dow Jones Newswires survey of analysts.

Oil demand is down by more than 800,000 barrels a day from a year earlier, according to the Energy Information Administration. The API also reported a 2.1 million-barrel increase in gasoline inventories, compared with an average forecast of a 600,000-barrel build. Distillate stocks, including heating oil and diesel, fell by 200,000 barrels, compared with an expected 1.4 million-barrel decline.

"Essentially a trifecta of awful inventory data," wrote analysts with Tudor, Pickering, Holt & Co. The market is waiting for confirmation from the government data before making any major moves, the analysts wrote.

Front-month March reformulated gasoline blendstock, or RBOB, recently traded down 32 points, or 0.3%, at $1.1638 a gallon. March heating oil traded 1.68 cents, or 1.3%, higher at $1.3422 a gallon.

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