US & World Daily Markets Financial Briefing 06-07-2010

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Stocks Sustaining Rally Despite Disappointing Service Sector Data

Stocks continue to post strong gains amid bargain buying in mid-morning trading on Tuesday, even as service sector data came in below expectations. The major averages are all firmly positive, bouncing off of last Friday's multi-month closing lows.

A short time ago, the Institute for Supply Management reported that activity in the service sector expanded for the sixth consecutive month in June, although the pace of growth in the sector slowed by much more than economists had anticipated.

The ISM said its index of activity in the service sector fell to 53.8 in June from 55.4 in May, but a reading above 50 indicates continued growth in the sector. Economists had expected the index to show a much more modest decrease to a reading of 55.0.

In corporate news, British Petroleum (BP) remains in focus after the company revealed that it has spent more than $3 billion in connection with the oil spill in Gulf of Mexico that includes the settlement of more than 50 percent of the claims for compensation.

Among other significant developments in the global markets, the Reserve Bank of Australia kept its overnight cash rate unchanged at 4.50 percent, in line with expectations.

The bank cited recent weakness in household consumption and a cooling real estate market as the primary reasons for leavings rates unchanged.

The major averages have seen some downside in recent dealing, pulling back off of their session highs. Nonetheless, the Dow remains up 154.24 points or 1.6 percent at 9,840.72, the Nasdaq is up 42.03 points or 2 percent at 2,133.82 and the S&P 500 is up 17.86 points or 1.8 percent at 1,040.44.

Sector News

Steel stocks are among the market's best performers in the early going, as reflected by the 3.7 percent advance by the NYSE Arca Steel Index. With the upward move, the index is recovering from a six-week closing low set on Friday.

Airline stocks are also on the rise, boosting the NYSE Arca Airline Index up by 3.6 percent. The advance is also lifting the index away from a six-week closing low.

Networking, banking, oil service and natural gas stocks are also rallying, further contributing to the recovery rally by the broader markets. Most of the other major sectors are also moving to the upside, although modest weakness is visible among gold stocks.

Stocks Driven By Analyst Comments

Walter Energy  is seeing notable strength after being upgraded at FBR Capital Markets from Perform to Outperform. The broker also raised its target on the stock from $85 to $88. Shares are currently up by 5.4 percent, looking to build on the recovery from an eight-month closing low set last Thursday.

Equity Residential  is also on the upside following an upgrade at Stifel Nicolaus from Hold to Buy. The stock is up by 1.3 percent, moving off of Friday's three-month closing low.

Other Markets

Overseas, stocks markets across the Asia-Pacific region ended notably higher after seeing some early weakness. Hong Kong's Hang Seng Index rose by 1.2 percent, while Japan's benchmark Nikkei 225 Index gained 0.8 percent.

The major European markets are also seeing strong gains. The U.K.'s FTSE 100 Index and the German DAX Index are up by 2.4 percent and 2.5 percent, respectively, while the French CAC 40 Index is up by 3.2 percent.

In the bond markets, treasuries are down by slim margins. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, is trading at 2.989 percent, posting a gain of 1 basis point.

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TSX Poised For A Higher Open On Global Cues

Canadian stocks may open higher Tuesday amid recovery in energy and base metals prices. Cues form the overseas markets were also encouraging after an upbeat assessment of the global economy by the Reserve Bank of Australia. Also, bottom fishing as the main index slipped to its 2010 low might help lift sentiment.

U.S. stock futures were pointing to a higher open ahead of June service sector survey from the Institute for Supply Management, due out later today.

On Monday, the S&P/TSX Composite Index shed 103.56 points or 0.92% to 11,092.50, its lowest close in 2010.

Elsewhere, the Asian markets ended up, while European stocks were moving higher in morning deals. The Reserve Bank of Australia left its interest rates unchanged today and said the country's economic growth was on track and China's expansion was "starting to moderate to a more sustainable rate."

The price of crude oil edged up after falling for the past six sessions. Crude for August was up $0.75 to $72.89 a barrel.

Meanwhile, the price of gold surrendered its early trading wins, with gold for August slipping $3.90 to $1,203.80 an ounce.

In corporate news, fertilizer maker Agrium Inc. said it acquired 24 retail farm centers in Argentina from DuPont Crop Protection, as well as its crop protection formulation facility. Annual anticipated revenue from the retail farm centers is around $57 million, the company said.

Agriculture nutrients company Stonegate Agricom said it appointed Germaine Coombs as Vice President and Chief Financial Officer, effective September 1, 2010. Coombs most recently was Corporate Controller of FNX Mining Company.

Base metals miner VMS Ventures said it has entered into a joint venture agreement and 4 separate option agreements with a unit of HudBay Minerals, respecting its copper-rich Reed Lake Discovery Zone properties and a series of adjacent mineral properties held by it. HudBay will make a $2.6-million cash payment to VMS for transferring the latter's southern claims to the joint venture.

Precious and base metals miner NGEx Resources said it sold its indirect wholly-owned subsidiary Sanu Resources Burkina S.A.R.L. to Indigo Exploration Inc. for C$65,000 cash and 3 million common shares of Indigo at a deemed price of C$0.15 per share.

Precious metals mining company Greystar Resources announced that it has appointed David Newbold as its Chief Financial Officer, effective August, 2010.

Airlines operator WestJet Airline reported a 19% increase in June traffic to 1.22 billion revenue passenger miles from 1.03 billion RPMs a year ago.

Pharmacy retailer Jean Coutu Group reported improved first-quarter net earnings of C$0.18 per share, compared to C$0.04 per share in the year ago quarter. The company declared a quarterly dividend of C$0.055 per share.

In economic news, Canadian building permits fell much more than expected on May following two consecutive monthly increases, data from Statistics Canada revealed today. Municipalities issued building permits worth C$6.0 billion in May, a 10.8% decline from April. Economists were looking for a modest decline of 2% following an upwardly revised increase of 5.9% in April and a 12.3% advance in March.

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Asian Markets End Higher On Bargain Hunting

Asian markets ended in positive territory on Tuesday as traders evinced fresh buying interest in stocks that were beaten down in the recent decline. Expectation that double dip recession will not take place and the global economic recovery has only shifted to a lower gear attracted bargain hunting at lower levels ahead of the earnings season poised to kickstart next week. Sharp gains in Shanghai market, which is at a 15-month low, and RBA's decision to retain interest rates unchanged also lifted market sentiment.

In Japan, the benchmark Nikkei 225 Index rose 71.26 points, or 0.77%, to 9,338, while the broader Topix index of all First Section issues advanced 10.35 points, or 1.24%, to 847.

On the economic front, economic data released by the Cabinet Office revealed that Japan's leading index fell for the second consecutive month to 98.7 in May, slightly more than the economists expectation for a drop to 98.9 for the month. In April, the index had dropped to 101.7, which was the first fall since February 2009.

Real estate stocks led the gains on bargain hunting at lower levels. Mitsui Fudosan surged up 3.79%, Sumitomo Realty & Development climbed 3.02%, Mitsubishi Estate rose 2.42%, Tokyu Land Corp. gained 2.59% and Heiwa Real Estate advanced 1.48%.

Iron & Steel product stocks also advanced as traders evinced fresh buying interest at lower levels. JFE Holdings gained 1.86%, Nippon Steel Corp. climbed 3.14%, Sumitomo Metal Industries surged 3.06%, Kobe Steel rose 2.94% and Pacific Metals Corp. added 0.51%.

Exporters also ended in positive territory on slight weakness of the local currency against the greenback. Canon Inc., rose 1.98%, Sharp Corp. added 0.74%, Sony Corp. advanced 1.33% and Panasonic Corp. was up 1.08%.

Major banks also gained on speculation that double-dip recession will not happen in global economy even as the pace slowed down on weak economic data. Sumitomo Mitsui Financial Group surged up 3.43%, Mitsubishi UFJ Financial climbed 2.96%, Mizuho Financial gained 2.14% and Resona Holdings added 0.37%.

Fast Retailing was the major loser in the market, having shed 2.96%, while oil exploration company Impex Corp. fell 1.54%.

In Australia, the benchmark S&P/ASX200 Index advanced 54.00 points, or 1.28% and closed at 4,276, while the All-Ordinaries Index ended at 4,300, representing a gain of 49.10 points, or 1.16%.

On the economic front, the Reserve Bank of Australia, in line with forecasts, decided to hold its overnight cash rate unchanged at 4.50%, after recent economic figures reflected weakness in household consumption and a cooling real estate market. Commenting on the decision, RBA Governor Glenn Stevens said, "Pending further information about international and local conditions for demand and prices, the board views this setting of monetary policy as appropriate."

Official data released earlier in the day revealed that Australia's trade balance surged to a surplus of A$1.65 billion in May compared to an upwardly revised A$1.12 billion in the previous month, driven by a surge in exports, especially that of non-monetary gold. Economists were looking for a surplus of about A$500 million for the month. Exports of goods and services rose 6% month-over-month in May to A$24.73 billion, while imports were up 4% to A$23.08 billion during the month.

Banks led the market higher after the RBA held rates unchanged at 4.50%. ANZ Bank rose 2.97%, Commonwealth Bank gained 2.30%, National Australia Bank climbed 2.99% and Westpac Banking increased by 2.98%. Investment banker Macquarie Group surged up 4.42%.

Oil stocks ended in positive territory. Woodside Petroleum gained 1.88%, Santos advanced 1.29%, Oil Search Ltd surged up 3.11% and Origin Energy added 0.61%. ROC Oil Ltd remained unchanged from previous close.

Mixed trading was witnessed among gold stocks. While Lihir Gold remained unchanged at previous close, Newcrest Mining declined 0.52%.

In Hong Kong, the benchmark Hang Seng Index ended in positive territory with a gain of 241.92 points, or 1.22%, at 20,084, on bargain hunting at lower levels. Sharp rise in mainland China's Shanghai composite index lifted the market sentiment amid speculation that the global economic recovery has not been stalled but slightly shifted to a lower gear.

Firm global cues, positive expectations ahead of the upcoming earnings season and the revival of the vital south-west monsoon rains helped the Indian market snap a three-day slide on Tuesday. The benchmark 30-share Sensex rose sharply to close at 17,614, up about a percent or 173 points, with twenty five of its components ending in the green. The 50-share Nifty also rose by 53 points or a little over a percent to 5,289.

Among the other major markets open for trading, China's Shanghai Composite Index surged up 45.48 points, or 1.92%, to 2,409, Singapore's Strait Times Index advanced 24.00 points, or 0.84% to close at 2,868, Taiwan's Weighted Index climbed 108.52 points, or 1.46%, to close at 7,548, and Indonesia's Jakarta Composite Index added 33.34 points, or 1.16%, and closed at 2,911.

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The major European averages are rallying on Tuesday, tracking positive global cues. The French CAC 40 Index and the German DAX Index are rising 3.23% and 2.46%, respectively, while the U.K.’s FTSE 100 Index is advancing 2.40%.

U.S. Economic Reports

The unfolding week has very little economic news to digest and the scarcity of Main Street catalysts is all the more reason for traders to show apprehension and stay on the sidelines. Soft economic readings released in recent weeks have engendered fears of a double-dip recession, leading to a large-scale exodus from risky assets. The results of the Institute for Supply Management's service sector survey and the weekly jobless claims report are the only economic reports that are likely have any meaningful impact on the markets this week.

The Federal Reserve's consumer credit report for May, the wholesale inventories report for May, a couple of Fed speeches and announcements concerning Treasury auctions of 3-year and 10-year notes and 30-year bonds round up the other economic events of the week. Traders may also evince interest in the chain store sales to be reported by the nation's retailers for June.

The ISM is scheduled to release the results of its non-manufacturing survey at 10 AM. The non-manufacturing index is likely to show a reading of 55 for June.

In May, the non-manufacturing index remained unchanged at 55.4, marking the highest level since May 2006. The employment index rose about 1 point to 50.4, moving above the 50 level for the first time since December 2007. On the other hand, the new orders index fell 1.1 points to 57.1, while the order backlogs index jumped 6.5 points to its highest level since August 2007. Despite falling 4 points, the price paid index remained elevated at 60.6.

Meanwhile, the non-manufacturing index may see a small retreat in June, given the fact that the index had been consolidating for the past three months. The not-so-optimistic expectations are not without a reason. Most recent economic indicators, including the ISM's manufacturing index, are suggesting a slight loss of momentum.

The employment index, which struggled below the cut-off level of '50' for months before making a comeback in May, rising to 50.4, is expected to slip back into contractionary territory in June.

After unexpectedly increasing in May following three straight months of declines, consumer credit is expected to decline once again in May. With auto sales not showing much improvement in recent months, one cannot expect the surge seen in non-revolving credit in April to last.

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Cliff Natural Resources (CLF) may be in focus after it announced that Spider Resources has recommended Cliff’s previously disclosed all-cash offer of C$0.19 per Spider share. The decision to support Cliff’s offer comes on the back of rival bidder KWG Resources’ decision not to submit an offer to match Cliff’s latest offer.

Ford (F) is likely to see some activity after it said its new vehicle sales in China during the first-half of the year rose 53% year-over-year to 301,524 units.

Fidelity Information Services (FIS) could also be in focus after it reaffirmed its second quarter outlook, which calls for low single digit growth in adjusted revenues compared to adjusted pro forma revenues of $1.26 billion in the second quarter of 2009. The company also said it expects second quarter adjusted earnings of 45-47 cents per share. Analysts estimate earnings of 46 cents per share on revenues of $1.28 billion. The company also said it launched its previously announced tender offer to buy back up to $2.5 billion shares in a price range between $29 to $31 per share. Separately, the company said it plans to privately offer $1.2 billion aggregate principal amount of senior notes.

Currency, Commodity Markets

Crude oil futures are trading up $1.02 at $73.16 a barrel after settling the week ended July 2nd up $6.72 or 8.52% to $72.14 a barrel.

Oil reversed the previous week’s gains in the week ended July 2nd, with the commodity declining moderately last Monday, as the equity markets see-sawed in the session to close modestly lower. The selling in the commodity intensified on Tuesday, with a barrel of oil retreating by over $2 in reaction to the equity market swoon following the Conference Board’s correction to the Chinese data.

On Wednesday, crude oil dipped modestly amid the release of a mixed oil inventory report showing a depletion in crude oil stockpiles but builds in gasoline and distillate inventories. Sentiment was also impacted by the warning from Moody’s about Spain’s debt rating.

Dismal housing reports and soft manufacturing data sent crude oil sharply lower on Thursday, with oil dipping by over $2.50-a-barrel. The commodity declined yet again on Friday, dipping moderately to close the week sharply lower and at its lowest level in about a month.

Gold futures are slipping $3 to $1,204.70 an ounce. In the previous week, the precious metal fell $48.50 or 3.86% to $1,207.70 an ounce.

On the currency front, the U.S. dollar weakened against the yen as well as the euro in the week ended July 2nd, with the greenback dipping 1.66% against the yen to 87.75 yen and declining 1.36% against the euro to $1.2537.

Currently, the U.S. dollar is trading at 87.836 yen and is valued at $1.2584 versus the euro.

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