US & World Daily Markets Financial Briefing 07-08-2009

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Jobs Report May Alleviate Worries Over Prolonged Downturn

The major U.S. index futures are pointing to a higher opening on Friday, with the futures and the European markets rebounding from early weakness following the release of a report that showed that the pace of job losses in the U.S. slowed down considerably in July and the jobless rate was little changed. The Asian markets had earlier in the day showed apprehension over the data and closed mixed. The data is likely to reinforce the view that the economy is moving towards stabilization after going about a rough ride ever since the financial crisis erupted.

U.S. stocks squandered a positive start and ended Thursday’s session lower, extending the decline seen in the previous session. After opening higher and seeing a sharp spike, the major averages moved into negative territory, as traders digested a mixed employment report and lackluster chain store sales reported by the nation’s retailers.

The Dow Industrials ended the session down 24.71 points or 0.27% at 9,526 and the S&P 500 Index closed at 997, representing a decline of 5.64 points or 0.56%, while the Nasdaq Composite Index fell 19.89 points or 1% to end at 1,973.

Sixteen of the thirty Dow components ended the session lower, with Alcoa (AA) (down 3.61%), Hewlett-Packard (HPQ) (down 2.43%), JP Morgan Chase (JPM) (down 2.47%) and Procter Gamble (PG) (down 4.54%) showing notable weakness. On the other hand, American Express (AXP) and Boeing (BA) rose more than 3% each. General Electric (GE) rose 2.29%, while United Technologies (UTX), Caterpillar (CAT) and DuPont (DD) moved up over 1% each.

Among the sector indexes, the Dow Jones Transportation Average slid 1.08% and the NYSE Arca Airline Index fell 2.28% compared to a 1.32% drop by the Philadelphia Semiconductor Index. The NYSE Arca Disk Drive Index and the NYSE Arca Computer Hardware Index lost close to a percentage point each. The NYSE Biotechnology Index declined 1.96%. However, the S&P Retail Index ended up 1.12%.

On the economic front, initial jobless claims came in at 550,000 in the week ended August 1st, down from 588,000 in the previous week. However, continuing claims rose by 69,000, which is evidence that labor market conditions remain tough.

That said, the economy is expected to rebound strongly in the third quarter, reflecting a temporary surge in vehicle production, a build up in inventories and modest improvements in some components of final demand. However, economic headwinds, including restrictive financial conditions, reduced access to credit and falling home prices, could prevent a sustainable uptrend. To top it off personal income growth has been lackluster, putting further pressure on spending. According to Morgan Stanley, the combination of a moderate recovery and downside inflation risks should keep the Fed on hold through mid-2010.

The Bank of England’s decision yesterday to increase the size of its asset purchase program is an indication that the U.K. economy is still in the danger zone despite many positive economic reports that pointed towards a fledgling recovery. The U.K. economy has been contracting since the second quarter of 2008, with the rate of contraction in the second quarter of 2009 slower than in the first quarter. Much of the downside in the second quarter was due to weakness in the financial and business services sector.

However, house prices have been seeing an improvement of late, reflecting a shortage of good properties and a gradual return of demand. The bank’s decision to increase asset purchases weighed down on bond yields and the pound on Thursday.

At the same, the Asia-Pacific region seems to be up and roaring. The Australian Central Bank said in its quarterly monetary policy statement today that demand and output have strengthened a little recently, which is seen as the result of the strong domestic financial system, the stimulatory effect of the monetary policy easing, which brought down interest rates by a cumulative 4 percentage points, fiscal measures and the strong recovery currently being witnessed in China.

The central bank predicts growth of 0.5% in 2009 and expects growth to gradually firm through 2010. The rebound is expected to be supported by strong dwelling activity and increased public infrastructure spending, the impact of which is likely to be partly offset by weaker consumption and investment.

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Toronto stocks will look to rebound on Friday morning as traders consider employment reports from both sides of the border. Commodities also saw moderate recoveries in early trading, which could boost resource sectors.

Canadian employment declined by 45,000 in July, with losses in both full- and part-time work, according to data released Friday by Stats Canada. Economists were expecting employment to decline by only 15,000 jobs.

Meanwhile, a U.S. Labor Department report showed non-farm payroll employment fell by 247,000 jobs in July following a revised decrease of 443,000 jobs in June. Economists had been expecting employment to fall by 325,000 jobs compared to the drop of 467,000 jobs originally reported for the previous month.

In corporate news, Telus Corp. reported second-quarter net income of C$244 million or C$0.77 per basic share, compared to C$268 million or C$0.83 per basic share in the same quarter of last year.

Labopharm Inc. reported second quarter net loss of C$4.87 million or C$0.09 per share, compared to a net loss of C$10.25 million or C$0.18 per share last year.
 
Boralex reported its second-quarter net earnings rose to C$1.82 million from restated C$1.10 million in the year earlier period. Net earnings per class A share for the latest quarter improved to C$0.05 from C$0.03 last year.

Air Canada announced that its second quarter net income was C$155 million or C$1.55 per share, compared to net income of C$122 million or C$1.22 per share in the second quarter of 2008.

Crude oil added 40 cents to move at $72.34 in electronic trading, recovering some of yesterday's slump. Gold added $4.10 to $967.00 and copper rose 1.3 cents to $2.765.

On Thursday, the S&P/TSX Composite Index fell 253.56 points or 2.3% to close at 10,793.37. The index reached an eight-month high Wednesday.

Crude oil futures are trading down at $0.50 at $71.44 a barrel after ending down $0.03 at $71.94 a barrel in the previous session. The commodity saw some volatility in yesterday’s session after the speculation that the Federal Trade Commission would impose fines on market abuse drove prices down by $2-a-barrel before they recovered most of their losses. Gold futures, which rose $3.40 to $962.90 an ounce on Thursday, are currently rising $2.30 to $965.20 an ounce.

On the currency front, the U.S. dollar is trading at 96.4960 yen compared to the 95.4573 yen it fetched at the close of New York trading on Thursday. The greenback is trading at $1.4313 versus the euro.

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Asian Markets End Weaker On Profit Taking, Valuation Concerns

The markets across Asia, except Japan, ended in the negative territory on Friday ahead of the key jobs report from the US Labor Department later in the day. Profit taking after the recent rally and concerns about valuations following recent run-up in stocks much too quickly impacted sentiment across the region.

In Japan, the stock market ended in positive territory lifted by late short covering in futures, after having declined sharply in early trading on weak earnings.

The benchmark Nikkei 225 Index ended the session at a new yearly closing high of 10,412, up 24.00 points, or 0.2%, while the broader Topix index of all first section stocks slipped into negative territory with a marginal loss of 0.75 points, or 0.1% at 957.

On the economic front, the Ministry of Finance revealed that the country's international reserves increased to US$1.022 trillion at the end of July, up US$3.48 billion from the previous month. The Ministry further noted that of the total international reserves, foreign currency reserves amounted to US$991.9 billion, while the reserves with the IMF totaled US$4.26 billion. Gold reserves were US$23.1 billion, while the SDRs amounted to US$2.97 billion.

Retail stocks advanced on expectations of recovery. Fast Retailing advanced 0.95%, and Seven & I Holdings rose 1.11%. However, Aeon Co. bucked the trend and slipped 0.43%.
 
Most of the stocks declined following disappointing earnings on concerns about valuations in the price being inconsistent with their earnings and forecast.

Konica Minolta Holdings, maker of printers and office equipment, reported a 98% drop in first quarter earnings. Following the disappointing results, Nomura Holdings had cut the ratings for the stock to "neutral" from"buy". The stock declined slumped 10.09%. Among others in the sector, Ricoh fell 1.42% and Terumo Corp. slipped 0.84%.

Kuboto Corp. engaged in the manufacture of farm machinery, reported a 72% drop in earnings for the recent quarter. The stock fell 6.13%. Among other machinery companies, Daikin Industries lost 3.46% and Hitachi Construction Machinery slipped 0.70%.

Automakers also ended weaker on profit taking ahead of key employment report in the U.S later in the day. Toyota Motor declined 0.97%, Honda Motor edged down 0.32% and Nissan Motor lost 1.12%.

Banks also ended in the negative territory on profit taking. Sumitomo Mitsui Financial lost 1.24%, Resona Holdings fell 1.26%, Mizuho Financial edged down 0.44% and Mitsubishi UFJ Financial shed 1.16%.

In Australia, the benchmark S&P/ASX200 Index dropped 26.90 points, or 0.62%, to close at 4,299, and the All-Ordinaries Index ended at 4,303, representing a loss of 27.90 points, or 0.64%.

Releasing the latest quarterly statement on Monetary Policy, the Reserve Bank of Australia noted that the economic conditions have been stronger than expected and is likely to reduce the prospect of further cuts in the benchmark interest rates. The bank said it is still apprehensive about the strength of the global recovery and hinted that it would consider moving towards a more normal setting of the monetary policy by raising the interest from the unusually low 3% at present on signs of sustainable recovery in the economy.

Light sweet crude oil price for September delivery ended at $71.82 a barrel in electronic trading, down $0.12 from its previous close $71.94 a barrel in New York on Thursday.

Metals and mining stocks declined after commodity prices fell sharply in the international market on Thursday. BHP Billiton lost 2.04%, Rio Tinto fell 2.15%, Fortescue Metals slumped 3.00%, Gindalbie Metals shed 2.35%, and Oz Minerals declined 1.37%.

Banks also ended weaker on profit taking and hawkish comments from the Reserve Bank. ANZ Bank slipped 0.47%, National Australia Bank lost 0.97% and Westpac Banking fell 0.44%. However, Commonwealth Bank of Australia bucked the trend and edged up 0.23%.

The third largest insurance company in the country, Suncorp-Metway reported a 39% drop in full year profit for the year ended 30 June, hurt by investment losses. The stock declined 1.25% following the results.
 
Mixed trading was witnessed among oil stocks. While Santos added 0.27% and Oil Search edged up 0.18%, Woodside Petroleum lost 0.57% and Origin Energy edged down 0.28%.

Gold stocks also witnessed mixed trading. While Lihir Gold lost 1.83% and Newcrest Mining edged down 0.10%, Sino Gold ended in positive territory with a gain of 3.54%.

In Hong Kong, the Hang Seng Index shed 523.87 points, or 2.51% and closed at 20,375 as traders preferred to lock in gains amid concerns that the stocks ran up too fast too quick and not in sync with the underlying earnings. Also, traders preferred to move to sidelines ahead of the key jobs report in the U.S later in the day.

Of the 42 components in the index, only two stocks managed to end in positive territory, with the rest ending in the red, on profit taking.

Resource related stocks fell sharply as commodity prices declined in the international market on Thursday. Aluminum Corp. of China, or CHALCO, slumped 5.24%, PetroChina lost 4.05% and CNOOC fell 3.09%.

Property and banking stocks also ended weaker on valuation concerns. In South Korea, the benchmark KOSPI Index ended in the positive territory with a gain of 10.96 points, or 0.70% to close at 1,576. Buying interest in financial stocks by foreign institutional investors and expectations of growth lifted the stocks in late trading after investors preferred to lock in gains in early trading ahead of US jobs report.

The Indian market fell sharply for a second day in a row on Friday, as worries that the recent rally outpaced fundamentals led to extensive profit taking amid caution ahead of the looming U.S. jobs report, due later in the day. The BSE Sensex finished at 15,160, down 354 points or 2.28% and the S&P CNX Nifty fell 104 points or 2.27% to close at 4,481.

Among the other major markets in the region, China's Shanghai Composite Index lost 95.64 points, or 2.85% to close at 3,260, Singapore's Strait Times Index shed 52.15 points, or 2.00% to close at 2,549, and Indonesia's Jakarta Composite Index declined 10.84 points, or 0.46% to close at 2,349. The market in Taiwan is closed for a holiday.

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The major European markets are trading higher on Friday, rebounding from the weakness they experienced in early trading following the release of the U.S. non-farm payrolls report. The French CAC 40 Index is up 0.74% compared to a 1.05% gain by the German DAX Index, while the U.K.’s FTSE 100 Index is rising 0.14%.

In corporate news, Royal Bank of Scotland reported a loss of 1.04 billion pounds compared with a loss of 827 million pounds in the year-ago period. The loss was mainly due to an increase in bad debts to 7.5 billion pounds. Revenues climbed 58% to 2.184 billion.

Allianz’s second quarter earnings climbed to 1.9 billion euros from 1.5 billion euros in the year-ago quarter. Revenues edged up slightly to 22.2 billion euros.

On the economic front, the German Federal Statistical Office said Germany’s trade surplus increased to 12.2 billion euros in June from 9.5 billion euros in May. Economists had expected the surplus to rise to 10.6 billion euros. On a monthly basis, exports climbed 7%, much bigger than the 0.2% increase seen in May. Meanwhile, imports grew 6.8%, reversing the 1.9% drop in May. According to provisional results of the Deutsche Bundesbank, the nation’s current account surplus surged to 13.3 billion euros in June from 4.2 billion euros last month. A year ago, the current account showed a surplus of 19.5 billion euros.

Meanwhile, a government report revealed that German industrial production fell 0.1% month-on-month in June after an upwardly revised increase of 4.3% in May. Economists had forecast an increase of 0.5% in June. On an annual basis, output plunged 18.1%, quicker than the 17.5% decline expected by economists.

The U.K's output prices measure for all manufactured products rose 0.3% in July from June, reflecting increases in prices of other manufactured good, chemical and tobacco and alcohol products. Annually, output prices slipped 1.3%. Core output prices, excluding volatile sectors, showed an annual increase of 0.2% in July. Economists were expecting a 0.5% drop.

U.S. Economic Reports

The Labor Department said non-farm payroll employment fell by 247,000 in July following a downwardly revised decline of 443,000 in June. Economists had expected a decrease of about 325000 jobs compared to the decrease of 467,000 originally reported for the previous month.

The continued decrease in jobs reflected declines in employment in both the good-producing and service-providing sectors. While goods-producing sectors lost 247,000 jobs, service-providing sectors lost 119,000 jobs, a slower pace of decline than the 220,000 rate in the previous month.

At the same time, the Labor Department said that the unemployment rate edged down slightly to 9.4% from 9.5% in June. The rate came in lower than the 9.6% rate expected by economists.

The U.S. Federal Reserve is expected to release its monthly consumer credit report at 3 PM ET. Consumer credit for June is likely to show a decline of $5 billion.

Consumer credit declined by $3.2 billion to $2.519 trillion in May, with the decline much smaller than the $5.6 billion drop expected by economists. The bulk of the decline was in revolving credit, which declined by $2.9 billion, while non-revolving credit declined by a more modest $400 million.

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Oshkosh is likely to be in focus after it announced that it has priced its public offering of 13 million shared at $25 per share, which is slightly below the $26.65 level at which it closed Thursday. Assuming no exercise of an overallotment option to buy an additional 1.95 million shares, the company expects to receive net proceeds of $311.4 million.

Watson Pharma may react to its announcement that it has received a request for additional information from the FTC in connection with its pending acquisition of privately-held Arrow Group. The company noted that the second request will extend the waiting period imposed by the HSR Act until 30 days after both companies have complied with the request.

AIG is likely to be in focus after it said its second quarter net income was $2.80 per share compared to a loss of $41.13 per share last year. Sales fell 18% to $17.8 billion. Separately, the company announced Thursday that its board has elected director Harvey Golub as its non-executive Chairman of the Board, replacing retiring Chairman Edward Liddy. Golub will assume his new role on August 10, 2009.

Fannie Mae may move in reaction to its announcement that its loss for the second quarter was $2.67 per share compared with a loss of $2.54 billion last year. The results reflected credit losses amounting to $18.8 billion. The company said it would request an incremental $10.7 billion funding in from the Treasury.

Verisign could also be in focus after it reported a second quarter profit of 18 cents per share compared with a loss of 35 cents per share in the year-ago quarter. On an adjusted basis, the company reported a profit of 31 cents per share, as revenues rose 6% to $256.6 million. Analysts estimated earnings of 32 cents per share on revenues of $255.2 million. The company also announced that it has appointed Mark McLaughlin as CEO, effective August 17th and Brian Robins as CFO, effective immediately.

EOG Resources may see activity after it reported a second quarter loss available to common shareholders of 7 cents per share compared to a profit of 71 cents per share last year. The company’s adjusted non-GAAP net income was 73 cents per share, lower than $2.52 per share last year. Net operating revenues fell to $861 million from the year-ago’s $1.096 billion. The consensus estimates had called for earnings of 42 cents per share on revenues of $965.89 million.

Continental Airlines could be in focus after it announced the pricing of a public offering of 14.4 million shares of its Class B common stock.

Nvidia is likely to move higher after reporting a second quarter loss of 19 cents per share compared with a loss of 22 cents per share last year. On an adjusted basis, earnings were 7 cents per share. Revenues dipped 13% to $776.5 million. Analysts estimated a loss of 2 cents per share on revenues of $713.6 million.

Netflix may trade higher after it said its board authorized the buyback of up to $300 million of its common stock through the end of 2010. Emulex receded in Thursday’s after hours session after reporting a fourth quarter adjusted profit of 9 cents per share on revenues of $79.3 million. In the year-ago quarter, the company reported earnings of 22 cents per share on an adjusted basis on revenues of $112.8 million. The consensus estimates called for earnings of 4 cents per share on revenues of $77.8 million.

CSC may rally after it reported first quarter earnings of 85 cents per share, including a tax benefit of 11 cents per share, compared to earnings of 79 cents per share in the year-ago period. Revenues fell 12% to $3.9 billion. Analysts estimated earnings of 51 cents per share on revenues of $3.89 billion. The company raised its 2010 earnings per share estimate.

Beazer Homes may gain ground after it reported a loss of 72 cents per share for its third quarter, narrower than $2.85 per share in the year-ago quarter. The recent quarter’s results included a gain of $55.2 million. Revenues fell 51% year-over-year to $224.7 million.

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