US & World Daily Markets Financial Briefing 08-06-2009

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Stocks Experiencing Notable Weakness In Mid-Morning Trading

Stocks are experiencing notable weakness on Monday, as traders are doing some profit taking following the recent strength in the markets. The major averages are all firmly in negative territory after a lower open, taking a breather amid a day free of any significant economic reports.

Packaged food supplier General Mills is in focus after the company said it is on track to exceed its prior earnings targets for the fiscal year ending May 31, 2009 due to good operating performance and a lower fourth-quarter tax rate.

The forecast, however, assumes no mark-to-market valuation as well as gains from asset sales. The company also provided its initial segmental sales outlook for 2010. The stock is up 3.9 percent in mid-morning trading.

Meanwhile, shares of fast food giant McDonald's Corp. (MCD) are moving after the company announced that its global comparable sales rose 5.1 percent in May 2009.

Shares of McDonald�s are currently down 2.6 percent, as U.S. sales came in well short of expectations. In the U.S., comparable sales grew 2.8 percent in May.

Meanwhile, a group of Indiana pension funds have filed an emergency appeal with the U.S. Supreme Court to delay the sale of bankrupt automaker Chrysler LLC to a group led by Italian automaker Fiat. The court�s decision on whether to stay the closing of the deal is expected later today.

Additionally, the annual Apple Worldwide Developers Conference is also taking place in San Francisco, with the tech world hoping for a Steve Jobs sighting following reports last week indicating he will return to work later this month.

Some traders are looking to another quantitative easing move by the Federal Reserve this morning. The New York branch of the Fed is buying back treasuries with maturity dates ranging between December of 2013 and April of 2016, set to reveal the results of the purchase at 11:00 a.m. ET.

Some speculation has risen as to whether the Fed will raise interest rates to combat the effects of expected inflation following its quantitative easing actions.

In other news, standard & Poor's downgraded Ireland's credit rating for the second time this year, citing fears that the government is set to incur a higher-than-expected cost for supporting banks.

The major indices are all posting notable losses, although they have moved well off of their worst levels of the day in recent trading. The Dow is currently down 102.40 at 8,660.73, the Nasdaq is down 25.69 at 1,823.73 and the S&P 500 is down 8.81 at 931.28.

Sector News

Most of the major sectors are in the red, contributing to the notable pullback by the major averages, which have partly offset last week�s gains.

Gold stocks are turning in some of the day�s worst performances, as reflected by the 2 percent pullback by the Amex Gold Bugs Index. With the retreat, the index continues to back off of ten ten-month high set earlier this month, as traders largely consider the late-May flight to commodities overdone.

Additional weakness is also present among airline stocks, with the Amex Airline Index down by 3 percent on the day.

The International Air Transport Association (IATA) said Sunday that the global airline industry will see wider than expected losses this year, as demand for travel and cargo traffic has dipped despite a decrease in air fares.

Steel, health insurance and computer hardware stocks are also posting notable declines. Among computer hardware stocks, Palm (PALM) is down 8.9 percent amid concerns about a lack of supply of its new Pre smart phone.

Meanwhile, banking stocks are bucking the downtrend, with the S&P Banks Index up by 2.3 percent on the day. The move comes as a number of the nation�s leading financial institutions are gearing up to pay back government issued TARP funds.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region finished Monday's session on a mixed note. Japan's benchmark Nikkei 225 Index rose by 1.0 percent, while Hong Kong's Hang Seng closed down by 2.3 percent.

Meanwhile, the major European markets are retreating by a considerable margin. The U.K.'s FTSE 100 Index is down by 1.0 percent, while the French CAC 40 Index and the German DAX Index are down by 1.7 percent and 1.5 percent, respectively.

In the bond markets, treasuries are holding in positive territory after seeing some volatility at the opening bell on Wall Street. Subsequently, the yield on the benchmark ten-year note is down to 3.826 percent, a drop of 3.6 basis points on the day.

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Resource Stocks Could Pull TSX Lower In Early Trading

Toronto stocks could give back some of their gains from last week in early Monday trading. The market may be dragged lower as commodity prices are in the red, while U.S. futures are also pointing lower.

Crude oil prices are down $1.01 to $67.43 per barrel in electronic trading after briefly topping $70 late last week. Gold is also down $13.10 to $949.50 per ounce, while copper is off 2 cents to $2.264 per pound.

In corporate news, Thompson Creek Metals said late Friday that Ken Collison, Chief Operating Officer, has chosen not to relocate to Denver and will be resigning from his position with the company later this year following the appointment of a successor.

Silvercorp Metals Inc. said it intends to make an offer to acquire all of the outstanding common shares of Klondex Mines Ltd. Pursuant to the offer, Klondex shareholders will be entitled to receive 0.50 common shares of Silvercorp for each Klondex common share validly tendered to the offer, representing approximately C$2.18 per Klondex common share.
 
Air Canada reported load factor for the month of May of 79.5% on a consolidated basis with Jazz, compared to 83.2% in May 2008, a decrease of 3.7 percentage points.

In economic news, housing starts increased to 128,400 units in May from 117,600 units in April, Canada Mortgage and Housing Corporation said in its monthly report released Monday morning. Economists anticipated 126,000 starts.

On Friday, the S&P/TSX Composite Index added 92.05 points or 0.87% to settle at 10,569.29. The index rallied about 200 points for the week.

Crude oil futures are currently edging down $0.79 to $67.65 a barrel after the commodity advanced $2.13 or 3.21% to $68.44 a barrel in the week ended June 5th. The commodity surged up strongly on Monday, rising over $2-a-barrel, but it edged down slightly on Tuesday, as traders resorted to profit taking.

Oil fell sharply on Wednesday, moving lower in reaction to the weekly oil inventory report, which showed a sharp increase in crude oil stockpiles. However, on Thursday, oil rebounded sharply by over $2.50 barrel, as the equity market rally and the dollar’s weakness supported the commodity. Notwithstanding the promising labor market data, oil ended down modestly on Friday after the dollar rose in the session.

Although a break above $70-a-barrel is not ruled out, oil could see a price correction to below $60-a-barrel soon. Relatively weak demand, high crude oil inventory levels and the likelihood of OPEC members raising production to capitalize from the recent price gains are viewed as downside risks.

Gold futures are currently receding $10.60 to $952 an ounce. In the previous week, the commodity fell $17.70 or 1.8% to $962.60 an ounce.

On the currency front, the U.S. dollar advanced against both the euro and the yen in the week ended June 5th. The dollar rose 3.46% against the yen to 98.64 yen and added 1.34% against the euro to $1.3968 a euro. Last week, the dollar received ample support from the release of a few positive U.S. economic readings, including the smaller-than-expected decline in non-farm payrolls.

Currently, the U.S. dollar is trading at 98.327 yen and is valued at $1.3871 versus the euro.

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The major averages in the Asian markets ended on a mixed note on Monday. While traders welcomed the sharp decline in the number of jobs lost in the U.S. during May, the rise in unemployment rate to 9.4%, the highest level since August 1983, has raised fresh concerns about the pace as well as the magnitude of the economic recovery. The Hong Kong, Indonesian, South Korean, Singaporean, Indonesian, Indian and Taiwanese markets ended in the negative territory, while the markets in Japan and China ended higher. The Australian market was closed for a public holiday.

Japan’s Nikkei 225 Average opened sharply higher at 9,829 compared to its previous close of 9,768 on the better than expected U.S. jobs report as well as a weaker local currency, which settled the Asian session down in the mid-98 yen region.

However, mixed reaction for the U.S. jobs report capped the gains as traders preferred to adopt a wait-and-watch attitude till clear signals emerge about the direction and pace of the global economic recovery. Exporters and automakers led the gains, with the markets holding onto the gains till the end of the session before closing at 9,866, marking a gain of 97.62 points or 1.00%.

On the economic front, Japan’s Ministry of Finance said in a preliminary report that the nation recorded an unadjusted surplus of 630 billion yen in April, sharply lower than economists' expectation of a surplus of 850 billion yen. The surplus in the current account for March was at 1.485 trillion yen. The current account surplus has been steadily declining month-over-month and the latest decline is the 14th consecutive month of decline. Year-over-year, the current account surplus declined 54.5%. The report further noted that the trade balance fell 69.2% year-over-year to 184.3 billion. Imports declined 37.8% year-on-year to 3.73 trillion yen, while exports dropped 40.6% to 3.915 trillion yen.

Exporters and automakers rose on the weaker local currency, as the Japanese export more than half of their products to other countries. Mazda Motor Co. gained more than 6%, and Toyota Motor advanced 1.30%. A newspaper report revealed that Toyota Motor is contemplating a reduction in production costs for smaller cars by as much as 100 billion yen by the year 2012.

Financial stocks ended in positive territory on hopes of a positive outlook for the economy. Mitsubishi UFJ gained 3.21%, Mizuho Financial soared 7.47%, Resona Holdings advanced 1.27% and Sumitomo Mitsui surged up 6.38%.

In Hong Kong, the Hang Seng Index opened lower at 18,522 compared to its previous close of 18,680 on concerns about the pace of the global economic recovery. Increasing concerns about the valuation of stocks following a sharp rise in the past few trading sessions also influenced the market. Thirty-seven of the forty-two index components, ended in negative territory. The index closed down 426 points or 2.24% at 18,253.

Property, financial and china-related stocks ended in negative territory on profit taking and concerns of over-valuation. All financial stocks ended weaker on concerns about the pace and magnitude of the global economic recovery.

Among resource stocks, PetroChina lost 2.45% and CNOOC, the largest offshore oil firm in China, declined 3.22%. Aluminum Corp. of China, or CHALCO, fell 2.73%.

China-related stocks also ended in negative territory. China Mercantile Holdings declined 6.16%, China Resources lost 3.29% and China Shenhua fell 3.66%.

In South Korea, the benchmark KOSPI Index ended in negative territory, as institutional investors preferred to offload shares of blue-chip companies, dragging the index down below the unchanged line amid volatile trading. The Kospi ended with a loss of 1.41 points, or 0.10%, at 1,393.

All the sectors ended in negative territory on heavy institutional selling. KB Financial Group, the holding company of Kookmin Bank, slipped 2.62%. Woori Finance lost 2.35% and Shinhan Financial Group fell 1.65%. The country's No. 1 builder, Samsung Construction & Trading lost 0.80%, while top automaker Hyundai Motor fell 4.44%. Kia Motor fell 2.94%.

In India, the stock market ended negative territory, dragged down by metals and commodities. Weak global cues on concerns about the global recovery negatively impacted the market. The BSE Sensex lost 437.63 points or 2.90% to close at 14,66, and the broader Nifty fell 157.00 points or 3.86%, to close at 4,410.

Among the other major markets in the region, China's Shanghai Composite Index ended higher by 14.44 points or 0.52% at 2,768. However, Taiwan's Weighted Index plunged 3.34% or 228.72 points to close at 6,628, the Strait Times Index of Singapore lost 62.65 points or 2.61% to close at 2,331, and Indonesia's Jakarta Composite Index fell 22.28 points, or 1.07% to close at 2,057.

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The major European markets are receding sharply on Monday, with commodities and banking stocks acting as drags on the market. Stocks going ex-dividend have weighed on the U.K.’s FTSE 100 Index, which is currently down 63.64 points or 1.18%. The French CAC 40 Index and the German DAX Index are also down, dropping about 1.53% and 1.51%, respectively.

On the economic front, the results of the latest Sentix survey showed that the headline index for eurozone improved to minus 27 in June from minus 34.3 in May. Economists were expecting the index to rise to minus 31. Among the sub indicators, the current situation index rose to minus 51.25 in June from minus 59, while the expectations index showed a positive reading of 1.25 versus minus 5.25 last month.

U.S. Economic Reports

Amid an increase in the uncertainty over the itinerary for a recovery, traders are likely to anxiously look forward to the unfolding week to take stock of the economic situation. The Commerce Department’s retail sales report for May, the preliminary June reading of the Reuters/University of Michigan’s consumer sentiment report, the weekly jobless claims report of the Labor Department and the Beige Book are likely to be the closely watched reports of the week.

Additionally, traders are likely to stay tuned to the Commerce Department’s trade balance report for April, the Labor Department’s import and export prices report for May, the Commerce Department’s business and wholesales inventories reports for April and the Energy Department’s crude oil inventories report.

Retail sales performance this year has so far been mixed. After rising in the first two months of the year, retail sales have been on a declining mode in the next two months and consequently, retail sales are up only about 0.4% thus far this year. State Street Advisors point out that the retail sales performance in the current year is better than the severe pullback in retail sales in the second half of 2008.

Difficult labor market conditions, accentuated by a rise in the jobless rate to over 9% in May, tight credit conditions and higher gasoline prices are likely to keep consumer spending subdued in the near term. However, a pick up in light vehicle sales could lead to a decent gain in retail sales in May.

The trade balance report is expected to show a widening of the deficit in April, mainly due to an increase in crude oil imports, reflecting the increase in crude oil prices. However, the deficit on non-oil import is expected to narrow slightly due to an increase in exports from the U.S. ports.

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Amylin Pharma (AMLN), Eli Lilly (LLY) and Alkermes (ALKS) are likely to be in focus after they announced that interim results from a DURATION-1 study showed sustained glucose control and weight loss and improvements in systolic blood pressure and triglycerides through 2 years of treatment with exenatide once, weekly an investigational therapy for type 2 diabetes. The companies also stated that a NDA application for exenatide once weekly was recently submitted to the FDA.

Headwaters (HW) may be in focus after it said it plans to launch a proposed amendment to its senior secured credit agreement that would permit it to replace its revolving credit facility and to amend certain covenants.

Piedmont Natural Gas (PNY) may also be in focus after it reported that its second quarter earnings rose to 73 cents per share from 66 cents per share last year. The consensus estimates has called for earnings of 68 cents per share. Revenues declined 28% to $455.4 million. The company reaffirmed its 2009 earnings per share guidance of $1.45-$1.60 compared to the analysts’ estimate pf $1.54 per share.

General Mills (GIS) may move in reaction to its announcement that it expects 2009 earnings per share to come above its earlier adjusted earnings guidance range of $3.87-$3.89 per share due to good operating performance and a lower fourth quarter tax rate. Analysts estimate earnings of $3.90 per share. Although it did not give specific financial targets for 2010, it said it remains comfortable with Reuters’ mean consensus estimate of $4.15 per share.

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