US & World Daily Markets Financial Briefing 08-09-2009

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Commodity Price Rally May Spur Buying Interest

The major U.S. index futures are pointing to a higher opening on Tuesday, with the optimism that characterized trading in Asia and Europe likely to pervade into the U.S. markets, which are opening after Monday’s public holiday. Commodity prices are once again on a roll, with gold breaching the $1000-an-ounce mark, with the optimism reflecting expectations of a recovery in demand and in turn an economic revival. Trading volume may remain thin, as traders return to their desk after ‘Labor Day.’

The return of M&A activity point to corporate America’s faith in growth and therefore may serve as a positive catalyst. That said, a lack of any major economic and corporate news could lead to some indecision in the session even as traders harbor hopes of a turnaround.

The major U.S. averages broke a 2-week winning streak in the week ended September 4th, as fears that the recent gains may have been overdone kept sentiment subdued in the markets throughout the week. Last Monday, economic worries dampened the mood of traders, as the major averages closed with moderate losses. Notwithstanding the support provided by some economic data, stocks fell sharply on Tuesday, with the major averages all ending down about 1%, dragged down by weakness in the financial space.

On Wednesday, stocks closed modestly lower amid some degree of volatility, as traders digested a few economic readings that essentially came in below expectations. Supported by a smaller than expected drop in retail sales reported by the nation’s retailers, the major averages closed higher on Thursday after seesawing through much of the session. After showing some apprehension in Friday’s early trading, as traders reacted to a mixed employment report, the major averages advanced sharply and ended higher, as the shrinking job losses became the focus of traders.

For the week, the Dow Industrials and the S&P 500 Index lost 1.08% and 1.22%, respectively, while the Nasdaq Composite ended down 0.49%.

Among the sector indexes, the Philadelphia Housing Sector Index and the KBW Bank Index fell over 4.5% each for the week, while the NYSE Arca Securities Broker/Dealer Index lost 2.35%. The Dow Jones Utility Average, the NYSE Arca Oil Index, the Philadelphia Oil Service Index and the S&P Retail Index declined over 1% each. On the other hand, the NYSE Arca Gold Bugs Index climbed 12.14% and the Dow Jones Transportation Average rose to 1.06%.

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Gold Stocks May Lead TSX To Fourth Straight Gain

Canadian stocks are looking for a fourth straight gain on Tuesday as traders return from a three-day weekend. Gold stocks are likely to see some strength as the precious metal surged past the key $1,000 mark.

December gold rose to $1,005.40, up $8.70 on the session. Silver jumped 40.5 cents to $16.69 and copper added 10.8 cents to $2.9745 per pound.

Barrick Gold Corp. said it agreed to sell silver production to Silver Wheaton Corp. for US$625 million.

Fairfax Financial Holdings Limited announced that it intends to offer 2.88 million subordinate voting shares at a price of US$347.00 per share, which would result in aggregate gross proceeds of US$1 billion.
 
In other commodity trading, crude oil surged $2.52 to $70.54 per barrel and natural gas climbed 11.7 cents to $2.845 per million British thermal units.

Canadian building permits dropped 11.4% in the month of July, compared to a revisited increase of 1.2% last month. Economists were looking for a drop of 0.5%.

On Friday, the S&P/TSX Composite Index gained 95.98 points or 0.88% to close at 11,017.47. The market came within a tick of its best finish since last September.

Crude oil futures are moving up $1.65 to $69.65 a barrel after receding $4.72 or 6.49% to $68.02 a barrel in the week ended September 4th. Oil declined by over $2.50-a-barrel last Monday following a weekly decline of 1.6% in the previous week. The weakness continued into Tuesday, as the commodity fell close to $1.50-a-barrel.

The steep price declines in the first two trading sessions of the week came amid a retreat in the equity markets, which reduced the appetite for risky investments and made traders migrate to safe havens. In the subsequent three sessions of the week, crude oil moved almost sideways to finish the week lower.

Oil is likely to see increased activity in anticipation of OPEC’s decision in the unfolding week. OPEC is scheduled to meet in Vienna this Wednesday and analysts widely expect the oil cartel to leave its production quota unchanged and call for member nations to strictly adhere to production quotas.

Gold futures are trading up $8.40 to $1,995.10 an ounce. In the previous week, the precious metal soared $37.90 or 3.95% to $996.70 an ounce, as speculative demand for gold picked up. Although there is inadequate fundamental support for gold at these levels, it is likely that it trades above the $1000-an-ounce mark, transitorily at least.

The dollar had a down week in the week ended September 4th, with the greenback falling 0.63% against the yen over the week to 93.01 yen. Meanwhile, the dollar edged down slightly against the euro to $1.4303.

Currently, the dollar is trading at 92.24 yen and is valued at $1.4481 versus the euro. According to Commerzbank, the forex market will mostly track the equity markets this week, given the paucity of market moving economic reports. The firm estimates that the EUR-USD will trade in the $1.40-$1.45 range.

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Asian Markets End Higher On Gold Prices, M&A News

The Asian markets ended sharply higher on Tuesday following surge in M&A activity and increasing confidence that the global economy is moving towards recovery. Higher commodity prices, including gold prices around $1000 an ounce, also lifted market sentiment.

In Japan, the benchmark Nikkei 225 Index ended at 10,393, representing a gain of 72.29 points, or 0.70%, while the broader Topix index of all first section stocks gained 1.80 points, or 0.19%, to 946.40

In the economic news, the Ministry of Finance revealed that current account surplus narrowed in July from the previous year, mainly due to a fall in the income surplus and the widening of the services deficit. The report noted that the current account surplus dropped 19.4% year-on-year to 1.26 trillion yen from 1.57 trillion yen in the previous year. The surplus was also lower than 1.45 trillion yen surplus estimated by economists, although it increased from June's surplus of 1.15 trillion yen.

Positive comments from the incumbent government and speculation that companies' earnings might rise lifted market sentiment. However, the strengthening of the local currency against the US dollar limited the gains.

Real estate stocks advanced on increasing optimism about recovery and higher demand. Mitsubishi Estate gained 2.17%, Sumitomo Realty and Development added 0.56%, Mitsui Fudosan advanced 0.84% and Tokyu Land Corp. rose 1.12%.
 
Japan Tobacco, the third largest maker of cigarettes in the world, gained 3.44% after Goldman Sachs revised the rating for the stock from"neutral" to "buy", citing that the stock price is cheaper.

Automakers ended weaker following the strengthening of the local currency. Honda Motor edged down 0.17%, Toyota Motor slipped 0.26%, Isuzu Motors lost 1.40%, Mitsubishi Motor declined 0.61% and Nissan Motor shed 0.32%.

Banking stocks ended in negative territory. Mitsubishi UFJ Financial declined 2.16%, Sumitomo Mitsui Financial fell 2.11%, Resona Holdings edged down 0.40% and Mizuho Financial slumped 2.86%.

In Australia, the benchmark S&P/ASX200 Index gained 1.56% or 69.40 points to close at 4,524, while the All-Ordinaries Index ended at 4,528, representing a gain of 66.70 points, or 1.50%.

On the economic front, a report released by the National Australia Bank revealed that Business confidence in the country rose to its highest level in almost six years, driven by better business conditions including improved trading and profitability. The report noted that the index measuring business confidence rose eight points to 18 in August, the highest reading since October 2003. The index continued to remain well above long-term average levels.

Metals and mining related stocks ended higher following higher commodity prices. BHP Billiton gained 2.18%, Fortescue Metals rose 3.18%, Gindalbie Metals surged up 4.17%, Mincor Resources advanced 4.27%, Oz Minerals advanced 1.44% and Rio Tinto increased 2.21%.

Gold stocks ended in positive territory following rise in price of bullion in the international market. Lihir Gold rose 3.00%, Newcrest Mining gained 3.65% and Sino Gold Mining added 0.43%..

Among oil stocks, Woodside Petroleum rose 2.09%, Oil Search added 1.12% and Origin Energy edged up 034%. However, Santos bucked the trend and ended in negative territory with a loss of 0.26%

Mixed trading was witnessed among the bank stocks. ANZ Bank gained 2.81%, Commonwealth Bank of Australia rose 2.05% and National Australia Bank surged up 3.37%, and Westpac Banking advanced 1.70%.
 
In Hong Kong, the Hang Seng Index continued its northward momentum and ended in positive territory with a gain of 440.50 points, or 2.14% to close at 21,070. Higher commodity prices including gold, surge in M& A activity and increasing confidence about global recovery lifted the stocks higher for the second successive day. Of the 42 components in the index, as many as 38 stocks ended in the positive territory. Property stocks and banks led the gains. HSBC Holdings gained 1.92%, Bank of China rose 2.20% and Bank of Communications advanced 3.33%.

In South Korea, the benchmark KOSPI Index ended in the positive territory with a gain of 0.69% or 11.22 points, at 1,620, led by technology stocks on increasing optimism about global recovery and higher earnings forecast. Positive closing among other markets in the region amid higher commodity prices and rise in M&A activity also lifted markets sentiment.

The Indian market ended in the positive territory, but well off the highs as profit taking at higher levels limited the gains. The BSE Sensex pared most of its early gains and finished at 16,124, up 107 points or 0.67% from its previous close, and the S&P CNX Nifty ended higher by 22 points or 0.47% at 4,805.

Among the other major markets in the region, China's Shanghai Composite Index advanced 1.71% or 49.36 points, to 2,930, Indonesia's Jakarta Composite Index added 30.91 points, or 1.32% to close at 2,371, Singapore's Strait Times Index gained 16.96 points, or 0.64% to close at 2,661, and Taiwan's Weighted Index rose 1.24% or 89.40 points to close at 7,314.

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The major European markets are trading higher, adding to gains posted in the previous two sessions. While the French CAC 40 Index and the German DAX Index are moving up 0.31% and 0.54%, respectively, the U.K.’s FTSE 100 Index is gaining 0.55%.

In corporate news, France Telecom said its subsidiary Orange Telecom is merging with T-Mobile’s U.K. operation in a 50:50 joint venture. U.K. retailer Kingfisher said it expects an underlying pre-tax profit of 285 million pounds to 290 million pounds for the first-half. The company was forced to release its results earlier than planned due to an administrative error.

On the economic front, the German Federal Statistical Office reported that Germany’s trade surplus was 13.9 billion euros in July compared to a surplus of 14 billion euros in July of last year. On a calendar and seasonally adjusted basis, the surplus was 12.4 billion euros. Exports fell 8.7% year-over-year compared to a steeper 22.3% drop in imports. The nation’s current account showed a surplus of 11 billion euros, almost flat with the year-ago surplus of 11.3 billion euros.

German industrial output dropped 0.9% month-on-month in July, a report released by the Federal Ministry of Economics and Technology said. The decline was the first drop in three months. Economists had forecast a 1.6% increase in output. On an annual basis, industrial production fell 17%, worse than the 15.8% decline economists had expected. It follows a drop of 17.6% in June, which was revised from a decline of 18.1%.

Meanwhile, the U.K. Office of National Statistics said manufacturing output rose by 0.9% month-over-month in July. The increase was better than the 0.3% increase expected by economists. Industrial production as a whole rose by 0.5%. On a year-over-year basis, manufacturing and industrial production fell by 10.1% and 9.3%, respectively.

U.S. Economic Reports

The unfolding holiday-shortened week has a light economic calendar, with only the Reuters/University of Michigan's preliminary consumer sentiment report for September, the Beige Book and the weekly jobless claims reports likely to have any meaningful impact on the markets.

Apart from these reports, traders may also watch the Commerce Department's trade balance report for July, the Labor Department's import and export prices report for August, the Federal Reserve's consumer credit report for July, the Commerce Department's wholesale inventories report for July and the weekly oil inventory report. Announcements concerning the results of the Treasury's auction of 3-year notes, 10-year notes and 30-year bonds, scheduled to be made public on Tuesday, Wednesday and Thursday, respectively, may also draw the attention of traders.

The Reuters/University of Michigan consumer sentiment index will most likely stay in its recent range of 65 to 71, which is synonymous with weak spending. Sentiment is expected to improve notably only when the job market conditions turnaround.

The weekly jobless claims are likely to see a decline, in line with the recent declining trend. That said, the rate of decline is turning out to be too slow for one's liking. Meanwhile, the Fed's Beige Book is likely to offer an upbeat assessment of the economy, with the report likely to show that auto sales, manufacturing and residential construction improved. However, the report is likely to acknowledge the weakness in the commercial real estate market.

The trade deficit is expected to widen in July, as export growth is likely to be restrained by a decline in aircraft orders. However, import volumes should see strength, as auto parts imports surged to keep pace with the ramp up in domestic vehicle production.

The U.S. Federal Reserve is expected to release its monthly consumer credit report at 3 PM ET on Tuesday. Consumer credit for July is likely to show a decline of $4 billion.

In June, consumer credit declined at an annual rate of 5% to $2.50 trillion. Among the components, revolving credit, which is tied to credit card loans, fell to $917 billion from May's $922.3 billion, while the non-revolving credit tied to auto loans fell to $1.586 trillion from $1.59 trillion.

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Smithfield Foods could move in reaction to its results for the first quarter, which revealed a loss from continuing operations of 75 cents per share compared to 22 cents per share in the year-ago period. On an adjusted basis, the company reported loss from continuing operations of 56 cents per share, while sales fell to $2.72 billion from the year-ago’s $3.14 billion. Analysts estimated a loss of 55 cents per share on revenues of $2.82 billion.

Chartered Semiconductor is likely to be in focus after it said it has agreed to be acquired by Advanced Technology Investment Company. The company noted that the equity value of the deal is $2.5 billion and the total value if $5.6 billion, including debt and convertible redeemable preference shares. Separately, the company said it is upwardly revising its revenue guidance for its third quarter due to incremental improvement in its business, mainly from its mature technologies. The company expects wafer shipments to show a 24% sequential improvement, while it also said it now expects a loss of $18 million for the quarter.

AIG is likely to react to its announcement that it has agreed to sell a portion of its investment advisory and asset management business to Bridge Partners L.P., a company owned by Hong-Kong based private investment firm Pacific Century Group. The deal value if $500 million, consisting of a cash payment of $300 million at closing, plus additional future consideration. Additionally, reports suggested that Chinatrust Financial is considering a $2.4 billion bid for AIG’s Taiwan Nan Shan Life unit.

MB Financial could see some activity after it announced that its subsidiary MB Financial Bank has acquired the deposits and loans of Oak Forest-based InBank in a transaction that was facilitated by the FDIC. Meanwhile, Great Southern Bank, a subsidiary of Great Southern Bancorp. (GSBC), entered into an agreement to assume all of the deposits and certain assets of Vantus Bank.

Headwaters may gain some ground after it announced that it has obtained an extension of the termination date for its senior secured revolving credit facility to September 30, 2009. The company said it paid an extension fee of $50,000 to the revolver lenders.

Ensco may see weakness after it lowered its earnings per share guidance for the third quarter by 14-18 cents per share due to unexpected downtime and repairs on two drilling rigs. The company also said its earlier revenues and drilling expense outlook issued on July 23rd should be disregarded. However, the company maintains its 2010 deepwater segment revenue guidance for 2010 unchanged at $600 million.

McClatchy (MNI) is likely to move to the upside after it announced that it has regained compliance with the NYSE’s continued listing standards for share price. Ericsson could see some buying interest after it announced that it has been selected as one of the two suppliers for AT&T’s Wireline Access products and services.

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