US & World Daily Markets Financial Briefing 12-05-2009

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Stocks May Fight Back as Traders Still Cling to Recovery Hopes

The major averages have moved off their lows for the session in recent trading, but they currently remain below the unchanged line. The Dow is currently down 7.56 at 8,411.21, the Nasdaq is down 17.40 at 1,713.84 and the S&P 500 is down 4.70 at 904.54.

The major U.S. index futures are pointing to a modestly higher opening on Tuesday. Federal Reserve Chairman Ben Bernanke’s comments that the stress test results should be encouraging for the banks may bring traders flocking back into financial stocks following a pause yesterday. That said, steady news flow of common stock offerings by some of the banks, as they scramble to pay back government loans in a bid to escape more restrictive regulations, should lead to some selling.

Commodity prices have resumed the rally, even as there are conflicting views about the economic recovery. While some look forward to a double-dip recession, others preclude the possibility of ‘V’ shaped quick recovery. Whatever be the case, the pain is going to persist at least until next year, when a sustainable recovery could begin to take shape. The trade balance report released earlier in the day was less comforting, as it showed a slip back in exports after they rebounded last month, casting doubts on predictions of a global economic recovery anytime soon.

U.S. stocks got off to a weak start on Monday, as traders scrambled to take profits on their recent gains. Banking stocks faced much of the bear onslaught following announcements of stock and debt offerings by several banks. The Dow Industrials and the S&P 500 Index remained entrenched in negative territory throughout the session amid some volatility before closing with sharp losses.

Meanwhile, the Nasdaq Composite shrugged off a very weak opening and clawed its way back to the positive zone in an hour of trading only to show back and forth movement across the unchanged line in a narrow range before closing modestly lower. The technology-weighted index ended down 7.76 points or 0.45% at 1,731, while the Dow shed 155.88 points or 1.82% to end the session at 8.419 and the S&P 500 Index lost 19.99 points or 2.15% to close at 909.

Twenty-five of the thirty Dow components ended the session lower, with American Express (AXP) (down 8.68%), Bank of America (BAC) (down 8.68%), JP Morgan (JPM) (down 7.99%) and General Motors (GM) (down 10.56%) leading the slide. Alcoa (AA), Citigroup (C), Caterpillar (CAT), Chevron (CVX) and Disney (DIS) were among the notable decliners. On the other hand, IBM (IBM), Hewlett-Packard (HPQ) and Wal-Mart Stores (WMT) showed some strength.

Among the sectors, the KBW Bank Index fell 7.09% and the Amex Securities Broker/Dealer Index declined 4.69%. The Dow Jones Transportation Average lost 3.86% compared to a 3.53% decline by the Philadelphia Housing Sector Index. In the resource space, the Amex Oil Index and the Philadelphia Oil Service Index moved down 3.17% and 4.06%, respectively.

Among the technology indexes, the Philadelphia Semiconductor Index surrendered all of its early gains and ended down modestly, while the Amex Disk Drive Index declined 3.01%. However, the Amex Software Index rose 1.06%.

The CBOE Volatility Index has declined significantly from its high above 80 in late October and is now trading around the 30 and 32 area after breaking below a medium term resistance around 33. If market sentiment continues to improve and volatility subsides, the index could move down to its next support level around $25.

Even as traders nurture hopes of a turnaround, some are bracing for a double-dip recession, which would mean the economy recovering and then again dipping into recession territory in the near term. When all is said and done, labor market conditions will have a key role to play in the current recovery. There is still a lot of cash sitting on the sidelines, as traders have been apprehensive of the veracity of the claims that the economy has embarked on a path towards recovery. Therefore, the markets could hold up even in the face of the continuing uncertainty.

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Resource Stocks Could Lead Rebound For TSX

Toronto stocks will look to rebound in early trading Tuesday after falling off a multi-month high in the previous session. Higher commodity prices could provide a boost to resource stocks.

Energy stocks could see strength as crude oil touched above $60 per barrel in overnight trading for the first time in 2009. Meanwhile, copper prices have surged almost 4% to challenge $4.50 per pound. Gold is up nearly 1%.

In corporate news, Nortel Networks reported a net loss of US$507 million or US$1.02 per share for the first quarter, wider than US$138 million or US$0.28 per share in the prior-year quarter.

Canadian Pacific Railway Limited announced that its wholly-owned subsidiary, Canadian Pacific Railway Company, is commencing an offer to purchase for cash up to US$450 million aggregate principal amount of its outstanding notes including CP's 6.25% Notes due 2011, 5.75% Notes due 2013 and 6.50% Notes due 2018.

McCoy Corp. reported first-quarter net earnings of C$0.33 million, down 82% from C$1.80 million in the 2008 first quarter. Earnings per share dropped 83% to C$0.01 from year-ago C$0.06.
 
European Goldfields Ltd reported first quarter net loss of US$3.26 million or US$0.02 per share, compared to a profit of US$3.41 million or US$0.02 per share in the same quarter of last year.

Petrobank Energy and Resources posted loss for the first-quarter of C$1.5 billion, compared to profit of C$35.5 billion in the year-ago period. On per share basis, loss was C$0.02, versus last year's profit of C$0.40 per share.

On the economic front, data released by Statistics Canada showed imports decreased more than twice as fast as exports, leading to the widening of Canada's trade surplus with the world from $262 million in February to $1.1 billion in March.

Imports fell 4.4% to $31.4 billion as most sectors posted decreases. Exports were down 1.8% to $32.5 billion, largely reflecting a decline in exports to the United States.

The S&P/Composite Index fell 143.85 points to 10,094.14 as traders cashed on last week's rally to a seven-month high. The index had posted its highest close since October 3 on Friday.

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The major European markets are trading on a mixed note. While the French CAC 40 Index is rising 0.29%, the German DAX Index is gaining 0.82%. The U.K.’s FTSE 100 Index is moving down 0.04%.

In corporate news, Enterprise Inns reported a decline in adjusted profit to 15 pence per share from 19.2 pence per share last year. Revenues also declined. Meanwhile, InterContinental Hotels Group Plc. (IHG) reported a lower first-quarter profit, hurt by a decline in its revenues, reflecting the impact of lower occupancy and rate across regions. The company also said that its outlook remains tough. Tullow Oil said its overall performance for the period January to May 12th is in line with expectations.

On the economic front, the U.K. Statistical Office reported that the U.K.’s trade deficit narrowed to 2.5 billion pounds in March compared to a deficit of 2.8 billion euros in February. Economists estimated a deficit of 3 billion pounds. On a monthly basis, exports and imports were down 0.8% and 1.4%, respectively.

A separate report released by the statistical agency showed that U.K'.s industrial production dropped 0.6% month-over-month in March. Economists were looking for a monthly 0.9% drop. Annually, production fell 12.4% in March, smaller than the 12.8% decline expected by economists.

Meanwhile, the Royal Institution of Chartered Surveyors or RICS released the results of its house price survey, which showed that the net balance of surveyors reporting house price falls eased further. Around 59.9% more surveyors reported a fall than a rise in house prices in April from a revised reading of 72.1% in March. The April level was the strongest since January 2008 and the balance was better than the expected minus 70%.

The German Federal Statistical Office said wholesale prices fell 8.1% year-over-year in April following an 8% drop in March. Economists had estimated an 8.2% decline for the month. The index was up 0.1% compared to the previous month, reversing some of the 0.9% decline in the previous month.

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Asian markets recovered partially and closed mixed on Tuesday amid continued profit taking following a strong rally last week. While worse-than-expected Chinese trade data for April weighed on investor sentiment, markets in China and Hong Kong advanced on stronger-than-expected investment data.

The Japanese market closed sharply lower, dragged down by financials, auto and other notable stocks, which had advanced sharply over the past few sessions. The strengthening of the Japanese yen against the U.S. dollar also weighed on exporters. However, stocks in the pulp and paper, glass and ceramics, and forestry and fishery sectors closed firm.

The benchmark Nikkei 225 index closed at 9,299, down 153 points or 1.62% and the broader Topix index of all First Section issues on the Tokyo Stock Exchange fell 15 points or 1.67% to 885.

Automakers led the declines, while banking stocks were also among the worst hit. Asahi Glass surged up 11.64% after Nomura Holdings Inc. raised its rating on the stock to "buy" from "neutral" despite posting a first-quarter loss. Advertising agency Dentsu Inc. plunged 7.49% after reporting a fourth-quarter loss of 24.6 billion yen.

Mitsubishi Materials tumbled 5.45% after its full-year net income plunged 92% to 6.11 billion yen. Sumitomo Heavy Industries plummeted 9.03% after projecting lower earnings for the current fiscal year.

On the economic front, Japan's leading index increased to 76.6 in March from 74.5 in February, a report from the Economic and Social Research Institute showed Tuesday. Economists expected the indicator to come in at 77. On the other hand, the coincident indicator declined to 84.9 in March from 85.2 in the preceding month. Economists were expecting the reading to be 85.8.

After trading in a narrow range all through the day, the Australian market ended sharply lower, led by losses by banks and big miners. The benchmark S&P/ASX200 closed at 3,877, down 49 points or 1.24% and the broader All Ordinaries index fell 47 points or 1.2% to 3,864.

Big miner BHP Billiton fell 2.75% and its rival Rio Tinto moved down 1.15%, but Iluka Resources rose 0.90%. Likewise, gold miner Newcrest Mining rose 0.68% and Lihir Gold added 1.32%, but Newmont Mining closed down 0.4%.

Banking stocks closed lower across the board, while energy stocks closed mixed. Woodside Petroleum fell 1.97% and Oil Search rose 0.38%. Santos was in a trading halt, as it plans to raise up to $3 billion from an equity offering.

The South Korean market snapped a three-day winning streak on profit taking. The benchmark KOSPI closed at 1,404, down 12 points or 0.8%. Volume was significant at 754.8 million shares worth 6.54 trillion won (US$5.26 billion) and decliners outnumbered advancers by 503 to 309.

Banking stocks closed weaker amid renewed concerns about U.S. banks. Woori Finance fell 4.74%, Korea Exchange Bank tumbled 5.56% and KB Financial, the holding firm of Kookmin Bank closed down 4.68%. Construction stocks such as Hyundai Engineering & Construction and GS Engineering also ended sharply lower. Shipbuilding, airline and telecom stocks also came under selling pressure. On the other hand, automakers and technology stocks gained ground.

In economic news, Bank of Korea Governor Lee Seong-tae and his board voted on Tuesday to keep interest rates on hold, maintaining the record low of 2.0 percent, in line with expectations. "The pace of the domestic economic slowdown has moderated thanks to the narrowing scale of the decline in exports and proactive fiscal and monetary policy strives although domestic demand remains sluggish," the minutes said.

The Chinese market closed higher, led by property, coal and steel shares. The benchmark Shanghai Composite index closed at 2,618, up 38 points or 1.49% after investment figures released by the government raised expectations that the economy will turn around. China's investments in factories, property and other fixed assets jumped 30.5 percent in January-April from a year earlier, the government reported.

The Hong Kong market also fared well, helped by a late recovery. The benchmark Hang Seng index rose 66 points or 0.38% to 17,154. Hong Kong & China Gas closed up 3.79% and Hutchison surged up 4.37%. On the other hand, New World Development, Bank of East Asia, Sino Land, Hang Lung Property, Hong Kong Exchange, China Shenhua and Bank of China Hong Kong showed weakness.

Meanwhile, the Indian market ignored lower-than-expected IIP data and bounced back sharply amid intense buying in index heavy weights. The benchmark Sensex was last trading at the day's high of 12,158, up 475.04 points or 4.07% from the previous close. Among the other markets in the region, Singapore's STI Straits Times index closed up 0.56%, while Taiwan's TWII Weighed index fell 3.23%.

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Dollar Under Pressure Versus Other Majors Tuesday Morning

The dollar remained under heavy pressure versus other major currencies Tuesday morning in New York as traders continued to flee from the safehaven of the world's reserve currency in favor of its higher-yielding counterparts.

While the economic calendar remains relatively light on Tuesday, trading could be impacted by the release of the Commerce Department's report on the U.S. trade deficit in the month of March. The deficit is expected to widen to $29.0 billion from $26.0 billion in February.

The Federal Reserve is encouraged by early signs of the ability of major banks to raise new capital in the aftermath of recently performed stress tests, Federal Reserve Chairman Ben Bernanke said Monday evening.

The dollar dropped to a new 7-week low of 1.3695 versus the euro Tuesday morning, extending a 2-week downtrend coincidence with a rally in equities.
 
Its been a brutal stretch of late for the dollar against the sterling, as fears about the collapse of the UK banking system have waned and oil prices have risen. The dollar dropped to a new 4-month low of 1.5325 Tuesday morning. A move to 1.5376 would bring the dollar to its lowest since last December.

The tentative signs of a pick-up in the UK housing activity became more broadly based over the last month, a survey from the Royal Institution of Chartered Surveyors or RICS showed Tuesday. The dollar fell to a 2-week low of 97 versus yen, having failed to crack the century mark last week.

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Ford (F) is likely to be in focus after it said it has launched a public offering of 300 million shares of common stock. The company intends to use the proceeds to fund its retiree health care trust and for general corporate expense.

Bank of New York Mellon (BK) may also be in focus after it announced a proposed offering of $1 billion of its common stock to the public. The bank intends to use some of the proceeds to repurchase its preferred stock and the warrant for its common stock held by the Treasury under its Capital Purchase Program.

Anadarko Petroleum (APC) and Xerox (XRX) are also likely to react to their common stock offering. Anadarko said it would offer 30 million new shares to raise money for general corporate purposes. Meanwhile, Xerox (XRX) said it closed a $750 million offering of senior unsecured notes due in 2014. The issue proceeds are used to repay a portion of the company’s borrowings under its 2007 credit facility and for general corporate purpose.

Fluor (FLR) is likely to react to its announcement that its first quarter earnings rose to $1.12 per share from 74 cents per share in the year-ago period, as revenues climbed 21% to $5.8 billion. The consensus estimates had called for earnings of 93 cents per share on revenues of $5.76 billion. The company lowered its 2009 earnings per share guidance to $3.80-$4.10 per share from its earlier estimate of $3.90-$4.20 per share, while analysts estimate earnings of $3.76 per share.

U.S. Economic Reports

Atlanta Federal Reserve Bank President Dennis Lockhart is due to deliver opening remarks at the Atlanta Fed's Financial Markets Conference in Jekyll Island, Georgia on Tuesday and closing remarks at noon on May 13. Boston Fed President Eric Rosengren and Atlanta Fed Governor Elizabeth Duke will each moderate panel discussions on Tuesday and Wednesday, respectively at 8:20 AM ET.

The Commerce Department noted that the U.S. trade deficit narrowed to $27.6 billion from a revised deficit of $26.1 billion in February. Economists had estimated a widening in the deficit to $29 billion in the month from the originally reported deficit of $26.1 billion for February.

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