US & World Daily Markets Financial Briefing 12-10-2009

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Optimistic Earnings Expectations to Keep Mood Upbeat

The major index futures are pointing to a higher opening on Monday, with sentiment improving after earnings optimism catalyzed a strong upward move in the European markets. In reaction to the optimism generated by earnings, commodity prices are moving higher, sending commodity-related stocks higher. The dollar, a risk haven, is losing its appeal and is moving to the downside. Given the fact that there isn’t any major economic report and earnings to digest in today’s session, it is likely that the markets attempt to hold on to their gains, although meaningful upside is unlikely due to the oversold levels of the markets.

U.S. stocks rebounded from two straight weeks of declines in the week ended October 9th, as earnings optimism and a few positive economic data points led to an increase in the risk appetite of traders, sending stocks higher throughout the markets.

Last Monday, a favorable service sector reading led to a sharp rally on Wall Street, helping the major averages to end with gains of 1% each. The buying momentum continued into Tuesday, as the Australian central bank’s decision to raise interest rates, the first among the developed nations to do so since the eruption of the recent crisis, lent hopes that a turnaround in global economic conditions may be around the corner.

A consolidation move was witnessed on Wednesday, as apprehensions about earnings led to some indecision. The major averages ended on a mixed note, with the Dow declining, while the Nasdaq Composite and S&P 500 Index closed higher. Stocks resumed the upward move and closed higher on Thursday, with Alcoa’s (AA) earnings and a positive weekly jobless claims report serving as positive catalysts. Although the major averages showed some indecision in early trading, they advanced over the course of Friday’s session to close higher.

During the week ended October 9th, the Dow Industrials rose 3.98%, advancing to its best level since October 6th, 2008, while the S&P 500 Index and the Nasdaq Composite Index gained 4.51% and 4.45%, respectively.

Among the sector indexes, the NYSE Arca Gold Bugs Index jumped 12.99%, the Philadelphia Oil Service Index climbed 9.14%, the Philadelphia Semiconductor Index gained 6.47% and the NYSE Arca Oil Index advanced 6.51%. The KBW Bank Index and the NYSE Arca Securities Broker Dealer Index rose 5.82% and 6.58%, respectively, while the Philadelphia Housing Sector Index moved up 5.46% and the S&P Retail Index ended up 5.90%. The Dow Jones Transportation Average gained close to a percentage point.

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Gold Stocks Drag TSX Modestly Lower

Gold stocks dragged Toronto's main index lower on Friday as the precious metal backed off of record highs. The drop was the first in five sessions for the market.

The S&P/TSX Composite Index declined 47.59 points or 0.41% to move at 11,436.92.

Gold stocks lost 1.6% as the precious metal dropped $7.60 on the Comex. New Gold dropped 4.1%, Seagold fell 2.75% and Royal Gold slipped 2.4%.

Paramount Gold and Silver Corp. fell 5.6% after the company announced the pricing of its previously announced public offering of 16 million shares of its common stock at US$1.25 apiece.

Materials slipped 1%. Potash dropped 3.6% after the stock was initiated at Sell by Dahlman Rose.

In corporate news, DragonWave soared more than 20% after the company reported second quarter net income of C$6.3 million or C$0.21 per share, compared to a loss of C$1.7 million or C$0.06 per share in the year-ago quarter.
 
MDS said it agreed to sell its Central Labs operation to Czura Thornton for around $8 million. The stock slipped 0.7%.

Newalta added 2.15%. The company announced that it has amended the terms of the credit facility by extending the maturity to October 12, 2011, and the principal amount has been reduced from $375 million to $350 million.

Dollarama  jumped 5.6% on its first day of trading following its initial public offering of common stock. The company announced that it will offer 17.14 million common shares at C$17.50 per share.

On the economic front, Statistics Canada said employment was up 31,000 last month, driven by large full-time gains. The unemployment rate fell by 0.3 percentage points to 8.4%, the first monthly decline since the beginning of the labor market downturn in the fall of 2008.

There is no major economic news on Monday's calendar. On Tuesday, traders will watch for the release of Canada's new home price index at 8:30 a.m. ET.

Currency, Commodity Futures

Crude oil futures are rising $1.37 to $73.12 a barrel after the commodity rose for the second straight week in the week ended October 9th. Oil rose $1.82 or 2.6% to $71.77 a barrel in the previous week, as the equity market rally and the weakness of the dollar supported the commodity.

Crude oil futures for November delivery rose moderately last Monday and continued to rise modestly on Tuesday. However, the commodity fell sharply by over $1.30-a-barrel on Wednesday despite a bullish oil inventory report from the EIA, which showed a draw down in crude oil stockpiles.

Oil rebounded on Thursday, rising more than $2-a-barrel in the session and advanced further, albeit modestly on Friday to close the week higher.

Gold futures, which rose $44.30 or 4.4% to $1,048.60 an ounce in the previous week, are currently gaining $7.20 to $1,055.80 an ounce.

On the currency front, the U.S. dollar weakened against the euro in the week ended October 9th, dropping 0.9% against the euro to settle the week at $1.4712. Although the dollar received a pounding earlier in the week after a report suggested that OPEC nations are evaluating the use of a basket of currencies for oil trading, it strengthened in late week trading after Federal Reserve Chairman Ben Bernanke signaled that the central bank is contemplating an interest rate hike as soon as the economy shows improvement.

However, the dollar advanced slightly against the yen, as traders began reconciling themselves to the idea that the Bank of Japan may not raise interest rates any time soon. The greenback rose slightly against the yen to 89.82 yen from 89.73 yen in the previous week.

Currently, the U.S. dollar is trading at 90.06 yen and is valued at $1.4765 versus the euro.

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Asian Markets End Mixed Ahead Of US Earnings

Mixed trading was witnessed among the major markets open for trading in Asia on Monday as traders preferred to adopt a wait-and-watch approach and moved to the sidelines ahead of US earnings. The market in Japan was closed for a public holiday. While the markets in Australia, China, Hong Kong, Indonesia and South Korea ended in negative territory, the markets in India, Singapore and Taiwan ended in positive territory.

In Australia, the benchmark S&P/ASX200 Index declined 13.10 points, or 0.28% to close at 4,740, while the All-Ordinaries Index ended at 4,745, representing a loss of 9.00 points, or 0.19%.

On the economic front, a report released by the Australian Bureau of Statistics revealed that housing finance for owner occupation, which excludes alterations and additions, dropped a seasonally adjusted 1.7% month-on-month in August. Owner occupied housing commitments decreased to A$16.54 billion from A$16.83 billion in the preceding month.

Australian Treasurer, Wayne Swan, in a function organized by the Australian Business Economists, said that the economy is expected to operate below capacity for a while yet and for the unemployment rate to continue to rise. He added that the Australian economy proved its resilience in the face of massive, synchronized recessions in almost all of major economies and performed better than expected at the time of the Budget in May. He further noted that the global economy and global financial markets remain in a more fragile state than they were prior to this crisis and opined that a sustained global recovery is no sure thing
 
Light sweet crude oil futures for November delivery ended at $72.54 a barrel in electronic trading, up $0.77 per barrel from previous close at $71.77 a barrel in New York on Friday.

Banking stocks led the decline after Merrill Lynch downgraded the stock of National Australia Bank to "under perform" on concerns about its valuation and risks associated with its retail banking strategy. The stock lost 1.87%. Among others, ANZ Bank fell 1.67%, Commonwealth Bank slipped 0.98% and Westpac Banking shed 1.28%. Investment bank Macquarie Group was the major loser, having declined 2.47%.

Mixed trading was witnessed among the mining and metal stocks. BHP Billiton edged up 0.11%; Fortescue Metals climbed 3.45% after reporting better-than-expected ore shipments for the three months ended September, Minara Resources rose 2.00% and Oz Minerals gained 1.57%. However, Rio Tinto slipped 0.33%, Gindalbie Metals shed 1.12% and Murchison Metals fell 0.65%.

Among oil and energy stocks, Woodside Petroleum gained 1.44%. However, Santos edged down 0.13%, Oil Search fell 1.03% and Origin Energy slipped 0.31%.

Gold stocks also witnessed mixed trading. While Lihir Gold managed to end in positive territory with a gain of 0.32%, Newcrest Mining declined 1.06% and Sino Gold Mining declined 1.80%.

Property stocks ended in negative territory. Mirvac Group slumped 3.92% after the company offered to buy one of its associated companies, Mirvac Real Estate Investment Trust for a consideration of A$338.73 million. Among other property stocks, GPT Group slipped 0.79%, Stockland declined 1.74% and Westfield Group fell 1.28%.

In Hong Kong, the Hang Seng Index ended in negative territory with a loss of 200.09 points, or 0.93% at 21,299, as traders preferred to lock-in gains following recent rally and move to the sidelines amid cautious optimism about the strength of corporate earnings in the U.S. All the 42 components of the index, except one, ended in negative territory.
 
In South Korea, the KOSPI Index slipped into negative territory with a minor loss of 6.98 points, or 0.42% and closed at 1,640, as traders preferred to lock in gains following recent gains. Foreign institutional investors were the major sellers in the market following the gains in the past two trading sessions. Caution ahead of earnings in the U.S and modest volume also impacted market sentiment.

In India, double-digit growth in industrial output for August, the strong response to Indiabulls IPO and firm overseas cues helped the market end sharply higher near the day's high. Higher European markets on the back of a surprise profit from Dutch conglomerate Philips Electronics and a rise in the U.S. stock futures on optimism about earnings, also helped improve sentiment. The BSE Sensex finished at 17,027, up 384 points or 2.31%, while the S&P CNX Nifty rose 109 points or 2.21% to 5,054.

Among the other major markets in the region, China's Shanghai Composite Index lost 17.23 points, or 0.59% to 2,894, and Indonesia's Jakarta Composite Index fell 17.71 points, or 0.72%, to close at 2,457. However, Singapore's Strait Times Index advanced 27.96 points, or 1.05% to close at 2,680 and Taiwan's Weighted Inded gained 27.92 points, or 0.37% to 7,600.

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The major European markets are advancing, encouraged by the upside in commodity prices and positive earnings from consumer electronics giant Royal Philips Electronics. The French CAC 40 Index and the German DAX Index is rising 1.55% and 1.76%, respectively, while the U.K.’s FTSE 100 Index is moving 1.30%.

In corporate news, Royal Philip Electronics reported a profit of 174 million euros for its third quarter compared to a profit of 57 million euros in the year-ago period. Sales fell 11%, smaller than the 15% sales decline expected by some analysts.

On the economic front, the German Federal Statistical Office reported that its wholesale price index decreased 8.1% year-over-year in September, compared to the 8.3% drop in the previous month. A year ago, wholesale prices were up 5.1%. On a monthly basis, wholesale prices edged down 0.2%, smaller than the 0.7% decline in the previous month.

U.S. Economic News

The unfolding week's economic calendar has its fair share of market moving first-tier economic reports, with the Commerce Department's retail sales report for September, the Federal Reserve's industrial production report for September, the Reuters/University of Michigan's preliminary consumer sentiment index for October and the results of the Philadelphia Fed's and the New York Fed's manufacturing surveys for October among the most import ones.

Traders may also keep an eye on the minutes of the September FOMC meeting, as they attempt to glean clues on the Fed's interest rate and economic outlook, given the fact that the Fed Chair has recently commented on the possibility of an upward adjustment to interest rates. Other reports that are scheduled to be released during the week include the Labor Department's report on import and export prices for September, the consumer price inflation report for September, the regularly scheduled weekly jobless claims and oil inventory reports, the Treasury Budget for September and the Commerce Department's business inventories report for August.

As consumers were weaned off the cash for clunkers program, they may have remained reluctant to spend. Therefore, retail sales for September may have seen a decline. However, benefiting from an extended back-to-school shopping season and strength among stray retail categories such as drug stores, warehouse clubs and department stores, retail sales, excluding autos, should show strength. That said, sustainable strength may still prove elusive for consumer spending, as the employment market is teetering.

Industrial production is likely to have increased again in September notwithstanding the reduction in auto sales due to the pay back phenomena brought about by the cash for clunkers program-induced sales. Production is likely to be hurt to a lesser extent than sales, as automakers rebuild their anemic inventory levels. That said, caution is likely to limit the gain in production.

The consumer sentiment index of Reuters/University of Michigan is most likely to remain flat or see downside, as weak job market conditions and a falling U.S. dollar dampen some of the recent enthusiasm generated by positive economic data.

Both consumer prices and core consumer prices are expected to see small upticks. However, the October manufacturing surveys are likely to show that both the Empire state manufacturing index as well as the Philadelphia Fed's manufacturing index retreated slightly following sharp advances in the previous month.

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National Semiconductor may react to its announcement that its CEO Brian Halla will retire, effective November 30th. The company also announced the appointment of COO Donald Macleod as its President and CEO.

Pfizer may see some weakness after reports said the company has stopped enrolling patients for the Phase III trials of its cancer drug candidate figitumumab. The halting was done based on recommendations by independent safety monitors, who found that the drug produced serious adverse events.

Perot Systems is also likely to be in focus after it said it would acquire BearingPoint Management Consulting Ltd. Earlier in late September, Perot Systems revealed an agreement to be acquired by Dell.

Lazard may see some activity after it announced that its Chairman and CEO Bruce Wasserstein has been hospitalized with an irregular heartbeat. The company stated that Wasserstein’s condition is serious, but he is stable and recovering.

General Dynamics may see some strength after it said the U.S. Army TACOM Lifecycle Management Command has awarded the company a $647 million contract to supply 352 Stryker vehicles. The contract is an extension of one that was initially awarded to the company in 2000.

Arcelor Mittal is likely to react to its announcement that it has signed an agreement to divest its 28.6% minority interest in Wabush Mines, Canada in favor of Consolidated Thompson Iron Mines Ltd. Arcelor Mittal received a consideration of $34.28 million. At the same time, U.S. Steel (X) also announced that its subsidiary U.S. Steel Canada has agreed to sell its 44.6% stake in Wabush Mines to Consolidated Thompson.

Sun Bancorp. could be in focus after it said it expects to record a provision for loan losses of $16.2 million, increasing its allowance for loan losses to about 1.7% of its outstanding loans as of September 30th, 2009 from 1.62% at the end of June. The company expects to record net charge offs of $14.5 million and non-performing assets of $94 million. Additionally, the company also said it would record write downs of $800,000 towards a real estate property and an impairment charge of $1.9 million.

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