US & World Daily Markets Financial Briefing 15-06-2009

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Hazy Economic Outlook May Hinder a Comeback

The major U.S. index futures are pointing to a lower opening on Monday. Global cues are negative, with the Asian and the European averages succumbing to the rout in the commodity space and apprehensions over a recovery. An economic report released earlier in the day showed that conditions in the manufacturing sector continues to be lackluster, which may belie fervent hopes of a near-term revival. The dollar has strengthened in response to comments from world leaders that the dollar still remains their favorite reserve currency.

Oil and gold are moving to the downside after the dollar staged a comeback and also on profit taking following their recent run up. On the other hand, the yield on the 10-year Treasury note is edging down, extending its losses of Friday. Market direction over the course of the session may also hinge on the housing market index of the National Association of Homebuilders’, which is due to be released mid-day.

U.S. stocks romped home with moderate gains in the week ended June 12th despite turning in lackluster performances all throughout the week, thereby extending their gains for a fourth straight week. Volume was below average.

Last Monday, amid a lack of any major catalysts, the markets swayed to the economic uncertainty and ended on a mixed note, with the Dow Industrials managing a slender gain, while the Nasdaq Composite and the S&P 500 Index ended modestly lower. The major averages closed on a mixed note yet again on Tuesday, as positive guidance from chipmaker Texas Instruments (TXN) salvaged the day for the Nasdaq Composite Index, while the Dow and the S&P 500 Index ended in negative territory.

The major averages moved uniformly lower on Wednesday, albeit posting moderate losses, after a rise in bond yields and a decline in mortgage applications volume stirred anxiety among traders. On Thursday, stocks closed moderately higher after the relatively better reception accorded to the government’s 30-year bond auction and fairly positive jobs and retail sales reports.

The major averages meandered to a mixed close on Friday despite positive signals from the global economies about a recovery. After remaining below the unchanged line for the bulk of the session, the Dow and the S&P 500 Index recovered in late trading, while the Nasdaq languished below the unchanged line throughout the session.

During the week, the Dow Industrials ended up 0.42% and the S&P 500 Index moved up 0.65%, while the Nasdaq Composite gained 0.51%.

The KBW Bank Index advanced 4.18% for the week and the Dow Jones Utility Average gained 3.98%. The Philadelphia Semiconductor Index was up 1.5% for the week compared to a 2.82% advance by the Philadelphia Oil Service Index. On the other hand, the NYSE Arca Airline Index and the NYSE Arca Gold Bugs Index posted weekly losses of 3.29% and 4.94%, respectively.

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Toronto Stocks Could Be Dragged Lower By Commodities

Canadian stocks could head to the downside in early trading Monday as commodity prices are down on a stronger dollar. European stocks are in the red and U.S. futures are pointing lower.

Crude oil prices are down 62 cents to $71.42 in electronic trading, adding to a slide on Friday. Gold is down $3.90 to $936.80 an ounce, while copper has dropped 2.75 cents to $2.346 per pound.

In corporate news, EnCana Corp. said it has extended its risk management program for 2010 by establishing fixed price hedges on about 35% of the company's expected natural gas production - about 1.39 billion cubic feet per day - at an average price of US$6.21 per thousand cubic feet for the 2010 gas year, which runs from November 1, 2009 to October 31, 2010.

NuVista Energy Ltd. announced that it has agreed to acquire certain properties located in the Martin Creek area of northeast British Columbia and in northwest Alberta for about C$176 million.

Uranium One announced that it has agreed to acquire a 50% interest in the Karatau Uranium Mine in Kazakhstan from JSC Atomredmetzoloto, the Russian state-owned uranium mining company. The purchase price will be paid by way of the issuance of 117 million common shares of Uranium One and a cash payment of US$ 90 million or equivalent promissory note.
 
CAE Inc. a simulation equipment and service provider to aviation industry, said Monday that it has received a series of contracts from Lockheed Martin Corp. and an undisclosed customer to design and manufacture four C-130 simulators and several training devices for military customers for a total value that exceeds C$115 million.

Sun Life Financial agreed to buy Lincoln National's U.K. insurance business for about $359 million in cash.

In economic news, Canadian manufacturing sales fell less than expected in April, edging down 0.1% from the previous month to $41.0 billion, according to Statistics Canada. Economists were a drop of more than 1% in April.

Meanwhile, new motor vehicle sales were basically unchanged in the month.

Across the border, the New York Federal Reserve said its general business conditions index fell to a negative 9.4 in June from a negative 4.55 in May, with a negative reading indicating a deterioration in conditions. Economists had expected the index to edge down to a negative 5.10.

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The Asian markets ended weaker on Monday as commodity prices, which spearheaded the recent rally, reversed trend and declined, raising concerns about a global recovery. Valuation concerns following a sharp rally have dented the optimism as investors preferred to lock-in profits and remain on the sidelines awaiting clear signals on the economic front.

Japan’s Nikkei 225 Average opened slightly lower at 10,127 compared to its previous close of 10,136, and continued to tread below the unchanged line, as investors preferred to lock in profits following the recent rally that helped the index surge past the psychological 10,000-mark. The index finally closed at 10,040, representing a loss of 96.15 points, or 0.95%. The broader Topix Index of all first section issues also slipped to 947, down 3.72 points, or 0.39%.

Financial stocks ended weaker on valuation concerns and the murky outlook for the global economy. Sumitomo Mitsui Financial slumped more than 6.5% following reports that the company might sell more stock than earlier planned. Among other financials, Mitsubishi UFJ Corp. fell 3.22%, Mizuho Financial lost 3.70%, and Resona Holdings declined 2.17%.

Commodity stocks declined on weaker prices. Japan Petroleum Exploration lost 2%, Nippon Oil Corp. edged down 0.33%, and Showa Shell slipped 0.41%. Nippon Mining & Metals, the leading producer of copper in the country, lost 2.60%.

Realty stocks advanced after Daiwa Securities raised its outlook for the real estate industry in the country from "underweight" to "neutral". Sumitomo Realty surged 6.79% and Tokyu Land Corp advanced 5.71%.

Retail stocks advanced after Merrill Lynch revised its outlook for the second largest retailer in the country, Aeon Ltd on improving investor sentiment. Aeon gained 1.31% and Seven & I Holding added 0.84%.

Australia’s All Ordinaries Index opened unchanged from its previous close at 4,062, but slipped into negative territory on lower commodity prices. The index remained below the unchanged line throughout the session before closing at the day's low of 4,030, representing a loss of 31.10 points, or 0.77%. The benchmark S&P/ASX 200 Index followed a similar trend and ended lower at 4,032, a loss of 30.50 points or 0.80%.

Resource stocks dragged the market lower on weak commodity prices. A measure of six metals traded in London Metals Exchange dropped 2.3% on Friday. Copper fell 2.6%, zinc shed 1.7% and nickel declined 0.7%.

BHP Billiton, the world's largest mining company, declined 2.73%, and rival Rio Tinto fell 2.20%. The third-largest iron-ore exporter, Fortescue Metals, declined more than 7% following a 2% drop in cash prices for iron-ore exported to China. Oz Minerals slumped 4.31% after Citigroup downgraded its stock rating to "sell" from "hold".

However, iron-ore mining company, Atlas Iron bucked the trend and surged up more than 17% after announcing plans to sell shares to fund its expansion projects.

Gold stocks also showed weakness on lower gold prices. Lihir Gold shed 1.35%, Newcrest Mining lost 1.38% and Sino Gold slumped 4.00%. Among oil stocks, Woodside Petroleum lost 1.59%, Santos fell 1.00% and Oil Search shed 2.85%.

Among financial stocks, Commonwealth Bank added 1.08% and National Australia Bank rose 0.77%. Australia and New Zealand Bank remained unchanged from the previous close, while Westpac Banking Corp. fell 0.25%.

In Hong Kong, the Hang Seng Index opened weaker at 18,712 compared to its previous close of 18,890, and continued to drift lower. The index finally ended with a loss of 391 points or 2.07% at 18,499.

Forty of the forty-two index components ended in negative territory on valuation concerns and profit taking. Among resource stocks, Aluminum Corp. of China, or CHALCO, slumped 4.49% on lower commodity prices. PetroChina lost 3.33% and CNOOC, the largest offshore oil firm in China, fell 3.32%. Property stocks also ended in negative territory. New World Development lost 2.81%, Sino Land fell 3.85% and SHK Property declined 2.48%.

South Korea’s benchmark KOSPI Index ended in negative territory on lower commodity prices and concerns about a global recovery. The KOSPI Index ended with a loss of 16.17 points, or 1.13% at 1,412. Financial shares ended weaker on concerns about a global recovery. Hana Financial Group tumbled 4.81%, KB Financial Group, which controls top lender Kookmin Bank, shed 0.71%, and Samsung Securities plunged 2.74%.

Among shipping firms, shipbuilder Hyundai Heavy Industries fell 3.37% and Hanjin Shipping dropped 3.84% on concerns that rising crude prices could drive up their operating costs. Tech bellwether Samsung Electronics lost 0.86% and automaker Hyundai Motor dropped 0.55%.

Among the gainers, Hynix Semiconductor rose 0.39% and LG Electronics advanced 2.08%. Steel maker POSCO advanced 3.22% amid the news of increases in steel prices in China and the U.S.

In India, the stock market ended in the negative territory on weak global cues and profit taking. The BSE Sensex lost 362.42 points or 2.38% to close at 14,876, and the broader Nifty Index shed 2.17% or 99.60 points, to close at 4,484.

Among the other major markets in the region, China's Shanghai Composite Index ended higher by 45.79 points or 1.67% at 2,790, while Strait Times Index in Singapore lost 60.51 points or 2.55% to close at 2,317, Taiwan Weighted Index lost 3.45% or 222.67 points to close at 6,226, and Indonesia's Jakarta Composite Index, fell 1.01%, or 21.07 points, to close at 2,070.

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The major European are moving to the downside, with the French CAC 40 Index and the German DAX Index receding 1.64% and 2%, respectively. The U.K.’s FTSE 100 Index is declining 1.69%. Resource stocks are responsible for much of the weakness.

On the economic front, Eurostat said eurozone employment decreased a seasonally adjusted 0.8% sequentially to 1.22 million persons in the first quarter compared with a 0.4% fall in the previous quarter. Year-on-year, employment declined 1.2% in the first quarter, after a flat reading in the previous quarter.

U.S. Economic Reports

Prospects of a fragile recovery continue to brighten with the release of each economic report and traders are likely to look forward to the unfolding week's economic calendar for confirmation of expectations that the economy will slowly and steadily limp its way towards a recovery. The Commerce Department's housing starts report for May, the National Homebuilders Association's housing market index for June, the Federal Reserve's industrial production report for May, the jobless claims report for the week ended June 13th and the results of the June manufacturing surveys of the New York Fed and the Philadelphia Fed are among the key reports that are likely to take the center stage during the week.

Additionally, some degree of importance may also be attached to the Labor Department's producer price and consumer price inflation reports for May, the Conference Board's leading indicators index for May and the weekly crude oil inventory report. Traders could also stay focused on the Fed speeches scheduled for the week.

Economists expect industrial production to have declined yet again in May, as the number of hours worked in the factory sector fell sharply in May. Manufacturing production is also likely to drop further, as motor vehicle production, which rose in the past two months, may see a reversal. Moreover, metals, machinery and electrical equipment output is also expected to see weakness.

However, industry output could gain support from the inventory cycle due to the fact that businesses have hugely reduced inventories and remain poised to replenish stocks, which in turn could kick start production. Recent ISM manufacturing survey suggested that the inventory index fell to 32.9, suggesting an accelerated pace of stock reduction.

Higher energy prices and the resultant increase in the prices at the pump are expected to support consumer prices to some extent. Wachovia Securities expects core prices to be supported by higher tobacco prices and owners' equivalent rent. That said, the firm is of the view that neither inflation nor deflation will be a problem in 2009.

Housing starts for May are expected to see an improvement following two straight months of declines. The rise in single-family starts in April, the improvement seen in builder confidence in the first five months of the year and expectations that the short-run multi-family correction has run its course should bode well for the headline number in May.

Chicago Federal Reserve Bank President Charles Evans is due to speak on the current crisis before the Executives Club of Chicago Joint Committee in Chicago at 8 AM ET on Monday.

Conditions for New York manufacturers have continued to deteriorate in the month of June, according to a report released by the New York Federal Reserve on Monday, with the index of activity in the sector falling by much more than expected.

The New York Fed said its general business conditions index fell to a negative 9.4 in June from a negative 4.55 in May, with a negative reading indicating a deterioration in conditions. Economists had expected the index to edge down to a negative 5.10.

The Treasury Department is due to release a report on the flows of financial instruments into and out of the U.S. for April at 9 AM ET.

The National Association of Homebuilders' is scheduled to release the results of their survey on homebuilders' confidence at 1 PM ET.

In April, the housing market index rose to 16 in May from 14. The increase was in line with expectations, with the index gauging current sales conditions rising 2 points to 14, while the index gauging sales expectations for the next six months rose 3 points to 27. However, the index gauging traffic of prospective buyers remained unchanged at 13.

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Sealed Air (SEE) is likely to react to its announcement that it has priced $400 million worth of 7.875% senior unsecured notes due June 15th, 2017. The company had previously announced a proposed offering of $250 million and the size of the offering was since then increased to $400 million due to market demand. The company expects to raise net proceeds of $385.8 million from the deal.

Illinois Tool Works (ITW) could be in focus after it reported a 26% decline in operating revenues for the three months ended May 31, 2009 due to a 23% drop in base revenues and a 9% decline in contribution from foreign currency translation. The company now expects earnings from continuing operations of 29-41 cents per share from its earlier estimate of 25-37 cents per share due to the decorative surfaces segment being placed back into continuing operations. Analysts estimate earnings of 30 cents per share.

Citi (C) could be in the spotlight after it signed a memorandum of understanding with the IFC to work on the development of a $1.25 billion funding facility.

Cemex (CX) is expected to react to its announcement that it has reached an agreement to sell its Australian operations to Switzerland-based building materials group Holcim Group for about A$2.02 billion.

Crude oil futures are currently receding $0.59 to $71.45 a barrel after rising $3.60 or 5.26% to $72.04 a barrel in the week ended June 12th. The commodity began the week on a weak note, showing a modest loss following over 3% gains in the previous week. However, oil rose close to $2-a-barrel to close above $70-a-barrel on Tuesday and climbed further on Wednesday in reaction to a bullish oil inventory report. After advancing yet again on Thursday, the commodity gave back some of its gains on Friday to close modestly weaker.

Although oil prices are surging ahead, they are still way off the $147-a-barrel mark reached in July 2008, when demand concerns measured against the supply constraints drove up prices.

Since then, however, since then conditions have undergone a significant change. Increased risk appetite and credit restrictions have reduced funds available for investment in the oil market. Oil inventories and spare productive capacity levels are currently at high levels. Current oil prices aren’t apparently supported by fundamentals and are seen as based on expectations of a tighter market. Consequently, Commerzbank expects oil prices to move sideways around current levels for the rest of the year.

Gold futures are currently moving down $5.10 to $935.60 an ounce. In the previous week, the precious metal fell $21.90 or 2.28% to $940.70 an ounce.

Among currencies, the U.S. dollar weakened slightly against the yen in the week ended June 12th, losing 0.21% to 98.4350. Meanwhile, the dollar fell 0.34% against the euro before ending the week at $1.4016.

Currently, the U.S. dollar is trading 98.168 yen and is valued at $1.3873 versus a euro.

Commerzbank is of the view that the currency markets are now concentrating less on the global economic crisis than on the question of which currency will be best suited to deal with the crisis. Going by market preference for the U.S. dollar as a trusted currency, the firm believes that the euro-dollar pair may have peaked.

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