US & World Daily Markets Financial Briefing 17-06-2009

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Traders May Exercise Caution as Doubts About Recovery Intensify

The major U.S. index futures are pointing to a mixed opening on Wednesday. The selling pressure witnessed in the past two sessions doesn’t seem to have run its course, with the global averages declining yet again, perturbed by no clear signals of a recovery and fears that the recent gains may be overdone. A report released earlier in the day showed that U.S. consumer prices declined at its steepest annul rate in 60 years. The sharp price declines are likely to stir up deflation concerns, even as the economy limps under the impact of the excesses.

Freight carrier FedEx issued a gloomy forecast earlier in the day, reflecting the deep impact the recession is having on corporate profit growth. Oil has pulled back below the $70-a-barrel mark, even as analysts debate the validity of the recent upward move that hasn’t been adequately supported by fundamentals. The commodity may see volatility amid the release of the weekly oil inventory data of the EIA. Ironically, the dollar is also moving to the downside, while the yield on the 10-year old Treasury bond is also easing further.

After stocks got off to a strong start on Tuesday on the back of a bigger-than-expected increase in housing starts for May, the initial optimism began to fade away, as traders sifted through the industrial production report and resigned themselves to a state of caution. Selling pressure intensified in early afternoon trading amid a retreat in commodity prices, with the major averages hitting the day’s low in late afternoon trading.

Thereafter, selling moderated and consequently, the major averages moved sideways for the rest of the session. The Dow Industrials ended down 107.46 points or 1.25% at 8,505 and the S&P 500 Index receded 11.75 points or 1.27% to 912. The Nasdaq Composite lost 20.20 points or 1.11% to close at 1,796.

Twenty-eight of the thirty index components ended the session lower, with Bank of America (down 4.50%), Disney (down 3.13%), Alcoa (down 2.77%), American Express (down 2.14%), DuPont (down 2.29%), General Electric (down 2.81%), Home Depot (down 2.73%), Merck (down 2.12%) and Procter Gamble (down 2.40%) declining sharply in the session.

Best Buy’s disappointing guidance dragged the S&P Retail Index down by 3.10%, and reflecting weakness in the resource space, the Dow Jones U.S. Basic Materials Average fell 2.26%, the NYSE Arca Oil Index slipped 1.37% and the Philadelphia Oil Service Index declined 1.05%.

The KBW Bank Index and the NYSE Arca Securities Broker/Dealer Index slipped over 2% each. The Dow Jones Transportation Average lost 1.02% compared to a 1.91% decline by the Philadelphia Housing Sector Index. On the technology front, the Philadelphia Semiconductor Index fell 2.51%. The NYSE Arca Disk Drive Index and the NYSE Arca Networking Index lost about 2% each.

The S&P 500 Index closed at 912, just short of its 50-day moving average on a daily chart of 907, although it has violated its near term support level of 926. The pullback seem over the past two sessions has brought the index’s relative strength index into a more neutral territory. In the eventuality of the index breaking below its 50-day moving average, the 882, 814 and 741 levels could serve as additional support levels.

The Federal Reserve’s industrial production report came as a dampener, with the May industrial output dropping 1.1% in May month-over-month, almost in-line with the expected decrease of 1%. Auto output showed one of the steepest declines, falling 7.9%. The April reading was revised down by 0.2 percentage points. Capacity utilization was at 68.3%, marking another record low reading. The output of mines fell by 2.1%.

Earlier in the day, the U.S. Labor Department said producer prices rose at a slower-than-anticipated monthly pace of 0.2% in May. On a year-over-year basis, producer prices were down 5%. The core produce prices index dipped 0.1%, as prescription drug prices fell 0.3% in May following a 1.3% increase in the previous month. Pipeline inflation is picking up, as reflected by a 0.3% increase in headline intermediate goods prices.

The housing starts report revealed stronger than expected growth. Housing starts rose 17.2% to a seasonally adjusted annual rate of 532,000 units in May and building permits rose 4% to 518,000. The increase in housing starts reflected a 62% jump in multi-family starts and an 8% increase in single family starts.

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Canadian stocks could extend its recent slump with crude oil seeing early weakness, which could hurt energy stocks. Mining stocks could also come under pressure with copper in the red as well.

Light sweet crude for July is down 70 cents to $69.77 per barrel ahead of the Energy Department's weekly inventory report at 10:30 a.m. ET. Copper has dropped 2.2 cents to $2.243. Gold is flat.

Grande Cache Coal reported fourth-quarter net income and comprehensive income of C$19 million or C$0.20 per share, compared to net loss and comprehensive loss of C$1.19 million or C$0.02 per share last year.

AutoCanada Income Fund said that it has signed agreements with GMAC and Chrysler Financial Canada whereby GMAC shall provide AutoCanada with wholesale floor plan funding for each of its owned dealerships.

Agricultural products supplier Agrium said the independent proxy voting and corporate governance advisory firm RiskMetrics Group, has recommended stockholders of CF Industries Holdings to tender their shares into Agrium's exchange offer of $40.00 in cash plus one Agrium share per CF share.
 
TransCanada agreed to acquire ConocoPhillips's stake in the Keystone Pipeline System for approximately US$550 million plus the assumption of approximately US$200 million of short-term debt.

In economic news, Canadian wholesale sales in current dollars fell for a seventh straight month in April, declining 0.6% to $40.3 billion, according to data released Wednesday by Statistics Canada. Economists expected wholesale sales to drop 0.7 percent in April.

In the US, a Commerce Department report showed that consumer prices edged up 0.1 percent in May after coming in unchanged in April. Economists had been expecting a somewhat more substantial increase in prices of about 0.3 percent.

On Tuesday, the S&P/TSX Composite Index fell 87.38 points to 0.84% to finish at 10,307.40. The index had climbed above 10,500 in the early going before heading lower.

Crude oil futures are receding $1.11 to $69.36 a barrel after declining $0.15 to $70.47 a barrel in Tuesday’s session. Despite views that the increase in oil prices is overdone, oil held above $70-a-barrel level yesterday. That said, there is an increasing risk of a downside price correction in the near term, as market expectations of a rapid economic recovery are unlikely to materialize.

Gold futures, which rose $4.70 to $932.20 an ounce yesterday, are currently slipping up by $2.50 to $929.70 an ounce.

Among currencies, the U.S. dollar is trading at 96.175 yen compared to the 96.385 yen it fetched at the close of New York trading on Tuesday. Against the euro, the dollar is trading at $1.3875.

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The major Asian markets ended Wednesday’s session mostly lower, with the declines led by India’s Sensex, which fell close to 3%. On the other hand, Japan’s Nikkei 225 Average and the Chinese Shanghai Composite Index bucked the downtrend, with gains of 0.90% and 1.23%, respectively.

Hong Kong’s Hang Seng Index opened lower and traded below the unchanged line in the morning session before staging a recovery in the afternoon. The index pulled back again on a late hour sell-off to end down 80.90 points or 0.45% at 18,085.

Cosco Pacific, China Mercantile Holding, Hang Lung Property and Henderson Land led the declines. China-related stocks also showed significant weakness. On the other hand, HSBC Holdings edged up modestly. Most other banks saw moderate buying interest. Utility and property stocks revealed mixed sentiment.

Japan’s Nikkei 225 Average ignored a weak start and climbed above the unchanged line in early trading after bargain hunters picked up stocks following two straight sessions of declines.

In its latest monthly assessment of recent economic and financial condition, the Bank of Japan raised its view on the broad economy as well as key sectors of the economy, including exports and industrial production.

Most stocks advanced as investors went on bargain hunting, picking up stocks at lower prices amid underlying optimism about a global recovery. Specifically, green technology related stocks led the gains after Nomura Holdings has started a new global fund exclusively for the sector that implements the environment-friendly technology. Sanyo Electric Co. engaged in the manufacture of rechargeable batteries, soared 13.93%, and GB Yuasa Corp. gained 12.49%.

Australia’s All Ordinaries Index opened unchanged from its previous close at 3,958 and drifted into negative territory mirroring the losses on Wall Street Tuesday. Lower commodity prices and concerns about growth also impacted sentiment. The index remained below the unchanged line throughout the session before closing at 3,904, representing a loss of 53.70 points or 1.36%.

Resource stocks dragged the market lower on weak commodity prices. BHP Billiton, the world's largest mining company, declined 2.19%. Rio Tinto edged down 0.14%. Nickel producer Mincor Resources fell 1.33%. Gold stocks also ended lower on lower gold prices. Lihir Gold declined 0.69%, Sino Gold lost 1.11%, and Newcrest Mining fell 1.65%.

Financial stocks also came under selling pressure. Mixed trading was witnessed among oil stocks. While Woodside Petroleum edged up 0.15% and Santos gained 0.50%, Oil Search ended lower by 1.78%.

In India, the stock market ended sharply lower as investors paused for locking gains in the recent rally amid weak global cues. The BSE Sensex lost 435.07 points, or 2.91% to close at 14,523, and the broader Nifty Index shed 161.68 points, or 3.58%, to close at 4,356.

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The major European markets are moving to the downside once again on Wednesday, with the French CAC 40 Index and the German DAX Index dropping 1.17% and 1.16%, respectively. The U.K.’s FTSE Index is down about 1.03%.

In corporate news, French tire maker Michelin announced a major restructuring move, including the elimination of 2,900 jobs or about 10% of its workforce. The company plans to close a small plant in Seclin, France and also to shift the production of its light-truck tire to Cholet in Western France from a plant in Germany.

U.K-based British American Tobacco (BTI) announced that it has acquired an 85% stake in PT Bentoel Internasional Investama for $494 million. Separately, J. Sainsbury said it plans to raise about 445 million pounds from the market. Additionally, the company reported strong sales growth for the first quarter, helped by like-for-like sales growth of 7.8%.

On the economic front, the eurozone trade surplus stood at 2.7 billion euros in April, widening from the 1.8 billion euro surplus in March. Economists were looking for a deficit of 1.5 billion euros. Separately, construction output increased a seasonally adjusted 0.6% month-over-month in April, marking the same pace as in the previous month. The April figure was revised from the 1% decline reported initially.

Policymakers at the Bank of England unanimously decided to retain the key interest rate at 0.5% and continue with the asset purchases scheme totaling 125 billion pounds using central bank reserves, according to the minutes of the Monetary Policy Committee meeting.

The minutes revealed that the members felt that it is too early to assess the impact of the asset purchase program on nominal demand. The central bank had acquired just less than 80 billion pounds of assets financed by the issuance of central bank reserves and said it would take another two months to meet the 125 billion pound target for purchases.

The U.K. Office of National Statistics released its jobless claims report, which showed that the number of people claiming jobless benefits in the U.K. rose 39,300 in May compared to the previous month to 1.54 million. Economists had expected an increase of 60,000 for the month. The claimant count rate rose 0.1 percentage point to 4.8%.

U.S. Economic Reports

Federal Reserve Chairman Ben Bernanke and FDIC Chair Sheila Bair are scheduled to speak to the Operation Hope Financial Literacy Summit in Washington.

A Labor Department report showed that consumer prices rose 0.1% in May after remaining unchanged in April. Core consumer prices, excluding food and energy, rose 0.1%, slower than the 0.3% increase in the previous month. The consensus estimates had called for 0.3% increase in the consumer price index and a 0.1% rise in the core consumer price index.

Annually, consumer prices were down 1.3%. Transportation prices rose 0.8% month-over-month and medical care costs rose 0.3%. On the other hand, food and beverage and housing prices declined 0.2% and 0.1%, respectively. Apparel prices also moved down by 0.2%. Costs of recreation remained unchanged.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET.

Crude oil inventories fell by 4.4 million barrels in the week ended June 8th to 361.6 million barrels. Despite the decline, stockpiles were still above the average range.

Distillate inventories edged down 0.3 million barrels, but remained above the upper bound of the average range. Gasoline stockpiles declined by 1.6 million barrels and were below the lower limit of the average range. Refinery capacity utilization averaged 84.8% in the four weeks ended June 5th compared to 84.2% in the previous week.

Earnings

FedEx (FDX) is receding in pre-market trading after it said it expects first quarter adjusted earnings of 30-45 cents per share compared to the 68 cents per share consensus estimate. The company reported adjusted first quarter earnings of 64 cents per share on a 20% revenue decline to $7.85 billion. Analysts expected earnings of 51 cents per share on revenues of $8.32 billion.

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Adobe Systems could come under selling pressure after it reported second quarter earnings of 24 cents per share, down sharply from 40 cents per share in the year-ago period. On an adjusted basis, the company reported earnings of 35 cents per share, in-line with the consensus estimate. Revenues declined 21% to $704.7 million compared to the $694.8 million consensus estimate. For the third quarter, the company expects adjusted earnings of 30-37 cents per share, surrounding the 33 cents per share consensus estimate, and revenues of $665 million to $715 million. The Street expects revenues of $676 million.

Morgan Stanley and Goldman Sachs could react to reports that they will repay their TARP funding on Wednesday. Reports suggested that Morgan is all set to return all of the $10 billion in funding it received from the government, while Goldman’s CEO Lloyd Blankfein said in a letter to some senators that the TARP has played an important role in helping stabilize the financial system and that the firm remains indebted to the government for its extraordinary efforts.

McMoran, Lincoln National, Limited Brands and Genesee & Wyoming could all move in reaction to their announcements regarding pricing of their public offerings. McMoran said it has priced its 14.5 million common stock offering at $5.75 per share. Lincoln National priced its public offering of 40 million shares at $15 per share. Meanwhile, Genesee & Wyoming said it has priced its previously announced underwritten registered public offering of 4 million shares of its Class A common stock at $24.50 per share. Limited Brands said it has agreed to sell $5 million aggregate principal amount of 8.50% senior notes due 2019 through an institutional private placement.

Employers Holdings may gain ground after Standard & Poor’s said it would replace Catapult Communications in the S&P SmallCap 600 Index. Meanwhile, Colonial BancGroup, which failed to meet the minimum market capitalization norms required to be in the S&P MidCap 400 Index, will be replaced by WMS Industries. Badger Meter is scheduled to take WMS Industries’ place in the S&P SmallCap 600 Index.

United Technologies could also see some buying interest after it said its Pratt & Whitney unit has secured a contract to supply International Aero Engines V2500 engines to power a new fleet of 20 Airbus A320-family aircrafts for Etihad Airways. The company noted that the contract is valued at more than $192 million, including a longer-term IAE after market agreement.

Biogen Idec is expected to be in focus after it said an arbitration panel reaffirmed its contractual right to fully participate in strategic decisions regarding the development of RITUXAN and other anti-CD20 antibodies in connection with its collaboration agreement with Genentech.

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