US & World Daily Markets Financial Briefing 20-05-2009

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Stocks Show Considerable Strength in Early Trading

Following a lackluster performance in the previous session, stocks are showing considerable strength in early trading on Wednesday.

Steel, gold and oil stocks are leading the day's upward move, while the major averages are being modestly limited by some losses in utility and computer hardware stocks.

In the past few minutes, the major averages have extended their gains. The Dow is currently up by 85.06 to 8559.91, the Nasdaq is up 21.98 to 1756.52, and the S&P 500 is up by 21.47 to 920.60.

Commodity Rally Likely to Lift Sentiment

The major U.S. index futures are pointing to a higher opening on Wednesday. Buoyant commodity prices are likely to serve as a shot in the arm for commodity stocks. With the oil inventory report due out in the session, the price of oil may see further gains if crude oil stockpiles show a decline for the second consecutive week. A week prognostication by Hewlett-Packard should lead to profit taking in the technology space, which saw a lift in yesterday’s session.

Market sentiment may also hinge on the message relayed by the minutes of April FOMC meeting scheduled to be released later in the day. Some degree of weakness may be visible among retail stocks in reaction to insipid earnings reported by some of the retailers.

U.S. stocks showed a significant degree of volatility in Tuesday’s session, with traders weighing mixed news, including an unexpected drop in housing starts for April, higher commodity prices and new restrictions announced for the credit card industry.

Consequently, the major averages swerved back and forth across the unchanged line before closing on a mixed note.

The Dow Industrials ended the session down 29.93 points or 0.34% at 8,475 and the S&P 500 Index lost 1.58 points or 0.17% to 908. Meanwhile, the Nasdaq Composite Index overcame some weakness in early morning trading before advancing in the afternoon, with the technology-weighted index closing up 2.18 points or 0.13% at 1,735.

Uncertainty is playing a spoilsport, as the market is drifting along like a rudderless ship, moving aimlessly in the direction the news takes it. The alternating sessions of up and down are likely to keep the Dow locked in the 8,275-8,584 range. The index is also likely to have support around its 21-day moving average of 8,266.

American Express (down 5.13%). Bank of America (down 4.09%), Home Depot (down 5.34%) and JP Morgan Chase (down 3.89%) were the notable decliners in the session. However, General Motors rallied 7.63%, Citigroup gained 3.57% and Hewlett-Packard rose 2.38% ahead of the release of its results.

Among the sector indexes, the KBW Bank Index receded 3.43% and the Amex Airline Index fell 1.51%. However, the Amex Gold Bugs Index gained 2.76% and the Dow Jones Utility Average rose 1.75%. The Philadelphia Semiconductor Index ended the session up 2%, the Amex Disk Drive Index moved up 2.38% and the Amex Networking Index gained 1.66%.

Notwithstanding the volatility the CBOE S&P Bank Index is experiencing, it has held up fairly well and has moved up 130% since hitting a low of 49.02 in early March. There is no grave threat of a sharp pullback as long as the index is able to hold support around the 102.6 level.

Outperformance by financial and retail stocks has laid the groundwork for the reversal in the fortunes of the market along with some support from the technology space. Therefore, traders are likely to watch these sectors to gauge the market direction. A break above the 124.6 level could lead to further gains by the S&P Bank Index.

On the economic front, housing starts for April came in at an annualized unit rate of 458,000, marking a record low, while economists had estimated an increase in starts to 520,000. Building permits also declined 3.3%, dropping to 494,000, below the consensus estimate of 530,000. Much of the weakness was centered on multi-family constructions, with multi-family starts dipping to a new cycle low in April.

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Resource Stocks Could Lead TSX Higher Again

Resource stocks could lead another strong session for the Canadian market on Wednesday. Toronto's main index jumped to a 10-day high in yesterday's trading as traders returned from a three-day weekend.

Energy stocks could rise again as crude oil moved above $60 a barrel on the first day as July serving as the front-month contract. Light sweet crude for July rallied to $60.79, up $1.09, as traders await the Energy Department's inventory data later this morning.

Other resource stocks may also see strength. June-gold jumped to $931.10, up $3.20 on the session and copper climbed 1.45 cents to $2.088 per pound.

In other corporate news, Canaccord Capital reported adjusted net income for the fourth quarter was C$3.8 million or $0.07, compared to net income of C$7.2 million or $0.15 in the same period of the prior year.
 
Silver Wheaton Corp. said that the shareholders of Silverstone Resources have approved the proposed arrangement, whereby Silver Wheaton will acquire all of the shares of Silverstone at an exchange ratio of 0.185 common shares of Silver Wheaton for each common share of Silverstone.

A fire at an Imperial Oil refinery in Sarnia, Canada, was extinguished within 15 minutes this morning, according to Canada's CHOK radio.

Across the border, industry data showed that mortgage application volume ticked up over 2 percent last week, as refinance activity jumped over 4 percent.

On Tuesday, the S&P/TSX Composite Index rallied 338.10 points or 3.46% to move at 10,100.95. This marked the best close for the index since May 8.

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Mixed trading was witnessed across the markets in the Asia-Pacific region, as they took cues from the U.S. markets. A rally in the commodity prices and the weakness of the domestic currencies helped offset some of the weakness generated by the lackluster performance of the U.S. markets overnight.

While the markets in China, Hong Kong, and Indonesia ended in negative territory, the Japanese, South Korean, Singaporean and Taiwanese markets closed in positive territory, with gains ranging between 0.22% and 0.72% from previous close.

In Tokyo, the benchmark Nikkei 225 index, which opened higher at 9,372 compared to previous close at 9,290, moved up to 9,399 in early trading. However, the index found resistance around the 9,400 level and gave up part of its gains following the release of GDP numbers. The Nikkei 225 Index ended the session with a gain of 54.35 points or 0.59% at 9,345, while the broader Topix index of all First Section issues added 6.54 points or 0.74% percent, to 886.30.

The Cabinet Office, in a preliminary report, said that Japan's gross domestic product contracted by a record 4% in the first quarter of 2009 compared to the previous three months. Economists had forecast a 4.4% GDP decline following a revised 3.8% quarterly decline in the fourth quarter of 2008. On an annualized basis, GDP was down 15.2%, not as bad as the 16.1% predicted by economists. Imports dropped 15% quarter-over-quarter, while exports were down 26%.

Technology exporters and oil stocks showed significant buying interest, while automakers ended weak on concerns about weaker demand and shrinking exports. Toyota Motor lost 0.54% and Honda Motor declined 0.74%.

Banking stocks extended their gains. Mitsubishi UFJ, Japan's biggest bank, added 0.32%, Sumitomo Mitsui advanced 0.79%, Mizuho Financial gained 0.88% and Resona Holdings rose 0.63%. Oil-related stocks advanced on higher oil prices. Inpex rose 1.72%, Nippon Oil added 1.23% and Showa Shell gained 0.92%.

In Australia, the broader All-Ordinaries index ended up 8.3 points or 0.22% at 3,809, while the benchmark S&P/ASX 200 index added 7.3 points or 0.19% to close at 3,825.

Economic reports continued to suggest weakness. Consumer sentiment in Australia deteriorated by 4.3 percent in May from April, according to survey results released by Westpac Bank and the Melbourne Institute. The group's May consumer sentiment index declined 3.9 points to a seasonally adjusted 88.8 compared to April's reading of 92.7.

Mining stocks led the gains on higher copper prices in the international market. Index leader BHP Billiton advanced 1.00% and its rival, Rio Tinto gained 1.60%. ‘The Australian’ newspaper, citing unidentified sources, reported that Rio Tinto is looking to replace its US$7.2 billion convertible bond issue to Chinalco with a capital raising underwritten by the Chinese firm.

Among banking stocks, ANZ Bank slipped 0.13%, and Westpac Banking lost 1.84%. However, Commonwealth Bank of Australia gained 0.14%, Macquarie Group added 0.18%, and National Australia Bank edged up 0.05%. Gold stocks advanced, while retail ended on a mixed note.

After opening weaker, Hong Kong’s Hang Seng Index continued to trade in negative territory and ended down with a loss of 68.19 points, or 0.39% at 17,476.

Mixed trading was witnessed among property stocks. While New World Development lost 2.64% and Hang Lung Properties declined 2.29%, Henderson Land advanced 1.61%, Sino Land gained 0.08%, and SHK Properties added 0.42%. Financials also ended mixed on profit taking. HSBC Holdings edged up 0.33%, while Hang Seng Bank declined 2.93%.

In Seoul, the benchmark KOSPI Index ended at 1,438, up 7.49 points, or 0.52%. Automakers saw significant buying interest, while oil and financial stocks ended on a mixed note.

India’s benchmark, the Sensex, ended lower by 260.69 points, or 1.89% at 14,041, while among the other markets, China's Shanghai Composite Index lost 25.27 points or 0.94% to 2,651, the Singaporean Strait Times Index gained 8.88 points, or 0.39% to 2,269, Indonesia's Jakarta Composite Index added 0.29 points or 0.02% to 1,500, and Taiwan's Weighted Index advanced 48.03 points or 0.72% to 6,704

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The major European averages are trading on a mixed note, as the commodity space is lending strong support to the markets in the region, which came into the session after four sessions of gains. The French CAC 40 Index and the German DAX Index are rising 0.44% and 0.81%, respectively, while the U.K.’s FTSE 100 Index is down modestly.

In corporate news, Experian reported that its earnings before interest and tax for the year ended March were $939 million. Revenues rose 8% to $3.9 billion. Meanwhile, the London Stock Exchange reported a loss of 338 million pounds for the year-ended March compared to a profit of 168.3 million pounds last year. The recent quarter’s results included an impairment charge of 484 million pounds related to its acquisition by Borsa Italiana. Sales were up 23% to 671.4 million pounds.

On the economic front, the German Federal Statistical Office reported that Germany’s producer prices fell by 2.7% year-over-year in April, marking the weakest annual rate since 1987, which saw a 3% decline in prices. In March, the annual producer price inflation was –0.5%. On a monthly basis, the producer price index declined 1.4% following a 0.7% drop in March.

The minutes of the Bank of England’s May Monetary Policy Committee meeting revealed that the committee decided unanimously to maintain rates at a record low of 0.5%. The meeting also showed that all committee members supported the decision to raise the size of asset purchase plan to 125 billion pounds.

U.S. Economic Reports

The Federal Reserve is scheduled to release the minutes of its April 29th meeting at 2 PM ET.

At its April meeting, the Fed maintained its key fed funds target rate unchanged at a range of 0%-0.25%. The FOMC noted that the economy continued to contract, with the pace of contraction slowing somewhat. Despite the stabilization in consumer spending, the committee noted that spending continued to be constrained by job losses, lower housing wealth and tight credit.

Overall, the central bank is of the view that economic activity is likely to remain weak for a time. That said, the committee expects sustained economic growth will resume gradually due to policy actions, fiscal and monetary stimulus and market forces. Additionally, the fed suggested that inflation may remain below rates that are consistent with economic growth and price stability.

Philadelphia Federal Reserve Bank President Charles Plosser is scheduled to speak to the New York Money Marketeers at 7PM ET both on Wednesday and Thursday.

The Energy Information Administration is due to release its weekly oil inventory report for the week ended May 15th at 10:30 AM ET.

Crude oil stockpiles declined by 4.7 million barrels in the week ended May 8th to 370.6 million barrels. Notwithstanding the decline, crude oil inventories were above the average range for this time of the year.

Distillate inventories increased by 1 million barrels and remained above the upper boundary of the average range, while gasoline inventories declined by 4.1 million barrels and have fallen to the middle of the average range. Refinery capacity utilization averaged 83.8% over the four weeks ended May 8th compared to 83% last week.

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Gold Edges Up Toward $930 On Weaker Dollar

Gold prices edged higher again in early trading on Wednesday and challenged the key $930 per barrel mark. The metal added to mild gains from the previous session.

June-stamped gold climbed to $929.80, up $1.90 on the session. Prices touched as high as $933.00 in early trading.

The greenback saw further weakness on Wednesday, adding to gold's hedge value. The dollar reached a fresh seven-week low against the euro and continued to drift lower versus the resurgent sterling. Gold usually moves opposite the dollar because of its hedge appeal.

Traders will pay close attention to testimony from Treasury Secretary Timothy Geithner to a Senate panel regarding government aid to financial firms.
 
In economic news, the Mortgage Bankers Association revealed that its market index of mortgage application volume rose 2.3 percent on a seasonally adjusted basis for the week of May 15th. The Market Composite Index was 915.9 compared to 895.6 in the previous week.

The Federal Open Market Committee will reveal the minutes from its meeting in late April. The Federal Reserve voted unanimously to keep the target range between 0 and 0.25 percent. The move by the Fed was widely-expected.

June-dated gold settled at $926.70 per ounce, posting a gain of $5.00 for the session. A disappointing housing report reduced hopes the struggling sector is on the road to recovery and encouraged some traders to invest in the precious metal as a safety outlet.

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Hewlett-Packard could come under selling pressure after it reported that its second quarter earnings declined to 70 cents per share. On an adjusted basis, the company reported earnings of 86 cents per share, in line with the consensus estimate. Sales fell 3% to $27.4 billion, also meeting the mean analysts’ estimate. The company also announced that it would lay-off about 6,400 of its employees.

Bank of America is likely to react to its announcement that its has raised about $13.47 billion through offering 1.25 billion shares at an average price of $10.77 per share. The bank had earlier sold part of its stake in China Construction Bank for $7.3 billion.

Ball Corp. could be in focus after it announced that it would record an after-tax gain of $31 million or 32 cents per share and realize cash proceeds of about $37 million in its second quarter results related to the sale of 75% of its shares of DigitalGlobe stock.

Ashland is likely to move in reaction to its announcement that it has priced $650 million of 9.125% senior unsecured notes. The company noted that the offering was increased from its previously announced size of $600 million.

Ann Taylor may also be in focus after it reported that it reversed to a loss of 4 cents per share from a profit of 43 cents per share last year. Revenues fell 27.9% to $426.7 million. Analysts, on average, estimated a loss of 13 cents per share on revenues of $454.66 million.

NetEase.com is also likely to be in focus after it reported that its first quarter revenues were $114.4 million, higher than $95.4 million in the year-ago period. The company reported earnings per share of 47 cents per ADS compared to last year’s 30 cents per ADS. The consensus estimates called for earnings of 46 cents per share on revenues of $116.29 million.

Deere may see some weakness after it reported that its lowered its full year earnings guidance to $1.1 billion from its previous estimate of $1.5 billion. The company also said its second quarter earnings declined to $1.11 per share from $1.74 per share in the year-ago quarter. Net sales were down 17% to $6.75 billion. The consensus estimates had called for earnings of $1.07 per share on revenues of $6.6 billion.

Toll Brothers is likely to move in reaction to its announcement that its second quarter homebuilding revenues fell 51% to $398.3 million. Analysts estimate a loss of 33 cents per share on revenues of $386.7 million.

Target could also be in focus after it reported that its first quarter net earnings declined to 69 cents per share from 74 cents per share in the year-ago quarter. Total revenues edged up 0.2% to $14.83 billion. Analysts, on average, estimated earnings of 59 cents per share on revenues of $14.81 billion.

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