US & World Daily Markets Financial Briefing 21-06-2010

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Chinese Announcement Keeps Stocks on Track For Further Gains

The major U.S. index futures are pointing to a sharply higher opening on Monday, with the optimism stemming from China’s assurance that it would soon relax its peg to the dollar. Equity markets across the globe relished the news and along with equities, commodities and risky currencies are also rallying. The Chinese announcement comes ahead of the G-20 meeting to be held over the weekend at Toronto and bodes well for world trade as a whole.

With the major averages having reclaimed a key resistance around their 200-day moving averages, they remain poised for further upside, especially in the wake of the Chinese announcement.

U.S. stocks extended their gains in the week ended June 18 despite showing indecision and uncertainty throughout much of the week, with the gains coming mostly in a single session, when skeptical traders showed excessive optimism in the face of fairly robust economic data.

Last Monday, the major averages remained solidly higher for much of the session, an extension of the buoyancy witnessed in the previous week. However, selling in late trading following a downgrade of Greece’s credit rating sent stocks lower. The major averages posted solid advances on Tuesday, with all three of them rising over 2% after the New York Federal Reserve’s survey showed that manufacturing activity in the region continued to expand at a pace that was expected.

Although stocks were weighed down by a weak housing starts report in early trading on Wednesday, stocks recovered by mid-session, although finishing the session on a mixed note. On Thursday, stocks staged a recovery in late trading after showing weakness for much of the session. Meanwhile, the major averages held their ground on Friday in the absence of any major catalysts, trading with a positive bias for much of the session and closing with modest gains.

For the week ended June 18th, the Dow Industrials added 239.57 points or 2.35% to close at 1,0451 and the S&P 500 Index advanced 25.91 points or 2.37% to 1,118, while the Nasdaq Composite Index rose 66.20 points or 2.95%.

Among the sector indexes, the Philadelphia Semiconductor Index rallied 6.20%, the NYSE Arca Gold Bugs Index gained 6.82%, the Philadelphia Oil Sector Index ended the week up 5.50% and the Dow Jones Utility Average rose 4.24%. The NYSE Arca Airline Index posted a weekly advance of 3.64%, while the NYSE Arca Biotechnology Index and the KBW Bank Index moved up over 2% each.

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Resource-heavy Bay Street poised for a higher open Monday as commodities prices rose after China indicated an end to the yuan's fixed rate to the dollar.

U.S. stock futures were pointing to a higher opening.

On Friday, the S&P/TSX Composite Index edged down 18.38 points or 0.15% to 11,927.59, after gaining nearly 500 points or 4.27% in the previous six sessions.

Over the weekend, the People's Bank of China said that it would 'strengthen the flexibility' of the country's currency, signaling that it was ready to break a 23-month-old peg to the dollar that had come under intense international criticism. The financial markets across the global surged higher welcoming the decision.

The move also reduces the threat of inflation in China, easing worries over a possible rate hike in the nation.

The price of oil moved up near its 6-week high on China's move, with crude for July adding $1.15 to $78.33 a barrel.

The price of gold was trading steady near its all-time high. Gold for August delivery edged up $1.0 to $1,259.30 an ounce.

In the international M&A space, Dutch paint-maker Akzo Nobel NV said it has agreed to sell its starches arm to U.S.-based Corn Products International for around $1.3 billion in cash.

In corporate news, Valeant Pharmaceuticals International  and pharmaceutical company Biovail Corp. announced plans to merge into a new company called Valeant Pharmaceuticals International, Inc. Valeant shareholders would receive a one-time special cash dividend of $16.77 per share and 1.7809 common shares of Biovail in exchange for each common share.

Base metals mining company Quadra FNX Mining guided copper production at 265 million pounds for the fiscal year 2010, compared to its previous estimate of 300 million pounds. Gold and precious metal production guidance remains unchanged at 155,000 ounces.

Uranium and gold mining company First Uranium reported a wider fourth-quarter loss of $0.14 per share, compared to $0.08 per share last year.

Uranium producer Cameco Corp. said it has increased its stake in uranium mining company UEX Corp. to about 23.3%, by acquiring 4.12 million shares for C$3.37.

Integrated drug development company Akela Pharma reported a narrower first quarter net loss of $0.01 per share, compared to net loss of $0.12 per share for the year-ago quarter.

Power generation company TransAlta Corp. announced that it appointed Brett Gellner as chief financial officer, succeeding Brian Burden.

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Asian markets ended the trading session on the first day of the week in a buoyant mood with all the markets ending sharply high following China's decision to allow its currency to trade freely against the US dollar, thus lifting the peg imposed since 2008. Higher commodity prices in the global market and optimism about sustaining global economic recovery, following positive closing on Wall Street on Friday, also lifted market sentiment.

In Japan, the benchmark Nikkei 225 Index advanced 242.99 points, or 2.43%, to 10,238, while the broader Topix index of all First Section issues gained 17.85 points, or 2.02%, to 902.

On the economic front, a report released by the Ministry of Trade, Economy and Industry revealed that Japanese all industry activity improved in April after falling for two straight months. As per the report, the indicator rose 1.8% month-on=month in April following 0.7% drop in the previous month. However, the monthly growth rate was smaller than the expected 2%. Year-on-year, all industry activity rose 3.8%, down from 4.9% in March. The overall growth rate was pulled down by 17.2% annual fall in construction.

A report released by the Japan Department Stores Association revealed that nationwide department store sales dipped 2.1% in May from the same period previous year. With the latest drop, department store sales have fallen for 27 consecutive months in the country.

Commodity related stocks and trading companies led the gains on speculation that China's move will help Japanese companies regain some of their competitiveness in the global market. Mitsubishi Corp. surged up 6.61%, Toyota Tsusho Corp. soared 6.60%, Mitsui & Co., climbed 5.66%, Sumitomo Corp. rose 5.18%, Itochu Corp. gained 4.16%, Marubeni Corp was up 4.44% and Sojitz Corp. increased 3.33%.

Shipping stocks also advanced on optimism about global economic recovery. Mitsui OSK Lines gained 4.52%, Kawasaki Kisen Kaisha rose 4.13% and Nippon Yusen climbed 3.12%.

Steel and machinery stocks also ended in positive territory. Among steel stocks, JFE Holdings gained 3.75%, Pacific Metals rose 3.61%, Sumitomo Metal Industries surged up 5.58%, Nisshin Steel Co., soared 5.73%, Nippon Steel climbed 2.88% and Kobe Steel was up 3.31%.

Among machinery stocks, Daikin Industries climbed 4.22%, Hitachi Construction machinery surged up 6.72%, Komatsu Ltd climbed 4.64%, Okuma Corp. soared 6.21% and Sumitomo Heavy Industries was up 5.59%.

In Australia, the benchmark S&P/ASX200 Index gained 60.70 points, or 1.33% and closed at 4,613, while the All-Ordinaries Index ended at 4,633, representing a gain of 58.60 points, or 1.28%.

On the economic front, a report released by the Australian Bureau of Statistics revealed that the total number of new vehicles in the country decreased by a seasonally adjusted 3.2% in May compared to the previous month. As per the report, a total of 88,484 new vehicles were sold during the month. Sales of sports utility vehicles and passenger vehicles decreased by 6.7% and 3.8% respectively. Other vehicle sales increased 3.1%. Compared to May 2009, total vehicle sales were up 16.4%.

In a separate report, the Australian Bureau of Statistics revealed that the value of goods imported into the country on a balance of payments basis increased a seasonally adjusted 4% in May compared to April. As per the report, the total value of imported goods stood at A$18.56 billion in May. Capital goods imports rose 9% and consumption goods imports were up 4%. Intermediate & other merchandise goods imports rose 2%, while those of non-monetary gold fell 7%. In original terms, merchandise imports also rose 4% in May compared with April.

Mining and metal stocks advanced following China's decision to let its currency Yuan gain against the dollar. Commodities advanced in the international market following the move. BHP Billiton gained 1.99%. Fortescue Metals surged 4.58%, Gindalbie Metals soared 8.19%, Iluka Resources added 0.99%, Macarthur Coal advanced 2.08%, Murchison Metals climbed 8.37%, Oz Minerals rose 1.90% and Rio Tinto was up 2.10%.

Mixed trading was witnessed among oil stocks. Woodside Petroleum gained 2.10%, Santos Ltd added 0.44%, Oil Search Ltd rose 1.19% and Origin Energy advanced 0.69%. However, ROC Oil Ltd bucked the trend and ended in negative territory with a loss of 1.39%.

Among gold stocks, Lihir Gold gained 1.15%, and Newcrest Mining rose 1.42%.

Major banks also ended in positive territory on optimism about global economic recovery, and positive impact of China's decision on global economy. ANZ Bank gained 1.94%, Commonwealth Bank rose 1.31%, National Australia Bank advanced 1.07% and Westpac Banking climbed 1.19%. Investment banking company Macquarie Group added 0.65%.

In Hong Kong, the benchmark Hang Seng Index surged 625.47 points, or 3.08%, to 20,912, lifted by resource stocks and banks following decision by Chinese authorities to allow its currency, the Yuan, to trade freely against the US dollar, thus lifting the peg initiated in 2008. Positive closing on Wall Street on Friday, and encouraging trading across neighboring markets lifted market sentiment. Higher commodity and oil prices also impacted trading.

Strong global cues in the wake of China's weekend announcement that it will keep its currency more flexible triggered a rally in Indian equities on Monday. An end to the uncertainty over the regulation of unit linked insurance products or Ulips also bolstered investor confidence to some extent. The 30-share BSE Sensex opened strong and rose steadily throughout the session before finishing 1.75% or 306 points higher at 17,877, while the 50-share Nifty climbed 91 points or 1.72% to 5,353.

Among the other major markets open for trading, Indonesia's Jakarta Composite Index added 12.31 points, or 0.42% to close at 2,942, China's Shanghai Composite Index surged 72.99 points, or 2.90%, to 2,586, Taiwan's Weighted Index climbed 142.45 points, or 1.90% to close at 7,654, and Singapore's Strait Times Index gained 52.24 points, or 1.84% to close at 2,886.

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The major European markets are also moving to the upside on Monday, with the  French CAC 40 Index and the German DAX Index rising 1.33% and 1.14%, respectively, while the U.K.’s FTSE  100 Index is gaining 0.84%.

In economic news, asking prices for homes in the U.K. increased 0.3% in June compared with the previous month, according to a report released by property website. This follows a 0.7% increase in the previous month. The average house price of a home in the U.K. was at 237,767 in June. On a year-over-year basis, house prices increased 5% in June. This follows a 4.3% rise in the prior month.


U.S. Economic Reports

In the unfolding week, traders are likely to closely watch the FOMC meeting and the existing and new home sales reports for May. The durable goods orders report for May, the weekly jobless claims report and the final reading of the Reuters/University of Michigan's consumer sentiment report are also among the reports likely to be in the spotlight.

The release of the final first quarter GDP report, the Federal Housing Finance Agency's house price index for April and the results of the Treasury auctions of 2-year, 5-year and 7-year notes round up the other economic events of the week.

The FOMC meeting is unlikely to throw forth any surprise, given the uncertainties that have increased in the inter-meeting period. Europe is mired in a debt crisis and some of the economic indicators from the U.S. are pointing towards a slowdown in growth. At the same time, the inflationary environment is so benign that it does not warrant any restraining action. Therefore, the Fed is most likely to repeat its resolve to maintain the fed funds target rate at "exceptionally low levels" for an "extended period."

FTN Financial expects the economic assessment to be more cautious, given the sharp slowdown in private sector hiring in May along with a rise in jobless claims in early June and a 2-month slowdown in consumer spending.

Meanwhile, new home sales are likely to slacken following the solid run seen in recent months, as the market cools after the hectic activity witnessed to take advantage of the extended first time homebuyers' credit. However, existing home sales could see an increase as they are recorded only when the contract is closed.

Durable goods orders for May could see some weakness following five straight months of gains, with the anticipated softness stemming mainly from weak transportation equipment orders. Boeing reported in its website that merely 5 aircraft orders were received in May compared to April's 34. But outside of the aircraft orders, order growth should remain fairly robust, given the exceptionally strong earnings growth and rising capacity utilization, which in turn is boosting investment.

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Corn Products is likely to be in focus after it said it would buy National Starch from the Netherlands-based Akzo Nobel for $1.3 billion in cash

Peabody Energy is likely to see some activity after it said it has completed a new 5-year senior unsecured credit facility to replace its existing facility that was scheduled to mature in September 2011. The new facility includes a $1.5 billion revolver and $500 million term loan.

Forex

The weekend decision by the Chinese authorities to increase the flexibility of the Yuan to a managed float against the US dollar could well make an interest rate rise to cool the growing Chinese economy less likely in the very short  - term.

This in turn should give an additional boost to risk appetite on top of the slow return of investor confidence we saw at the end of last week. However, while Chinese inflation remains above 3% the risk of a further tightening in policy in the medium term should not be ruled out, further down the line.

The US along with other parts of the G20, has for some time now had concerns about the weakness of the Chinese currency, and was planning to raise these concerns at the upcoming G20 meeting; however this move by China looks a shrewd one, and has taken some of the sting out of what could have been a tense meeting.
As a result the US dollar has slipped back further, below last weeks lows as investors rotate capital back into riskier assets.

As such we could well see further US dollar weakness unfold over the coming days, especially if there aren’t any further surprises out of Europe.

The euro continues to push higher as European Union officials announced that its stress tests on its 25 biggest banks, under the scenario of a slowdown in growth and stress in sovereign debt holdings, would be much tougher than the US equivalents.

Gold continues to make fresh record highs above $1,250 and looks set for a test towards $1,300 this week, as investors continue to hedge their risk by indulging in further safe haven buying.

With little in the way of data ahead of tomorrow’s UK emergency budget the pound should continue to trade in a choppy range after last weeks Public Sector Net Borrowing Requirement (PSNBR) for May, came in at £16bn, much better than expected. However this improvement is not likely to make much difference in relation to the Chancellor’s planned budget cuts in the emergency budget tomorrow.

EURUSD – having failed to break much below the support around the 1.2250/60 area late last week the single currency has continued to push higher, making new highs around 1.2485 in Asia trading overnight touching the 1.2480/90 trend line resistance from the 14th April highs at 1.3690.
For now the risk remains of a squeeze higher towards 1.2750 on a break of 1.2500, this will continue to delay the move towards the 2005 lows, around 1.1650.
The extent of dips so far has been the 1.2250/60 level and a move below here could well be a precursor to a test back towards the 1.2135/45 level which remains a pivotal level in the near term.

GBPUSD – the pound continues to look fairly robust after last weeks PSNBR figures retesrting last weeks highs around 1.4880/90 in early Asia.
The likelihood of a test towards the 1.4970 level and even 1.5080, remains while above the 1.4680/90 support area.
On the flip side of that a sustained break below 1.4680/90 here would no doubt re-target the 1.4510 area.
There is also the trend line support from the 1.4230 lows of the 20th May at 1.4425, which should continue to support in the event we break below 1.4500. The key support level remains down at 1.4230/50.

EURGBP – the key resistance above 0.8400 held in early Asia trading overnight, touching 0.8420 before dropping rapidly back below 0.8400.
While the Euro continues to hold below this 0.8420 area the overall tone remains of selling the rally.
The 0.8400/20 break-out level remains key resistance, and while this holds then upside still looks likely to remain limited. The Euro is currently finding an element of support around the 0.8320/30 area and we would need to see a break back below these levels to re-target the lows at 0.8210.
The twin lows at 0.8210, remain a key support but the all important 0.8170 area remains the primary objective.

USDJPY – the failure to break back above 91.20, after breaking below the 90.80 support level over the last couple of days has seen the dollar hit 90.00 in early Asia trading. The US dollar now needs to see a move back above 90.70/80 resistance area towards 91.20 to re-stabilise, otherwise we could well see further dollar losses towards 89.80 in the short - term, and possibly 89.30.
The longer term resistance remains around the 92.20 area, a break of which would then target the 92.80/90 June highs.

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