US & World Daily Markets Financial Briefing 22-06-2009

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Following a string of largely lackluster performances, stocks are retreating by considerable margins in mid-morning trading on Monday. The major averages are all firmly in negative territory as traders consider a murky near-term economic outlook.

The weakness in the markets is partly due to news that the World Bank has reduced its global GDP estimate as well as the outlook for most other economies and warned of a large decline in international capital flows amidst financial market fragility and recession.

The Washington-based lender now expects the world economy to shrink by 2.9 percent this year, larger than its earlier prediction of a 1.7 percent decrease.

On the earnings front, drug store retailer Walgreen (WAG) reported third-quarter earnings that fell to $0.53 per share from $0.58 per share in the year-ago quarter, coming below analyst estimates of $0.56 per share. The stock is down by 4 percent as traders react to the news.

Shares of Marvell Technology (MRVL) have also turned lower even though the chip maker raised its second quarter revenue guidance, citing an improvement in demand. The company now expects revenues of $600 to $630 million compared to its previous guidance of $540 to $580 million.

In other news from the tech sector, Apple Inc. (AAPL) announced that it has sold over one million iPhone 3GS models through Sunday, June 21, the third day after its launch. The company said that six million customers have downloaded the new iPhone 3.0 software in the first five days since its release.

Meanwhile, Anglo-Swiss mining company Xstrata has approached rival Anglo American, seeking their consideration regarding a merger of the two companies. If accepted, the merger would create the third largest mining firm in the world.

The major averages have seen some further downside in recent trading, falling to new lows for the session. The Dow is currently down 137.24 at 8,402.49, the Nasdaq is down 45.81 at 1,781.66 and the S&P 500 is down 19.32 at 901.91.

Sector News

Most of the major sectors have shown notable moves to the downside, contributing to the considerable breadth of the day’s losses.

Gold stocks are experiencing a notable pullback, as reflected by the 5.4 percent retreat by the NYSE Arca Gold Bugs Index. With the decline, the index continues to offset recent gains, falling to a one-month low after hitting a ten-month higher in early June.

Other resource stocks are also suffering on the day, with significant weakness emerging among steel, oil service and natural gas stocks. The NYSE Arca Steel Index, the Philadelphia Oil Service Index and the NYSE Arca Natural Gas Index have all slipped to their worst levels in roughly a month.

The downward move has been precipitated by a drop in commodity prices on the NYMEX, with the price of oil falling $1.65 to $67.90 a barrel.

Trucking, railroad, banking and healthcare-related stocks are also showing notable moves to the downside, reflecting the day’s broad based weakness.

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Bay Street Stocks May See Early Weakness

Toronto stocks could see early weakness on Monday morning as falling commodity prices may hurt the resource sectors. The market saw notable gains on Friday to move off of a multi-week low.

Crude oil dropped $1.42 per barrel to $68.13 in electronic trading. Gold fell $13.80 to $922.40 an ounce and copper fell 6.2 cents to $2.1995 a pound.

In corporate news, Fresnillo announced that subsidiary Fresbal Investments withdrew its proposal for the remaining shares of MAG Silver Corp.saying it is no longer in the best interests of Fresnillo shareholders.

Nortel Networks, which is operating under insolvency court protection, is in advanced discussions with potential buyers for its main business operations and is likely to announce further asset sales in 'weeks or months, rather than months or years', the Financial Times reported Sunday, citing the company's Chief executive Officer Mike Zafirovski.
 
CAE said it will spend up to C$274 million in expansion into mining and energy over the next seven years.

In economic news, Statistics Canada reported employment rose to 2.7% to about 700,000 in the month of April.

On Friday, the S&P/TSX Composite Index rose 166.45 or 1.64% to settle at 10,287.95. The market had hit a three-week closing low on Wednesday.

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Crude oil prices are currently slipping $1.37 to $68.18 a barrel after the commodity showed significant volatility in the past week. The commodity fell $2.49 or 3.5% to $69.55 a barrel. The July contract is set to expire on Monday.

Last Monday, oil declined by about $1.50-a-barrel, reversing some of the over 5% gain it recorded in the previous week, as the dollar strengthened.

The black gold fell modestly on Tuesday, while it stalled the losses and rose moderately on Wednesday in reaction to the weekly inventory data that showed a draw down in crude oil stockpiles. Oil rose again on Thursday only to pullback sharply on Friday and settle below the $70-a-barrel mark for the first time since June 8th.

Gold futures, which ended the previous week down $4.50 or 0.48% at $936.20 an ounce, are currently receding $12.90 to $923.30 an ounce.

On the currency front, primarily due to expectations that the Fed is likely to indicate that they may not raise interest rates anytime soon and also following the Japanese central bank raising its assessment of the economy, the dollar fell about 2.2% to 96.27 yen in the week ended June 19th.

However, the dollar rose 0.6% against the euro to $1.3937. Currently, the U.S. dollar is trading at 95.94 yen and is valued at $1.3834 versus the euro.

Asia

The major Asian markets closed Monday’s session on a positive note, with Japan benefiting from better-than-expected economic data from the services sector and manufacturing sector.

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The major European markets are trading lower on Monday, with the French CAC 40 Index and the German DAX Index receding 2.03% and 1.87%, respectively, while the U.K.’s FTSE 100 Index is moving down 1.53%.

In corporate news, mining company Xstrata offered to combine with Anglo American in a merger of equals to create a company with a market value of $68 billion. Engineering giant Siemens said it expects to win around $21 billion in new orders in the fiscal years 2010 through 2012.

On the economic front, German business sentiment improved to 85.9 in June from a revised reading of 84.3 in May, a monthly survey by the Munich-based Ifo Institute for Economic Research showed. Economists had expected the index to rise to 85 in June. The index gauging the assessment of future situation improved to 89.5 in June, while economists expected a more modest improvement to 86.9. Meanwhile, the current assessment index stood at 82.4, below the consensus forecast of 83.

At the same time, U.K. Rightmove, a property website, released the results of its June survey, showing that the average property asking price in the U.K. eased 0.4% month-over-month in June to 226,436 pounds. Annually, the asking price fell a steeper 5.5%. In comparison, average property asking price rose at a monthly rate of 2.4% to 227,441 pounds in May, while prices fell 6.2% year-over-year.

Stocks in Focus

Marvell Technology is likely to see buying interest after it increased its second quarter revenue guidance, citing improved an demand outlook. The company now expects revenues of $600 million to $630 million compared to its previous guidance of $540 million to $580 million.

Citigroup and MasterCard could also be in focus after MasterCard appointed Citi’s senior Executive Ajay Banga as its president and chief operating officer. Nokia Siemens Networks, a joint venture between Nokia  and Siemens, said on Saturday that it would buy the wireless operations of Canada’s Nortel Networks in a deal valued at $650 million.

Walgreen is likely to move in reaction to its announcement that its third quarter sales rose 8% to $16.2 billion. The company’s net earnings fell to 52 cents per share, including 6 cent per share costs and 6 cents per share in savings, which is a decline from the prior year’s 58 cents per share. The consensus estimates call for earnings of 56 cents per share on revenues of $16.16 billion.

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The hesitant recovery many are anticipating is keeping traders glued to the economic numbers that could validate expectations. The FOMC meeting is likely to headline the economic events of the unfolding week, although there are a few economic reports that could help investors gain more clarity on the state of the economy.

The existing and new home sales reports for May, the Commerce Department's durable goods orders report for May, the weekly jobless claims report, the Bureau of Economic Analysis' personal income and outlays report for May and the final reading of the University of Michigan's consumer sentiment for June are all likely to be in focus during the week. Some degree of attention may also be bestowed on the final reading of first quarter GDP and the weekly oil inventory reports. Traders may also keep an eye on the Treasury Department’s bond auctions, including those of 2-year, 5-year and 7-year notes, scheduled for the week.

The Fed will be left in a dilemma on the course of interest rates, as the central bank is forced to do a balancing act. One section of the FOMC members fears that inflationary pressures may overshoot if the central bank does not state that it is ready with exit strategies. The FOMC statement may show slightly increased optimism on economic growth, while at the same time suggesting that interest rates may remain on hold for a long time due to expectations that inflationary environment will remain benign.

Market expectations for a 75 basis point increase in Fed rates before the end of next year are seen as too aggressive by economists. Even if the economy improves, the unemployment rate will continue to grow, resulting in high idle capacity. So, at least until the second half of next year, we may not see a change in interest rates from the current depressed levels.

Additionally, the Fed is not expected to alter the size of its purchase of mortgage and government bonds, although it could choose to extend the period of the current program. The central bank could also alter the composition of purchases.

Existing home sales are expected to hold within the narrow range they have been in since late last year. Wachovia Securities expects buyers to have remained on the sidelines except in the distressed markets. Additional job losses and the recent rise in mortgage rates should exert downward pressure on sales in the near term.

Durable goods orders are expected to see a drop in May, as regional purchasing managers' surveys showed that conditions in the manufacturing sector haven’t improved considerably. Capacity utilization remains at a historical low. However, IHS Global Insight forecasts a rebound in orders in May, with the firm expecting the reversal of a spike in defense orders masking a positive performance by some key sectors.

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