US & World Daily Markets Financial Briefing 27-04-2009

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Fears of Further Economic Setback Could Sour Sentiment

The major U.S. index futures are pointing to a notably lower opening on Monday. Swine fever-related economic damage may add to worries over a prolonged downturn even as few positive earnings and economic readings have raised faint hopes in the minds of traders over a fledgling recovery. General Motors (GM) may be in the spotlight after it announced that it would exchange $27 billion of its debt for stocks, as it strives to sidestep liquidation.

Additionally, comments from Lawrence Summers, director of the White House National Economic Council, that the recession will prolong for some more time are also likely to pressure stocks. Commodities are also moving to the downside in reaction to prognostication for weak growth for some time to come.

U.S. stocks snapped a six-week winning streak and ended mixed in the week ended April 24th despite most bellwether companies turning in forecast-beating results. The insipid showing reflects a lack of conviction among investors that they have seen the last of the bad news from the financials.

On Monday, Bank of America (BAC) played the spoilsport, pulling the markets sharply lower despite reporting better-than-expected first quarter result. The ballooning of loan loss provisions generated anxiety among traders, leading to a large-scale sell-off. However, the markets rebounded with vigor on Tuesday, cutting some of Monday�s losses. The reversal in sentiment was brought about by comments from U.S. Treasury Secretary Timothy Geithner, who expressed some comfort at the capital adequacy of some banks.

The markets showed uncertainty throughout Wednesday�s session, as traders digested mixed news on the earnings and economics front. Reflecting the uncertainty, the major averages closed Wednesday�s session on a mixed note, with the technology-weighted Nasdaq Composite Index advancing, while the S&P 500 Index and the Dow Jones Industrial Average closed in the red.

A late-selling buying spree lifted the markets out of the woods on Thursday amid anxiety over an impending government announcement about the evaluation criteria for the stress test results. The market continued to climb higher and showed exuberance on Friday, with traders focusing on the positives, including some encouraging earnings reports and the announcement by the Treasury that most banks are adequately capitalized.

During the week, the Dow Industrials ended down 0.68% and the S&P 500 Index fell 0.39%, while the Nasdaq Composite gained 1.3%. Positive earnings from big cap tech stocks gave a shot in the arm for the Nasdaq.

Among the major sectors, financial stocks ended a volatile week mostly lower, as reflected by a 7.1% weekly decline by the KBW Bank Index. The Amex Securities Broker/Dealer Index ended down only modestly, while the Amex Biotechnology index was off 3.29% for the week. However, the Philadelphia Housing Sector ended up 7.01% for the week. In the resource space, the Amex Gold Bugs Index advanced 12.92% and the Philadelphia Oil Service Index moved up 3.55%.

With earnings news set to taper off in a couple of weeks, the markets are likely to shift their focus back to the evolution of business cycle. Markets are most likely stay tuned to earnings, auto restructuring, results of bank stress tests and the U.S. Treasury supply in this week.

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Bay Street Stocks Could Drop In Early Trading

Toronto stocks may give back some recent gains in early trading on Monday as worries over recent swine flu outbreak generating some selling pressure. Toronto's main index finished its previous session at a five-month high.

While the flu does seem to be spreading, many doctors agree that the swine flu is no more panic worthy than any other breakout of the human flu during flu season.

Meanwhile, General Motors presented its updated Viability Plan, which will focus on 4 core brands in U.S. to cut costs. The company also expects to reduce its U.S. dealer count to just over 3,600 by the end of next year.

Energy stocks could also see some weakness with crude oil on the decline in the early going. Light sweet crude for June delivery dropped to $48.51, down $3.04 on the day.
 
In corporate news, Integrated Device Technology announced that it has offered to acquire Tundra Semiconductor in an all cash offer at a price of C$6.25 per share or about C$120.8 million.

HudBay Minerals will also be worth watching amid a report in the Globe and Mail that Indian mining company Lakomasko has purchased about 10% of the struggling Canadian zinc and copper producer.

Ritchie Bros. Auctioneers said it sold US$50 million of equipment at an unreserved public auction in Moerdijk, the Netherlands last week - including US$7 million of equipment that was sold to online bidders.

The S&P/TSX Composite Index rallied 139.98 points or 1.48% to end at 9,549.48, its best finish since November 10. With the rally, Toronto's main index added 112.33 points for the week, erasing a sharp plunge from Monday.

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The major European markets are moving to the downside on Monday, as Swine flu worries are weighing on the averages. The French CAC 40 Index and the German DAX Index are receding 1.41 and 1.36%, respectively, while the U.K.’s FTSE 100 Index is declining 0.94%.

On the economic front, the German Federal Statistics reported that the index of import prices for Germany fell by 7.1% year-over-year in March, marking the biggest price decline since April 1987, which saw a 8.1% drop. On a monthly basis, the index was down 0.4%. The export price index fell 1.7% from last year and edged down 0.4% from the previous month.

Germany’s GfK Institute released the results of its consumer climate survey for April, which showed that Germany’s consumer climate continued to be stable in April after the slight drop in the previous month. The overall consumer climate indicator is forecast to be at 2.5 in May following a revised reading of 2.5 for April.

The economic expectations index rose 1.6 points in April to –31.2 and the income expectations index climbed 3.4 points to –8. Notwithstanding a 1.5 point-decline, the index for the propensity to buy remained 17 points higher than a year-ago at 12.4.

U.S. Economic Reports

The unfolding week, with a host of key economic reports and the FOMC meeting is likely to be keenly watched by traders, who are extremely anxious about getting some clarity on the course of the economy. Along with the 2-day FOMC meeting ending on Wednesday, the Bureau of Economic Analysis' advance first quarter GDP report, the results of the Institute for Supply Management's manufacturing index for April, the BEA's personal income and outlays report for March and the weekly jobless claims report are likely to take the spotlight in the week.

Traders may also evince interest in the S&P Case-Shiller's home price index for February, the Conference Board's consumer confidence index for April, the NAPM-Chicago purchasing managers' index for April and the final reading of the Reuters/University of Michigan's consumer sentiment index for April. Apart from these, the Commerce Department's factory goods orders report for March, the Labor Department's employment cost index for the first quarter and the EIA's weekly oil inventory report are also due to be released in the week.

The Fed is mostly likely to retain its fed funds target rate at the record low of level of 0%-0.25% after holding it at the level in each of its first two meetings of this year. The Fed's focus is now on stabilizing the financial markets and stimulating the economy using quantitative tools and massive expansion of its balance sheet. State Street Global Advisors is of the view that the central bank is more likely to fine-tune the TALF, including a possible expansion into other more impaired credits than to expand its asset purchase program.

The advance first quarter GDP report is likely to show that the U.S. economy contracted for the third straight quarter, although at a slower rate than in the fourth quarter. If the prediction comes true, then the fourth quarter would likely have been the bleakest period in the current economic downturn. Wachovia Securities sees some support for growth from consumer spending, residential investment and exports. That said, business investment in structures is likely to see significant weakness in the first quarter and continue to contract well into 2010.

Going by the regional surveys released earlier in the month, the ISM's manufacturing index is expected to remain weak, while showing tentative signs of improvement. The weak reading is consistent with declines in industrial production and the loss of manufacturing jobs. The manufacturing sector is likely to remain under considerable pressure in the near term due to weak demand, capacity reductions and an inventory glut.

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Monday, the major markets across the Asia-Pacific region closed mostly lower as investors across the region assessed the implications of the swine flu outbreak on the global economy. The World Health Organization declared the strain of swine flu to be a "public health emergency of international concern." Additionally, investors expressed caution as they awaited the results of the stress test on 19 leading U.S. banks, which are expected to be out by May 4.

Despite the weakness seen in most of the markets in the region, the Japanese market closed higher, led by banks and drug makers. However, the strengthening of the dollar, poor earnings reports and negative news flow over the breakout of swine flu limited the upside.

The benchmark Nikkei 225 index rose 18 points or 0.21% to 8,726 and the broader Topix index of all First Section issues on the Tokyo Stock Exchange closed at 833, up 3 points or 0.37%. Trading volume was moderate at about 2 billion shares. While textile and banking stocks closed firm, air and sea transport and mining stocks led the decliners.

Banking stocks closed stronger despite giving up most of their early gains. Pharmaceutical and surgical-mask related stocks also rose in response to news of swine flu spreading in humans worldwide. Chugai Pharmaceutical soared 14.03% on expectations of a pick-up in flu drug sales and Denki Kagaku Kogyo K.K, whose subsidiary Denka Seiken makes flu vaccines, jumped 7.77%. However, All Nippon Airways slumped 5.19% and Japan Airlines tumbled 4.02% on speculation that swine flu will impact passenger traffic.

Shipping stocks came under significant selling pressure due to disappointment over fiscal 2008 earnings. Nippon Yusen fell 3.86%, Mitsui O.S.K. Lines tumbled 5.77% and Kawasaki Kisen moved down 4.46%.

The Australian market closed up modestly, led by gains in the resources sector. The benchmark S&P/ASX200 index closed at 3,732, up 19 points or 0.52% and the broader All Ordinaries index rose 22 points or 0.59% to 3,690.

Among miners, BHP Billiton rose 1.12%, its rival Rio Tinto closed up 0.08% and Iluka Resources advanced 3.43%. Gold miner Newcrest Mining and Lihir Gold also closed sharply higher.

Among airline stocks, Quantas tumbled 4.04% and Virgin Blue slumped 5.36%, weighed down by negative news flow on the flu outbreak. Banking stocks pared all their early gains and closed mostly lower.

The South Korean market finished a volatile session lower for the second day in a row as wary institutional investors indulged in profit taking. The benchmark KOSPI closed at 1,340, down 14 points or 1.1%. Volume was at 537.02 million shares worth 6.79 trillion won (US$5.05 billion) and decliners outnumbered gainers by 491 to 369.

Kia Motor gained 2.44% after JPMorgan Chase & Co. raised its rating outlook on the stock to "neutral" from "underweight". Ssangyong Motor also moved up 1.92%, but Hyundai Motor declined 1.65%.

Among other notable stocks, Hynix Semiconductor rose 1.66% on better-than-expected quarterly results, steel maker POSCO gained 0.38% and telecom stock SK Telecom moved up 0.54%, while Korean Air Line plunged 7.35% and Asiana Air Line tumbled 5.21% on concerns over the swine flu outbreak. Market heavyweight Samsung Electronics declined 1.18% and LG Electronics fell 3.77%.

The Hong Kong market fell sharply, led by airlines and hotel stocks on worries over a drop in international travel following the outbreak of swine flu in Mexico, the U.S. and Canada. The benchmark Hang Seng Index closed at 14,840, down 418 points, or 2.7% and turnover totaled HK$53.01 billion. China's Shanghai Composite Index, which tracks both A and B shares, ended down 1.8% at 2,405 following a 0.6% decline Friday.

Meanwhile, the Indian market exhibited considerable volatility amid profit taking ahead of the expiry of April series derivative contracts on Wednesday and due to a truncated trading week. The market will remain shut on April 30 and May 1 on account of parliamentary elections and Labor Day respectively. The BSE benchmark ended at 11,372, up 42.80 points or a mere 0.38% over the previous close.

Among the other markets in the region, Singapore's STI Straits Times index closed down 1.85% and Taiwan's TWII Weighed index fell nearly 3%.

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