US & World Daily Markets Financial Briefing 29-06-2009

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Market Action May Remain Muted Ahead of Week’s Key Reports

The major U.S. index futures are pointing to a higher opening on Monday. Although no clear direction is evident, the markets may get some support from bargain hunters, who may be attracted to make an entry after recent lackadaisical performance. In the absence of any major trigger and the likelihood of volumes remaining light in the truncated week ahead of Friday’s public holiday, the markets are unlikely to witness major action and most likely to confine within recent trading ranges.

The commodity space may see some activity as the prices of commodities have begun to move higher. End-of-the-quarter buying could also generate some buying interest. The energy and financial spaces, which are behind much of recent market moves, could play a key role in determining the market direction of the day.

The markets’ recent lackluster phase continued in the week ended June 26th, as the major averages meandered to a mixed close following a negative close in the previous week. Uncertainty surrounding the economic outlook is keeping sentiment subdued, although faint underlying hope that is brought to the forefront with the release of each piece of positive economic data is helping to prevent any major pullback.

Last Monday, the markets declined sharply after the World Bank lowered its forecast for global economic growth, with the major averages pulling back by 2%-3.5%. The major averages closed mixed on Tuesday amid uncertainty over the prospects of an economic revival, even as the Fed began its deliberation on monetary policy.

The markets witnessed another mixed session on Wednesday, as the Fed decision failed to enthuse traders. The Dow Industrials ended lower for the fourth straight session, while the S&P 500 Index and the Nasdaq Composite advanced. Bargain hunting lifted the markets on Thursday, as the major averages all rose in excess of 2%. On Friday, the underlying mood was one of pessimism, as the major averages remained below the unchanged line for much of the session. However, the Nasdaq Composite recovered in the afternoon to close moderately higher.

For the week, the Dow Industrials was down 1.19% and the S&P 500 Index was down 0.25%, while the Nasdaq Composite ended up 0.59%.

Among the sector indexes, the KBW Bank Index ended down 2.44% for the week compared to a 1.02% gain by the NYSE Arca Securities Broker/Dealer Index. The NYSE Arca Oil Index and the Philadelphia Oil Service Index lost 1.90% and 2.30%, respectively, while the NYSE Arca Gold Bugs Index advanced 4%. The NYSE Arca Biotechnology Index posted a weekly gain of 3.25%.

Things seem to be shaping up well in Asia. Last week, a report from Japan suggested that the all industry activity index climbed 2.6% month-over-month in April, marking the first increase since October. Earlier today, Japan's Ministry of Economy, Trade and Industry released industrial production report for May, showing a 5.9% jump in output, marking the third straight month of increases. Based on its survey of manufacturers, the ministry forecasts that industrial output will rise by 3.1% in June and by 0.9% in July. The datapoint supports expectations that the recession in Japan may end soon and the economy will return to growth.

Notwithstanding the positive economic readings, the markets are still cautious. According to State Street, the fragile economy and markets are resilient enough to withstand a significant negative shock, leaving the risks clearly skewed to the downside.

The Dow Industrials is now sandwiched between its 50-day moving average of 8,406 and its 200-day moving average of 8,494. The index has strong support around the 8,138 level. Only if this level is violated clearly to the downside, will the Dow face the risk of dipping down to its November lows or its early March lows. In the absence of any potent catalysts, the average is likely to be rangebound between the 8,138 and 8,862 levels.

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Canadian Stocks Could Start Abbreviated Week A Little Higher

Toronto stocks could see slightly strength in early trading on Monday morning. Commodities prices are slightly higher, while U.S. futures are pointing toward an uncertain open.

Crude oil prices are up 55 cents to $69.71 in electronic trading. Gold has added $1.90 to $942.90 per ounce and copper is up 2.5 cents to $2.334 a pound.

Trading is likely to be light this week with Bay Street markets closed on Wednesday for Canada Day and U.S. markets closed next Friday for Independence Day. On Tuesday, traders will watch for Canadian gross domestic product data.

On the corporate front, Tim Hortons has applied to become a Canadian company, in an effort to save taxes. The vast majority of the doughnut chain's nearly 3,500 restaurants are in Canada.
 
Bombardier workers voted to accept the a labor contract and avoided a strike. A total of 84% of workers voted in favor of the contract, according to Bloomberg.

Friday after the bell, SNC-Lavalin Group Inc. announced the pricing of an aggregate principal amount of $350 million 6.19% debentures.

Terra Energy Corp. said it has received written consent from holders of more than 50% of its common shares to the previously announced offering.

On Friday, the S&P/TSX Composite Index edged up 33.91 points or 0.32% to end at 10,389.76. This marks the market's highest close since June 15.

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The major Asian markets closed mostly lower. Japan’s Nikkei 225 Average opened slightly lower at 9,866 compared to its previous close of 9,877, but it moved above the unchanged line on the release of a positive industrial production report.

However, negative sentiment generated by announcements regarding stock sales dragged the indices below the unchanged line. The average ended weaker at 9,783, representing a loss of 93.92 points or 0.95%. The broader Topix Index of all first section issues declined 11.78 points, or 1.2% to close at 915.

Mizuho Financial, the second largest bank in the country, led the declines following reports that the bank is planning to raise 600 billion yen through the sale of new shares.

The stock declined 4.18%. Among others in the banking space, Mitsubishi UFJ Financial lost 2.78%, Resona Holdings fell 1.95% and Sumitomo Mitsui lost 2.00%. Daiwa Securities declined more than 11% following the news that the company would raise funds in a public offering. Nomura Holdings fell 4.21%.

In Australia, the All Ordinaries Index opened unchanged from its previous close at 3,899. A weak lead from Wall Street and the other Asian markets impacted market sentiment The index traded in a narrow range around the unchanged line amid volatility and ended the session with a loss of 16.80 points or 0.43%, at 3,883. The benchmark S&P/ASX 200 Index followed a similar trend and ended lower at 3,887, representing a loss of 16.90 points, or 0.43%.

Metal stocks declined on softer prices in the international market, while gold stocks also slipped into the red on lower bullion prices. At the same time, financial stocks ended mixed amid concerns about a recovery.

In Hong Kong, the Hang Seng Index opened slightly lower at 18,561 compared to its previous close at 18,600 amid weak global cues. Weak commodity prices and concerns about global recovery kept the index in a narrow range amid volatility and the index finally ended in negative territory with a loss of 71.75 points, or 0.39%, at 18,529.

Resource stocks ended in negative territory on soft commodity prices. Aluminum Corp. of China, or CHALCO, fell 2.70%. PetroChina shed 0.58% and CNOOC, the largest offshore oil firm in China, lost 2.32%. Oil refiner Sinopec Corp, however managed to edge up 0.35%.

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The major European markets are advancing on Monday, with the French CAC 40 Index and the German DAX Index rising 1.21% and 1.18%, respectively. The U.K.’s FTSE 100 Index is moving up 0.59%.

In corporate news, reports suggested that Vodafone is likely to make an offer for T-Mobile’s U.K. unit. Separately, reports said Anglo American, which had earlier last week spurned an unsolicited offer from Xstrata, is looking to form a tie up with Chinalco. The company is reportedly eyeing to sell its Brazilian iron ore assets.

A survey by Hometrack showed that U.K. house prices remained flat in June compared to the previous month, while they declined 8.7% from the previous year. House prices averaged GBP 155,600.

High public debt and the fiscal stimulus are likely to significantly worsen France's fiscal outlook over the medium term, the International Monetary Fund warned. Additionally, the IMF said the fall in tax revenues in 2009-10 due to the sharp contraction in economic output will lead to uncomfortably high fiscal deficits.

A survey by the European Commission showed that Eurozone economic sentiment improved for the third consecutive month in June. The economic confidence index stood at 73.3 in June, up from 70.2 in May and higher than the expected reading of 71. However, the reading stayed below the lows reached in the previous trough at the end of 1992.

U.S. Economic Reports

The monthly non-farm payrolls report for June is likely to headline the economic reports in the unfolding week. Traders are also likely to keep an eye on the jobless claims report for the week ended June 27th, the Conference Board's consumer confidence index for June and the results of the Institute for Supply Management's manufacturing survey for June.

Additionally, the pending home sales report for May, the Commerce Department's construction spending report for May and the S&P Case-Shiller home prices survey for April are likely to in the spotlight. The ISM-Chicago purchasing managers' index for June and factory goods orders report for May could also offer some clues to the economic outlook. Traders may also evince interest in the Fed speeches scheduled for the week and the results of the 3-year and 10-year bond auctions by the Treasury Department, scheduled to be announced on Thursday.

Job losses are likely to moderate further in June, as jobless claims continued to see downside for much of June. The current recession has forced companies to lay-off workers in droves and this could lead to a faster return to job growth once production picks up. However, the insolvency of Chrysler and General Motors may have lead to a large number of temporary and permanent job losses. The jobless rate, being a lagging indicator, is likely to continue to rise at least a year following the end of the recession. Therefore, the unemployment rate could challenge 1983's peak of 10.8%.

With most regional surveys suggesting improvement in June from the month-ago levels, one can expect the ISM's manufacturing index to rise further. Nevertheless, the index may still remain in recession territory. New orders should see a rebound, as most manufacturing sectors, with the exception of the beleaguered auto industry, are seeing a slowdown in the rate of contraction. Brian Bethune from IHS Global Insights is of the view that the third quarter will likely be the critical turning point for the manufacturing sector.

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PMI Group is likely to react to an announcement from Moody’s that it has confirmed the company’s senior debt ratings of B3 and revised its rating outlook to ‘developing.’ The action follows the company successfully executing its amended and restated credit agreement. The amended agreement reduces the size of the facility to $125 million and eliminates certain financial covenants.

Alliance One International could be in focus after it announced that it has priced its previously announced offering of senior notes due 2016. The company noted that the face value of the notes is $570 million with an interest rate of 10% and was priced at 95.177% of the face value for gross proceeds of about $542.5 million.

Northrop Grumman may gain ground after it said it has received a contract along with Cobham Intercoms LLC for the supply of an upgraded vehicle intercom system from the U.S. Army. The contract is valued at $2.4 billion.

Currency, Commodity Futures

Crude oil futures are trading up $0.77 to $69.93 a barrel after showing modest weakness in the week ended June 26th, when they slid $0.86 or 1.23% to $69.16 a barrel.

After rising close to $1.75 a barrel on Tuesday, oil fell modestly on Wednesday, notwithstanding a decline in crude oil stockpiles for the recent reporting week
The commodity drew support from geopolitical tensions surrounding Iran and Nigeria and showed an over $1.50-a-barrel increase on Thursday to $70.23 a barrel. Oil futures slid on Friday, however, as growth concerns dragged stocks lower along with oil.

Meanwhile, the International Energy Agency announced today that it is lowering its oil demand forecast through 2014, citing the contracting global demand in response to the worst economic recession in over 50 years.

Gold futures are trading up $1.80 to $942.80 an ounce. In the previous week, gold advanced $4.80 or 0.51% to $941 an ounce.

The U.S. dollar fell against the yen in the week ended June 26th, dropping 1.13% to 95.185 yen. At the same time, the greenback lost 0.85% against the euro to $1.4056.

Currently, the U.S. dollar is trading at 95.30 yen and is valued at $1.4071 versus the euro. According to Commerzbank, the U.S. dollar is likely to see some strength in the unfolding week on the back of some positive sentiment indicators. That said, the greenback is unlikely to breach the bottom end of its recent trading range of 1.38-1.4150.

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