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Morning Call for June 9, 2011 - Market Summary

A deadlocked OPEC’s failure to raise output quotas lifted oil prices and oil company shares yesterday, and concerns about global growth added to the appeal of defensive shares, boosting utilities and telecommunication issues; however, the meat of the manufacturing sector, basic material and industrials, along with the stuff of business investment, technology, both suffered on eclipsed expansion hopes, sending stock prices to their lowest since March 18. Both the DJIA and S&P500 have now found investors interested in bidding equity prices higher lacking for six straight sessions.

The tech-heavy NASDAQ ended below 2700 for the first time since March 23. An after-the-close warning from Texas Instruments (NYSE:TXN) on second quarter earnings and revenues was attributed to a single customer, and analysts had anticipated a slowdown from Nokia’s (NYSE:NOK) business. The DJ Transports, a leading indicator for economic activity, fell 1.1%, and is now in negative territory for the year.

Today’s futures suggest investors may be in the market for bargains, with the major indices headed for modest gains at the open. After the week’s light showing of macro US posts, today’s calendar provides some news on employment, trade and inventories. Among Fed speakers are addresses from Plosser on the economy and Yellen on housing.

The weekly jobless claims figure is expected to post at 419K, slightly down from 422K a week ago and still stubbornly above the 400K level. Continuing claims are expected to post at 3.7 million, basically unchanged from last week’s 3.711 million.

The nation’s trade balance is expected to post a $49 billion deficit in April as the cost of imports gained on higher oil prices, the euro climbed and manufacturing strengthened. The number would prove the highest deficit since June 2010, slightly higher that March’s $48.2 billion.

The report on April wholesale inventories is forecast to show a 1% gain, their 16th straight increase, reflecting management’s confidence over demand prospects, a sentiment that may weaken as data has softened.

Oil prices extended Wednesday’s near 2% gains, up $0.25 this morning to $100.99 after a divisive OPEC meeting failed to produce the expected increase in output quotas.

Gold futures eased 0.2% to $1535 this morning.

Wednesday markets saw the DJIA close off 22 points for a 0.2% drop to 12,049. The S&P500 dropped 0.4% to finish at 1280. The tech-laden NASDAQ tumbled 1% to end at 2675, as the PHLX semiconductor index dropped 2.1%.

An Oppenheimer upgrade of Verizon (NYSE:VZ) sent the DJIA component 1.5% higher Wednesday; ExxonMobil (NYSE:XOM) announced three new oil and gas finds in the Gulf that could produce 700 million barrels and its shares rose 1%. However, the gains failed to offset Alcoa (NYSE:AA) declines of 1.8%, Caterpillar’s (NYSE:CAT) of 1.8%, American Express’ (NYSE:AXP) of 1.6%, and Cisco’ (NASDAQ:CSCO) of 1.4%. Caterpillar shares fell despite a two-cent dividend boost to $0.46 as management reaffirmed its 2011 earnings outlook to $6.25-$6.75 on revenues of $52 billion-$54 billion.

The ten S&P500 industry sectors showed gains in oil and gas (+0.4%), telecommunications (+0.1%), and utilities (+0.2%). On the downside were basic materials (-1.1%), financials (-1.0%), technology (-0.9%), industrials (-0.8%), consumer services (-0.5%), consumer goods (-0.5%), and health care (-0.1%).

As economic growth forecasts have been lowered and as the Fed exits QE2, prospects for corporate profits and the outlook for stock market indices have also been diminished. According to Credit Suisse’s (NYSE:CS) equity strategist, the S&P500 could fall about 10% to 1170-1200 before ending the year flat at 1275 as the Fed’s end of its quantitative easing program is felt. The outlook for S&P500 earnings showed Credit Suisse expects $100.07 for 2011 and $113.43 for 2012; Citigroup (NYSE:C) forecasts $98 and $105, respectively; Goldman Sachs (NYSE:GS) $96 and $104.

Valuations may be further threatened should Beijing’s efforts to cool inflation burst its property price bubble, causing the hard landing feared by some, and highlighted in today’s WSJ article. This week’s government report is expected to show inflation up in May, a teaser for tightening expectations; however, China Construction Bank’s investment banking unit yesterday asserted a second half stock market rally may take hold as the nation’s tightening cycle ends. The Shanghai Composite ended off 1.7% in today’s trade as Asian markets turned mixed. Hong Kong’s Hang Seng lost 0.2% and Japan’s Nikkei added 0.2%.

Elsewhere, markets are driven by news from Wednesday’s Fed Beige Book that indicated four of the 12 district banks reported manufacturing sector disruptions to the US supply chain from Japan’s quake and soft consumer spending from poor weather and rising food prices. Labor markets “continued to improve gradually,” and housing market problems remained.

It would seem that the economy’s soft patch may indeed prove temporary, and so further accommodation from the Fed both unnecessary and unlikely. Such medicine is hard for investors to swallow. It may prove more difficult still for foreign observers to interpret a possible July endgame on the Hill, with a potential default on its sovereign bonds, even if only of several days’ duration, threatening the nation’s credit rating and overseas’ investors sense of their safe-haven status. So far, Treasuries have ignored the squabble, and yields on the 10-year held below 3% yesterday at 2.946% with prices up 14/32.

The US dollar rose 0.5% to 73.88 Wednesday as traders looked toward end-of-the-week interest rate decisions from central bank peers. Traders are concerned that inflation fears may generate interest rate increases despite a slowing global recovery. Today’s decision by the Bank of England showed rates unchanged, as expected. The ECB is expected to show key lending rates unchanged at 1.25% after last month’s hike lifted rates for the first time in nearly a year. However, in the post-decision announcement, ECB President Trichet may signal a rate boost next month.

According to our analytics team, The SmarTrend® indicators became more oversold as base-hunting continued; the market indices are expected to bounce up today, but a meaningful near-term rally still awaits catalytic reasons not yet apparent.