Market Analysis

Beyond the Number

Rate Fears Render the Mood Cautious
8/24/2016 8:59 AM

The major U.S. index futures are pointing to a slightly higher opening on Wednesday, with sentiment reflecting  nervousness as traders are unclear of the Fed's stance on the pace of further rate increases. Commodities are all low, reflecting the risk off mood, and the dollar is mostly higher. Traders may also seek clues from the existing home sales report due shortly after the markets open. With the major averages closing in on their all time highs yet again, valuations concerns may also weigh down in the minds of traders.
U.S. stocks gave back much of their early gains built up on the back of an optimistic assessment of the global economy and oil’s climb before ending modestly higher on Tuesday, as rate worries continued to taunt traders. 
The major averages opened moderately higher but fell steadily until late afternoon trading. After some sideways movement, the indexes ended slightly higher. 
The Dow Industrials added 17.88 points or 0.10 percent before ending at 18,547, the S&P 500 Index closed 4.26 points or 0.20 percent higher at 2,187 and the Nasdaq Composite ended at 5,260l, up 15.47 points or 0.30 percent. 
Eighteen of the thirty Dow components ended the session higher, but 12 stocks moved to the downside. Nike (NKE) and Cisco Systems (CSCO) were among the best performers of the session, while Wal-Mart (WMT) came under selling pressure. 
Among the sectors, housing and oil service stocks advanced notably, while gold stocks tumbled. 
On the economic front, the Commerce Department reported that new home sales rose 12.4 percent to a seasonally adjusted annual rate of 654,000 in July compared to a revised 582,000 rate for June. The median price of a new home fell 5.1 percent month-over-month to $294,600, rendering the annual rate to –0.5 percent. New home inventories fell 7,000 to 233,000, with inventories measured in terms of months of supply dipping to 4.3 months from 4.9 months. 
The flash estimate released by Markit showed that manufacturing activity expanded at a slower pace in August, with a PMI score of 52.1 compared to 52.9 in July and the 53.2 consensus estimate. 
Currency, Commodity Markets 
Crude oil futures for October delivery are slipping $0.90 to $47.20 a barrel after climbing $0.69 to $48.10 a barrel in the previous session. Meanwhile, an ounce of gold for December delivery is currently trading at $1,341.50, down $4.60 from the previous session’s close of $1,346.10. On Tuesday, gold rose $2.70.

On the currency front, the U.S. dollar is trading at 100.28 yen compared to the 100.24 yen it fetched at the close of New York trading on Tuesday. Against the euro, the dollar is valued at $1.1259 compared to yesterday’s $1.1305.
The Asian markets were biding time until they see Yellen’s Jackson Hole address on Friday and ended mixed. The Japanese, Australian and Singaporean markets advanced, while most of the rest of the major markets closed lower for the session. 
With the yen weakening slightly against the dollar, the Japanese market rose, with the upside also supported by the positive close by Wall Street stocks overnight. 
The Nikkei 225 Index opened higher and hovered in positive territory throughout the session. The index ended up 99.94 points or 0.61 percent at 16,597.  
Most export stocks advanced, capitalizing on the mild weakening of the yen. Food, construction, resource, chemical, utility, pharma and financial stocks also gained ground. On the other hand, retail, telecom, real estate, machinery makers and steel stocks came under selling pressure. 
Australia’s All Ordinaries Index overcame jittery sentiment till the afternoon and moved decisively higher thereafter. The index ended up 6.50 points or 0.12 percent at a fresh 3-week high of 5,654. 
Financial, material, IT, energy and healthcare stocks gained ground, but telecom stocks slumped. Consumer staple stocks also retreated steeply. 
Meanwhile, China’s Shanghai Composite Index ended at 3,086, down 3.83 points or 0.12 percent, and Hong Kong’s Hang Seng Index closed 178.15 points or 0.77 percent lower at 22,821. 
On the economic front, revised data released by Japan’s Cabinet Office showed that the leading economic indicators index rose to 99.2 in June from 98.4 in May, while the flash estimate was at 98.4. The coincident index was also upwardly revised. 
A report released by the Australian Bureau of Statistics showed that construction work done in Australia fell 3.7 percent sequentially in the second quarter, steeper than the 2 percent drop expected by economists. Annually, construction output was down 10.6 percent. 
After a markedly lower opening, European stocks trimmed their losses and are trading mixed. The name of the game is ‘wait and watch,’ as Yellen’s speech draws closer. 
In major corporate news, U.K. miner and commodity trader Glencore reported a steep drop in its first half profits, although the drop was roughly in line with expectations. The company also announced plans to reinstate its dividend, which it scrapped last year amid slumping commodity prices. Ad firm WPP reported strong profit growth, helped by a weak pound in the wake of the Brexit vote. 
On the economic front, the German Federal Statistical Office confirmed its second quarter sequential GDP growth estimate at 0.4 percent, slower than the 0.7 percent growth in the first quarter. Trade contributed to growth and household spending and government spending also rose, but capital formation slipped. 

U.K. mortgage approvals declined to the lowest level since early 2015, the British Bankers' Association reported. The number of mortgages approved in July dropped more-than-expected to 37,662 in July from 39,763 in June. 
U.S. Economic Reports 
The Federal Housing Finance Agency is scheduled to release its house price index for June at 9 am ET. Economists expect house prices to have increased by 0.3 percent month-over-month. 
At 10 am ET, the National Association of Realtors is scheduled to release its existing home sales report for July. Economists expect existing home sales to come in at a seasonally adjusted annual rate of 5.520 million units. 
Existing home sales rose 1.1 percent month-over-month to a seasonally adjusted annual rate of 5.570 million units in June compared to a downwardly revised 5.510 million-unit rate for May. Economists had expected a 5.475 million-unit rate for the month.
Single-family sales rose 0.8 percent and condominium sales were up 3.7 percent.  
Existing home inventories fell 0.9 percent to 2.12 million units, and inventories measured in terms of months of suppl dipped to 4.6 months from 4.7 months. The median sales price of an existing home rose 3.7 percent to $247,700, resulting in an annual rate of growth of 4.7 percent. 

The Energy Information Administration is due to release its weekly petroleum status report for the week ended August 19th at 10:30 am ET. 
Crude oil stockpiles fell by 2.5 million barrels to 521.10 million barrels in the week ended August 12th. Stockpiles were at historically high levels for this time of year.

Gasoline inventories declined by 2.7 million barrels but were well above the upper limit of the average range. Meanwhile, distillate inventories rose by 1.9 million barrels and were near the upper limit of the average range for this time of the year.

Refinery capacity utilization averaged 92.8 percent over the four weeks ended August 12th compared to 92.8 percent for the four weeks ended August 5th.
Stocks in Focus 
Pfizer (PFE) announced an agreement to buy the development and commercialization rights to AstraZeneca’s (AZN) late-stage, small molecule anti-infective business, primarily outside the U.S. The deal has been clinched with an upfront payment of $550 million and a deferred payment of $175 million in January 2019 and potential milestone and sales-related payments of $250 million and $600 million, respectively. 
La-Z-Boy (LZB) reported first quarter earnings and revenues that trailed estimates. 
Intuit’s (INTU) reported a loss for its fourth quarter that was narrower than expected and its revenues also exceeded estimates. However, the company’s first quarter guidance was weak. 
Dycom Industries (DY) reported better than expected adjusted earnings per share and revenues for the fourth quarter. 
Standard & Poor’s announced that S&P SmallCap 600 constituent EnerSys (ENS) will replace DreamWorks Animation (DWA) in the S&P MidCap 400 Index and Wabash National (WNC) will replace EnerSys in the S&P SmallCap 600 Index after the close of trading on August 25th. 
Guess? (GES), HP (HPQ), PVH (PVH) and Williams-Sonoma (WSM) are among the companies due to release their quarterly results after the close of trading. 
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