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Beyond the Number

Valuation Concerns Could Temper Momentum
3/3/2015 9:04 AM

The major U.S. index futures are pointing to lower opening on Tuesday, with sentiment reflecting nervousness of traders about the overbought levels. On Monday, the Dow Industrials and the S&P 500 Index hit fresh closing highs, while the Nasdaq Composite scaled a 15-year peak. With the monetary policy outlook ever so uncertain, traders may seek more convincing catalysts for the upward momentum to be sustained. Across the Atlantic, the mood turned negative after a positive start. The mood in the domestic markets may largely depend on the monthly sales results of the U.S. automakers and some earnings reported ahead of the market open.

U.S. stocks advanced in the first trading session of March on Monday, with the Dow Industrials and the S&P 500 Index hitting fresh closing highs, while the Nasdaq Composite moved back above the 5,000 level. The gains came despite domestic economic data disappointing to the downside, although there were positive triggers in the form of a surprise rate cut by the People’s Bank of China and M&A news.

The major averages opened higher and rose steadily in early trading. After moving roughly sideways till late afternoon trading, the averages advanced yet again before closing notably higher.

The Dow Industrials ended up 155.93 points or 0.86 percent at 18,289, the S&P 500 Index added 12.89 points or 0.61 percent before closing at 2,117 and the Nasdaq Composite ended at 5,008, up 44.57 points or 0.90 percent.

Twenty-six of the thirty Dow components closed higher, while the remaining four stocks retreated. Cisco Systems (CSCO), Intel (INTC), United Technologies (UTX) and Boeing (BA) were among the biggest gainers of the session.

Airline, semiconductor, financial and retail stocks moved to the upside, while utility, oil, and gold stocks came under selling pressure.

On the economic front, the Institute for Supply Management’s manufacturing PMI fell to 52.9 in February from 53.5 in January, hitting the lowest level since January 2014. The new orders index slipped 0.4 points to 52.5, the lowest since May 2013, while the order backlogs index rebounded by 5.5 points. The production index dipped to a 1-year low and the employment index declined to 51.4 from 54.1. Of the 18 industries surveyed, 12 reported growth compared to 14 in the previous month. The ISM attributed some of the weakness to the West coast port strike.

Meanwhile, final estimates released by Markit showed that manufacturing activity expanded more than expected in February. Markit’s manufacturing PMI rose to 55.1 from 53.9 in January, coming in higher than the consensus estimate of 54 and the mid-month reading of 53.9.

Personal income rose a little less than expected and personal spending unexpectedly fell, according to a report released by the Commerce Department. Personal income rose by 0.3 percent month-over-month, thanks to a 0.6 percent increase in wages and salaries. Personal spending fell for the second straight month, dropping 0.2 percent compared to expectations for an unchanged reading. The personal savings rate rose to 5.5 percent from 5 percent, reaching the highest level since December 2012. The core price consumption expenditure index was up 0.1 percent month-over-month and was 1.3 higher from a year ago.

Another report released by the Commerce Department showed that construction spending fell 1.1 percent month-over-month in January following a 0.8 percent increase in December. Economists expected a 0.3 percent increase for the month. Public construction spending fell 2.6 percent and private non-residential construction spending was down 1.6 percent, while private residential construction spending rose 0.6 percent.

Currency, Commodity Markets

Crude oil futures are rising $0.38 to $49.97 a barrel after slipping $0.17 to $49.59 a barrel on Monday. Meanwhile, an ounce of gold is currently trading at $1,207.30, down $0.90 from the previous session’s close of $1,208.20. On Monday, gold fell $4.90.

On the currency front, the U.S. dollar is trading at 119.73 yen compared to the 120.13 yen it fetched at the close of New York trading on Monday. Against the euro, the dollar is valued at $1.1168 compared to yesterday’s $1.1184.

Asia

The major Asian markets ended on a mixed note, as the overnight gains on Wall Street spurred buying in some markets, while the Australian market took a hit from the Reserve Bank of Australia’s monetary policy announcement. The Chinese and Hong Kong markets also retreated sharply, while the Japanese market was little changed.

Japanese stocks reacted to a rebound by the yen after it weakened about 0.4 percent in Monday’s session. Japan’s Nikkei 225 average opened higher and was firmer till early afternoon trading. After retreating sharply in the mid-session, the index recouped some of its losses over the remainder of the session. The index ended down 11.72 points or 0.06 percent at 18,815.

Export stocks moved mostly to the downside, while strength among defensive food, telecom, pharma and financial stocks helped to limit the downside.

Australia’s All Ordinaries held above the unchanged line till the monetary policy announcement in late trading. Thereafter, the index languished in the red before closing down 23.40 points or 0.39 percent at 5,903.

Material and utility stocks retreated sharply, while telecom, financial and energy stocks also saw weakness. On the other hand, IT, industrial and consumer stocks moved to the upside.

Hon Kong’s Hang Seng Index ended 184.57 points or 0.74 percent lower at 24,703, while China’s Shanghai Composite Index tumbled by 73.23 points or 2.20 percent to 3,263.

On the economic front, the Reserve Bank of Australia decided to leave its policy rate unchanged after lowering it by 25 basis points to 2.25 percent at its February meeting. Strength in the housing market may have acted as a deterrent for the central bank to announce back-to-back rate reductions even as it has indicated that the economy is growing at a below-trend pace.

A report released by the Reserve Bank of Australia showed that building approvals rose 7.9 percent month-over-month in January, belying expectations for a 1.8 percent drop. Another report showed that the nation’s current account deficit was narrower than estimated at A$9.588 billion.

Data released by the Bank of Japan showed that the monetary base surged up 36.7 percent year-over-year in February following a 37.4 percent increase in January. A separate government report showed that total labor cash earnings rose 1.3 percent year-over-year in January, the same rate as in December but more than the 0.5 percent increase expected by economists.

Europe

European stocks opened higher and advanced in the morning session amid the release of some positive economic data and fairly encouraging corporate news. However, by the mid-session, the indexes lost ground and have retreated into negative territory.

In corporate news, commodity trader Glencore reported a profit for the full year that was in line with estimates. Germany’s Merck KGaA reported higher EBITDA for the fourth quarter and said it expects sales in 2015 to grow slightly.

Barclays (BCS) reported a decline in its pre-tax profits in 2014, hurt by charges set aside to meet forex settlement expenses.

On the economic front, the German Federal Statistical Office reported that retail sales in Germany rose at a faster rate of 2.9 percent month-over-month in January. Economists expected a mere 0.4 percent increase for the month.

The results of a survey by Markit and the CIPS showed that the U.K. construction sector PMI rose to 60.1 in February from 59.1in January, while it was expected to drop to 59.

A producer price inflation report released by Eurostat showed that eurozone producer prices fell the most since November 2009, dragged down by lower energy prices.

U.S. Economic Reports

Automakers are scheduled to release their monthly auto sales results for February. Economists expect total vehicle sales to come in at a seasonally adjusted annual rate of 16.7 million units, flat with the previous month.

Federal Reserve Chair Janet Yellen is due to speak on bank regulation in New York at 8:15 pm ET.

Stocks in Focus

Best Buy (BBY) reported better than expected fourth quarter earnings and raised its dividend by 21 percent. Meanwhile, its revenues missed expectations.

Mylan Labs (MYL) reported fourth quarter adjusted earnings that were in line and its revenues were ahead of expectations. The company forecast 2015 earnings and revenues in line with estimates.

AutoZone’s (AZO) second quarter results exceeded estimates.

Citigroup (C) said it agreed to sell OneMain Financial Holdings, Inc. to Springleaf Holdings (LEAF) for a purchase price of $4.25 billion.

DICK’s Sporting Goods (DKS) reported better than expected fourth quarter results, while its 2015 earnings guidance was lackluster.

Stage Stores (SSI) reported better than expected fourth quarter earnings, while its revenues missed estimates. The company’s 2015 guidance was lackluster.

Nutrisystem’s (NTRI) fourth quarter earnings were better than expected, and the company issued in line earnings guidance for the first quarter and the full year.

McDermott (MDR) reported better than expected fourth quarter results and its 2015 revenue guidance was also above estimates. The company also said it expects annual cash savings, excluding restructuring costs, of about $50 million in 2015, with the annualized savings being bumped up to $100 million in 2016.

MBIA (MBI) reported lower earnings for its fourth quarter, but the results still came in above estimates.

GenCorp. (GY) announced the appointment of United Technologies executive Eileen Drake as its COO.

Nabors (NBR) reported fourth quarter adjusted earnings from continuing operations that missed estimates.

ABM Industries (ABM), Bob Evans (BOBE), Career Education (CECO), Smith & Wesson (SWHC) and TiVo (TIVO) are among the companies due to release their quarterly results after the close of trading.
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