Market Analysis

The major U.S. index futures are pointing to a lower opening on Monday, with sentiment suggesting caution among investors, who are extremely nervous about the extended run up. Economic fundamentals and earnings buoyancy have supported the markets in recent sessions. This is despite the markets facing several headwinds such as the debt crisis in Europe, slowing growth in developing countries and the domestic fiscal concerns. With little catalysts to render direction to the markets, a consolidation move around their recent highs could be a prudent expectation, although M&A news could offer encouragement and support further buying in the markets.

U.S. stocks extended their gains in the week ended May 17th, rising for the fourth straight week, as economic data continued to vouch for the strength of the recovery that has been underway in the domestic economy. The Dow Industrials and the S&P 500 Index closed at new record highs and the Nasdaq Composite rose to a fresh multi-year high.

Last Monday, the major averages took cues from strong retail sales data for April that served to allay the fears concerning a pullback. The averages closed narrowly mixed in the session. Despite the lack of any major domestic catalysts, stocks rose strongly on Tuesday amid economic hopes.

With traders digesting mixed economic data on the manufacturing and housing sectors, the major averages moved about in a lackluster fashion on Wednesday and yet closed moderately higher. However, the major averages lost ground on Thursday, as traders turned wary after digesting mixed economic and earnings news. The release of a positive consumer sentiment report and leading economic indicators index, the markets returned to their winning ways on Friday, ending notably higher.



For the week ended May 17th, the Dow Industrials rose 1.56 percent and the S&P 500 Index climbed 2.07 percent, while the Nasdaq Composite Index advanced 1.82 percent.

Among the sector indexes, the NYSE Arca Securities Broker/Dealer Index and the KBW Bank Index added over 4 percent each for the week. The Dow Jones Transportation Average, the NYSE Arca Oil Index and the Philadelphia Housing Sector Index all moved up over 2 percent, while the NYSE Arca Gold Bugs Index tumbled 12.11 percent.

The Dow Industrials is currently at a new record closing high of 15,354, with the economic momentum expected to support the overbought markets unless strong downside catalysts emerge. In the eventuality of the index undergoing a correction, a pullback towards the 15,271, 15,222 and 15,123 levels are likely. A strong downside support is also available in the form of the index’s 21-day MA of 14,933.



Currency, Commodity Markets

Crude oil futures are slipping $0.32 to $95.70a barrel after edging down $0.02 or 0.02 percent to $96.02 a barrel in the week ended May 17th.

Last Monday, oil extended its slide, declining moderately, amid the reduction in risk appetite and despite the release of U.S. retail sales report for April showing an unexpected increase in retail sales. The commodity lost close to $1 a barrel on Tuesday amid a lack of any meaningful catalysts.

Oil reversed its slide and ended modestly higher on Wednesday following the release of mixed economic data and the weekly oil inventory report. The commodity rose moderately on Thursday and rose by the same magnitude yet again on Friday, as traders digested mostly positive economic data, and yet ended the week marginally lower.

Gold futures, which fell $71.90 or 5 percent to $1,364.70 an ounce in the previous week, are currently declining $5.50 to $1,359.20 an ounce.

Among currencies, the dollar strengthened against most currencies in the recent week, as positive economic evidence from the world’s largest economy kept the currency in favor. Additionally, speculation concerning the Fed scaling back its quantitative easing also offered support to the buck. The dollar rose 1.11 percent against the euro before ending the week ended May 17th at $1.2839, while it climbed 1.53 percent against the yen to 103.21 yen.

The U.S. dollar is trading at 102.43 yen and is valued at $1.2859 versus the euro.

Asia

The major Asian markets advanced strongly, encouraged by Wall Street’s resilience in the wake of positive economic evidence. Meanwhile, the South Korean market bucked the uptrend, with the Kospi average declining modestly on geopolitical concerns after neighbor North Korea resorted to a series of missile launches.

Japan’s Nikkei 225 average opened higher and advanced steadily until the mid-session. Thereafter, the index went about a consolidation move before closing up 222.69 points or 1.47 percent at 15,361. The gains came despite the firming up of the yen

Sharp, Tokuyama and Japan Steel Works all rallied over 16 percent, while Tokyo Electric Power, Mitsubishi Motors, Nippon Yusen and Kobe Steel were also among the best performers of the session. Meanwhile, banks, real estate, pharna, cement and utility stocks came under selling pressure.

Australia’s All Ordinaries opened higher and rose sharply in early trading. With the buying momentum slowing, the index began moving roughly sideways in late morning trading. After consolidating till the mid-session, the index gave back some of its gains over the course of the afternoon and yet closed up 25.60 points or 0.50 percent at 5,185. Most sector stocks advanced modestly, with the exception of healthcare stocks.

Hong Kong’s Hang Seng closed at 23,493, up 410.35 points or 1.78 percent, and China’s Shanghai Composite Index rallied 17.12 points or 0.75 percent before closing at 2,300.

On the economic front, Japan’s Cabinet Office upgraded its assessment of the domestic economy, citing the positive influence a weaker yen has on exports and factory output. The Cabinet Office said the Japanese economy is picking up slowly as opposed to its earlier commentary that the economy is showing signs of picking up, with weakness seen in some areas.

Final estimates released by Japan’s Cabinet Office showed its leading economic indicators index rose to 97.9 in March from 97.4 in February, upwardly revised from the previously reported reading of 97.6. The coincident index rose 1.3 points to 93.8, while the lagging index was up 0.5 points to 87.6.

Europe

European stocks started on a firm note, with the averages holding above the unchanged line until the afternoon. Subsequently, selling pressure emerged and the averages either gave back all their gains or trimmed their gains. The French CAC 40 Index is currently lower, while the German DAX Index and the U.K. FTSE 100 Index are trading above the unchanged.

In corporate news, budget carrier Ryanair reported full year profits that rose 13 percent and also came in ahead of estimates by most analysts.

A report released by Rightmove showed that house prices in the U.K. rose for the fifth straight month, advancing 2.1 percent month-over-month in May, as inventories shrank. Annually, prices were up 2.5 percent.

U.S. Economic Reports

The markets get to digest a few key economic reports in the unfolding week after the flurry of data released last week. The focus of the week is likely to be on a speech by Federal Reserve Chairman Ben Bernanke, the National Association of Realtors’ existing home sales data for April, the Commerce Department’s new home sales report for April, the weekly jobless claims report, the minutes of the FOMC meeting held between April 30th and May 1st and the Commerce Department’s durable goods orders report for April.

The Chicago Federal Reserve’s national activity index for May, the Federal House Finance Agency’s house price index for March and announcements concerning Treasury auctions of 2-year, 5-year and 7-year notes round up the economic events of the week.

The Chicago Federal Reserve is due to release its monthly index measuring overall economic activity at 8:30 am ET.

Stocks in Focus

Actavis Inc. (ACT) announced that it will acquire Warner Chilcott (WCRX) in a stock-for-stock transaction valued at about $8.5 billion.

Websense, Inc. (WBSN) has agreed to be acquired by Vista Equity Partners, a leading private equity firm focused on investments in software, data and technology-enabled businesses.

Chesapeake Energy Corp. (CHK) has tapped Anadarko Petroleum Corp. (APC) executive Robert Douglas Lawler to become its Chief Executive Officer and a member of the board.

Yahoo! Inc. (YHOO) announced a definitive agreement to acquire Tumblr for total consideration of approximately $1.1 billion. Tumblr is a media network powered by independent creators and home to an audience of more than 300 million unique visitors.

Elan (ELN) announced deals to buy Austria’s AOP Orphan for 263.5 million euros and a 48 percent stake in Dubai’s Newbridge Pharma. Additionally, the company announced a new $200 million stock buyback program and a proposal to offer $800 million in aggregate principal amount of senior notes due 2021.