The major U.S. index futures are pointing to a lower opening on Monday. Stocks may see weakness, as traders look to take profits after Friday's sharp advances. Reports that Home Depot (HD) is settling for a lower price for its HD Supply business is expected to act as an overhang, reminding traders of the continuing risks due to the credit market crisis. Nonetheless, M&A news could help cushion any drop, as deal activity signals that corporations are confident of future profit growth. The price of oil has not moved much, and this could support oil-sensitive stocks. Sentiment may largely be determined by the existing home sales data to be released shortly after the markets open.
The U.S. markets advanced strongly in the week ended August 24th , propped up by M&A activity and strong economic numbers released during the week. After moving to the upside at the end of the previous week, the markets spent the first two sessions of the week on a cautious note amid fears that the credit crisis still remains a headwind. Nonetheless, the return of deal activity encouraged traders on Wednesday, while on Thursday optimism gave way to caution. Strong readings on the housing and durable goods manufacturing sector brought back buoyancy to the markets on Friday.
The Dow Industrials rose 2.29% during the week ended August 24th compared to a 2.32% advance by the Nasdaq Composite Index. The S&P 500 Index posted a weekly gain of 2.86%. The Dow Industrials ended Friday's trading at its best closing level in over two weeks.
Resources stocks were mostly higher. Despite a weekly decline in oil prices, the Amex Oil Index was up 3.28% for the week. The Amex Gold Bugs Index advanced 6.14%, while the S&P Retail Index gained about 4%.
Sherry Cooper from BMO Capital Markets does not expect the credit crisis to cause severe economic danger. Nonetheless, the economist expects a modest dampening of the economic outlook and a delay in the recovery of the U.S. housing market. While noting that the growing market stress has led to a significant re-pricing of risk, the economist also highlighted the fact that the re-pricing has not been so much as in the case of the previous market crises. As a corollary of the events, lenders may limit loans, impacting consumer sentiment and business investment. Additionally, the increase in the cost of capital and the risk aversion could reduce the number of leveraged buyouts and acquisitions. There is also the danger of more hedge funds and non-conventional mortgage lenders shutting operations.
The previous market crashes, such as the stock market crash of 1987, the peso crisis in 1995, the Asian crisis in 1997 and the Russian debt default/LTCM crisis in 1998, did not lead to recessions, but only to mid-cycle slowdowns. With stocks better value and interest rates lower now than during any of the previous crises, the probability of the U.S. economy slipping into a recession is low.
Consequent to the recent developments, most market participants have scaled back the chances for an inter-meeting cut in the U.S. Fed funds rate. However, hope now strengthens for a 25 basis point cut in rates at the Fed's September meeting. In the past, the Fed implemented inter-meeting cuts on January 3, 2001 and on October 15th, 1998 following the collapse of the LTCM. Additionally, former Chairman Alan Greenspan came to the rescue of the markets, especially following the 1987 stock market crash and the early 1990 savings & lending crisis, the 1998 credit crunch and the 2000 tech bubble burst.
Currency, commodity markets
Crude oil futures ended the week ended August 24th at $71.09 a barrel, down $0.73 a barrel from the previous week. Currently, crude futures for October delivery are trading up $0.20 at $71.29 a barrel.
Meanwhile, gold futures advanced $10.70 an ounce or 1.6% in the week ended August 24th to $677.50. The yellow metal gained ground amid weakness in the U.S. dollar and the rebound by the equity markets. Currently, an ounce of gold is fetching $676.50, representing a decrease of $1.
On the currency front, the U.S. dollar ended the week at 116.45 yen, up 1.81% from the 114.3750 yen it fetched at the end of the previous week. Meanwhile, the dollar traded at $1.3676 a euro at the end of the week compared to $1.3475 in the previous week. The dollar posted a weekly loss of about 1.5% versus the 13-nation currency.
The dollar's gains may have been triggered by large-scale build up in carry trade position following the revival in equity markets last week. Additionally, economic reports suggesting strong growth in the U.S. lent hopes of robust global growth, thereby increasing the risk appetite of investors.
DBS Research Group believes that the worst is not yet over for the financial markets. The firm believes that the rise in the yen against the dollar from its bottom on August 17th is likely to be due to short covering. According to the firm, the dollar has to break above its two key resistances at 116.90 and 117.90 to assume comfortably that yen carry trades have returned. Broadly, DBS Research Group expects the dollar/yen pair to be in a consolidation phase.
A dollar is currently worth 116.23 yen and is trading at $1.3656 versus the euro.
Asia
The major Asian markets ended higher in Monday's session. The optimism stemmed from the gains recorded by Wall Street stocks last Friday. The Japanese Nikkei 225 average gap-opened higher, but the emergence of selling pressure eroded much of its early gains. The index closed up 52.42 points or 0.32% at 16,301, off its intra-day high of 16,505.
Honda Motor rose 2.43% and Toyota Motor climbed 0.60%, while most of other auto stocks also advanced. Other noteworthy gainers included Credit Saison, Japan Airlines, Japan Tobacco, Mitsubishi Chemicals, Nikon Corp., NTT DoCoMo, Yahoo Japan and Tosoh.
Meanwhile, the steel space saw mixed sentiment. Japan Steel Work and Kobe Steel rose modestly, while Nippon Steel slipped 0.12%. The pullback in oil prices led the oil space lower. Inpex Holdings eased 0.30% and Nippon Oil declined 0.21%. Mining stocks revealed a lackluster performance.
Aeon receded 2.84%. Other decliners included Asahi Glass, Daiichi Sankyo, Dentsu, GS Yuasa, Mitsubishi Corp., Mitsui & Co., Nisshin Oillio, NSK, Sojitz and Sumitomo Heavy Industries.
Australia's All Ordinaries opened unchanged and rose in early trading. Thereafter, the index traded mostly sideways before ending up 97.70 points or 1.61% at 6,185. Energy stocks fueled much of the market's advance, while other sector stocks also lent support to the market. Significant buying interest was also visible among healthcare, consumer staple, industrial and material stocks.
Miners Alumina, BHP Billiton, Zinifex and Rio Tinto rose in the session. Rio Tinto announced today that it has received U.S. anti-trust clearance for its impending acquisition of Alcan. Oil stock Woodside Petroleum also gained.
Banking stocks Westpac, National Australia Bank, Macquarie Bank and Commonwealth Bank also gained ground in the session. Retailers Woolworths and Coles also moved to the upside.
Hong Kong's Hang Seng gap-opened significantly higher and traded sideways for the rest of the session. At the close of trading, the index was up 655.84 points or 2.86% at 23,578. Monday's closing level represents a record performance. The buoyancy can be traced back to a Chinese government move towards allowing domestic individual investors in foreign stocks listed in other exchanges.
Property stocks Cheung Kong, Wharf Holdings, Henderson Land, Shopping Property, New World Development, Swire Pacific, Sino Land and Hang Lung Properties posted sharp gains. Index heavyweight HSBC Holdings advanced 0.43%. Other financial stocks also found buying interest.
CCB, Cosco Pacific and Ping An were all up over 5%. China related shares gained ground in the session, with heavily weighted China Mobile rising about 4.14%. Hong Kong Electric and Yue Yuen Industries were the lone decliners in the session, dropping about 0.13% and 1.24%, respectively.
South Korea's Kospi, which rose to an intra-day high of 1,835 in early trading, surrendered most of its gains before ending at 1,803, representing an advance of 11.70 points or 0.65%.
Steel maker Posco rallied 4.5%, while shipbuilders Hyundai Heavy Industries and Daewoo Shipbuilding also posted significant gains. However, technology shares Samsung Electronics and Hynix Semiconductor and auto stocks Hyundai and Kia Motors ended the session lower. Kia Motors reacted negatively to the news that production is hurt by a strike call by temporary workers.
The Chinese Shanghai Composite Index hovered in positive territory for most of Monday's session, except for a moment of weakness in early afternoon trading. The index ended the session up 42.45 points or 0.83% at 5,150.
In India, the Sensex opened with a modest gain and the buying momentum picked up over the course of trading, as the index ended up 417.51 points or 2.89% at 14,842. The market witnessed all around buying interest, with bank, realty and consumer durable stocks posting appreciable gains.
Among the other markets in the region, Singapore's Straits Times Index advanced 0.56% and Taiwan's Weighted Average Index edged up 0.32%. The Malaysian KLSE Composite Index rose 0.37%, while New Zealand's NZ50 average was up 0.79%.
Europe
The major European markets are trading higher in Monday's session. The U.K. market remained closed on account of the banking holiday. The French CAC 40 Index is rising 0.83% compared to a 0.20% decline by the German DAX Index.
In Paris, Alstom and Renault are leading the market's advances, with gains of about 1.90% and 1.75%, respectively. Other gainers include financial stocks BNP Paribas, Credit Agricole, Dexia and Axa, Essilor International, EDF and Carrefour. On the other hand, technology stocks STMicroelectronics, Cap Gemini, Vinci, Vallourec, Thomson and Vallourec are posting losses.
Among Frankfurt stocks, auto stocks DaimlerChrysler and Volkswagen are gaining, while BMW is receding. Tire maker Continental is also firming up. Merck KgaA and BASF are moving to the upside. However, Siemens, Deutsche Post, RWE, SAP, Deutsche Postbank, E.ON and Man are receding.
U.S. Economic Reports
The upcoming week is likely to witness the release of a few key reports such as the preliminary second quarter GDP report and personal income & outlays report for July. Apart from these, the markets may also focus on existing home sales for July, the consumer confidence index of the Conference Board, the Chicago National Association of Purchasing Managers' purchasing managers' index for August, and the University of Michigan's consumer sentiment index for August. Another noteworthy release that may be in the spotlight is the minutes of the August FOMC meeting.
Data released following the publishing of the advance second quarter GDP estimate favor an upward revision to growth. Despite a pick up in manufacturing growth and fairly decent retail sales growth, economists are not upbeat about growth going forward. Wachovia expects GDP growth to be 1.9% in 2007 and 2.5% in 2008. Meanwhile, the personal income & outlays report is expected to show that personal income growth remains solid.
Although economists expect some improvement in home sales, basing their optimism on the recent rise in the pending home sales index, the credit market crisis may keep a lid on gains.
According to Wachovia Securities, the Conference Board's consumer confidence index has a strong positive correlation to the health of the labor market. Going by the recent labor market data, one can expect the index to hold up. Nonetheless, the financial market turmoil could have dented consumer confidence to some extent.
The number of previously constructed homes, condominiums and co-operatives in which sales closed is expected to be 5.90 million units for July. The Existing Home Sales data is due out at 10 AM ET on Monday.
Existing home sales declined 3.8% in June to a seasonally adjusted annual rate of 5.75 million units from a downwardly revised 5.98-million unit-annual rate in May. June sales were about 11.4% lower than in the year-ago period.
The national median existing home price rose 0.3% in June to $230.100 from June 2006. The total housing inventory declined 4.3% at the end of June to 4.20 million existing homes available for sale, representing a supply of 8.8 months at the current sales pace.
Among categories, single-family home sales dipped 3.5%, while existing condominium and co-op sales fell 6.3%. Regionally, existing home sales slipped 1.7% in the South compared to a 2.8% fall in the Midwest. Sales in the West and Northeast declined 6.8% and 7.3%, respectively.
Stocks in Focus
Marsh & McLennan (MMC) could be in focus over its announcement that it has entered into an agreement with a financial institution for an accelerated buyback of up to $600 million shares. The company clarified that the buyback is a part of the $1.5 billion share repurchase the company announced on August 7th. Rambus (RMBS) rallied in Friday's after hours trading after it said that the special litigation committee the company's board instituted to review stock option granting practices has recommended ending all disputes with all former employees except its former Vice President Human Resources Ed Larsen. The company has agreed to settle with all former employees for more than $6.5 million in cash and cash equivalents.
Sun-Times Media Group (SVN) is likely to recede after it said its investment in asset-backed securities of aggregate value of $48 million was not redeemed and remain outstanding. Additionally, the company noted that it has $47 million of investments that will mature between August 27, 2007 and September 10, 2007. Altria (MO) could react to media reports that it may spin-off its Philips Morris International division to sidestep the legal and public relation problems in the U.S.
United Steel (X) could be in focus over its announcement that it has entered into an agreement to acquire all outstanding shares of Stelco for C$38.50 per share in cash or U.S.$1.1 billion. The acquisition is expected to close before the end of 2007. Chicago Bridge & Iron (CBI) is expected to react to the news that the company will acquire Lummus Global business from ABB (ABB) for an enterprise value of $950 million on a debt and cash free basis. The company expects to close the deal in the fourth quarter of 2007.
Gateway (GTW) may rally after it said it has agreed to be bought by Taiwan-based Acer for $710 million or $1.90 per share. Home Depot (HD) could react to reports that it has agreed to reduce the sale price of its HD Supply unit by $1.88 billion.
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