The major U.S. index futures are pointing to a significantly lower opening on Monday. The unfolding events in the financial space may become too much to digest and leave the traders unsettled. A U.K. mortgage lender had to be rescued at the brink of going under, while the Benelux governments moved forward to nationalize Fortis. Across the Atlantic, Charlotte-based Wachovia (WB) was essentially taken over by Citigroup (C) under government supervision. Against this backdrop, the rescue package, which is scheduled to be discussed today by Congress, may not completely alleviate the anxiety of traders.
Unnerved by the uncertainty over the implementation of the $700 billion dollar rescue package, U.S. stocks receded sharply in the week ended September 26th after closing mixed in the previous week. The major averages plummeted on Monday, with the Dow Industrials and the S&P 500 Index losing more than 3% each. The markets receded again on Tuesday, with the major averages losing more than 1% each.
Although sentiment improved on Wednesday on the back of a proposed investment in Goldman Sachs (GS) by Warren Buffet, the major averages witnessed significant volatility before ending modestly lower. However, the markets advanced solidly in the next two trading sessions of the weeks on hopes that the government will expedite the implementation of the rescue package. The late-week revival helped the averages snap back some of their losses.
During the week, the Dow Industrials ended down 2.15% and the Nasdaq Composite fell 3.98%, while the S&P 500 Index receded 3.33%.
Among the sector indexes, the Amex Securities Broker Index declined 9.15% and the KBW Bank Index fell 10.53% in a week that saw the two of the three remaining investment banks obtaining permission from the Federal Reserve to convert themselves to bank holding companies and Washington Mutual was taken over by the Federal Deposit Insurance Corporation-FDIC.
The Dow Jones Transportation Average retreated 6.85% for the week compared to a 14.72% tumble by the Amex Airline Index. The Philadelphia Housing Sector Index and the S&P Retail Index fell 6.12% and 4.71%, respectively. The Philadelphia Semiconductor Index receded 3.68%. While the Amex Oil Index posted a weekly loss of 2.02%, the Philadelphia Oil Service Sector Index fell 6.49%. On the other hand, the Amex Gold Bugs Index rose 1.68%.
Bailout Plan Inching Closer to Implementation
Lawmakers burnt the midnight oil in their pursuit of a solution to the deadlock over their disagreements on the rescue package proposed by Treasury Secretary Henry Paulson. The proposed bill is likely to be moved to the House of Representatives later today. Some of the ingredients of the plan are provisions to make the participating banks liable for five years for any losses the government suffers on the assets it purchases from these banks, to grant equity stake in the form of warrants to the government and to limit the executive compensation. Analysts see the plan mostly as a liquidity provision plan.
Currency, Commodity Markets
Crude oil futures are showing some weakness after the commodity saw strength in the week ended September 26th. The commodity gained 4% last week to $106.89 a barrel. Oil surged up last Monday, although it declined in the next two trading sessions of the week. The black gold advanced on Thursday only to recede again on Friday.
A barrel of oil is currently fetching$101.09, representing a decline of $5.80.
Meanwhile, gold futures are currently declining $6.70 to $881.80 an ounce. In the previous week, the precious metal had gained 2.75% to $888.50 an ounce. After climbing sharply on Monday on the back of a sharp rally in the crude oil prices, the commodity pulled back notably on Tuesday, giving back part of the gains its notched on Monday. Gold rose modestly on Wednesday, but it declined sharply on Thursday before recovering mildly in the last trading session of the week.
Among the currencies, the U.S. dollar weakened against the yen and the euro in the week ended September 26th, as some bleak economic readings and the wrangling over the rescue package exerted downward pressure on the dollar. The dollar posted a weekly loss of 1.34% against the yen and 1.02% against the euro.
The dollar is currently trading at 105.651 yen and is worth $1.4382 versus the euro.
Asia
Stock markets across the Asia-Pacific region closed lower on Monday, led by Hong Kong and India, ahead of a vote in both the Senate and the Congress on the revised $700 billion rescue package agreed by the U.S. lawmakers. Investors turned cautious on concerns about the effectiveness of the plan and also on worries about the health of financial institutions in Europe. The stock markets in China, Malaysia, and Taiwan remained closed on account of public holidays.
The Japanese stock market pared early gains to close lower, extending losses for a third day. The benchmark Nikkei 225 index closed down 149.55 points or 1.26% at 11,744.
On the economic front, Japanese retail sales rose 0.7% in August from a year-earlier, rising for the 13th straight month, the Ministry of Economy, Trade and Industry said. In July, retail sales rose by a revised 2.0% year-over-year. Sales at department stores and supermarkets fell, for the fifth straight month, by 2.2% on year after adjustment for the change in the number of stores.
Stocks declined almost across the board, led by sea transport, mining and trading houses. Shippers extended last week's slide after the Baltic Exchange's chief freight index for global raw materials trade tumbled more than 10% on Friday. Mitsui OSK Lines plummeted 6.0% and Kawasaki Kisen Kaisha slumped 6.3%. Commodity-related stocks fell as oil prices continued to decline on Monday in the Asian session.
Among financials, Mitsubishi UFJ Financial Group rose 0.6%, but Mizuho Financial Group declined 1.5% and Sumitomo Mitsui Financial Group shed 1.6%. Top brokerage Nomura Holdings lost 2.5% and Daiwa Securities Group lost 1.9%. Sompo Japan Insurance gave away 1.5% and Mitsui Sumitomo Insurance plunged 5.0%.
The South Korean market closed lower as steep falls in the won weighed on banks. The Korea Composite Stock Price Index or KOSPI closed down 19.97 points or 1.35% at 1,456.
Among financials, Hana Financial Group plunged 6.8% and Woori Finance Holdings shed 4.4%. In the tech space, Hynix Semiconductor slipped 0.3% as top shareholder Korea Exchange Bank is set to announce results of major shareholders' vote on a stake sale plan for the chipmaker later in the day. Airlines fell following a weaker won.
The Hong Kong stock market closed sharply lower, with the benchmark index falling below the 18,000 mark, led by property developers after HSBC raised mortgage interest rates. Chinese financials stocks saw heavy profit taking, as mainland markets are closed this week for holidays. The Hang Seng index closed down 801.41 points or 4.29% at 17,881.
Ping An Insurance tumbled over 10%, extending Friday's 9.7% fall on worries about possible losses on its investment in Europe's Fortis, which was nationalized by the Benelux governments. China coal firms slumped after Goldman Sachs downgraded the sector to 'Neutral' and cut target prices on three Hong Kong-listed firms. Among large-caps, HSBC lost 1.7%, China Mobile fell 3.6%, China Life plunged 4.6%, and China Construction Bank tumbled 6.1%.
The Australian stock market closed lower, extending its losses for the third consecutive trading session. The All Ordinaries index lost 95.4 points, or 1.9%, to finish at 4,839.
Banks started firm, but they gave back all of their gains over the course of trading. Commonwealth Bank fell 1.3%, Westpac plunged 3.5%, National Australia Bank dropped 0.4%, and Australia and New Zealand Banking Group lost 1.1%. Takeover target St George Bank dropped 2.5% and Australia's largest investment bank Macquarie Group gave away 2.9%.
Big miners were weak due to softer metal prices and concerns about Chinese demand. Index leader BHP Billiton plunged 4.5% and Rio Tinto tumbled 5.5%. Among gold miners, Newcrest Mining fell 2.6% and Lihir Gold dropped 0.7%. Retailers ended mixed after the unlisted Myer Group reported a nearly 40% increase in net profit for 2008 and
Europe
The major European markets are trading lower on the back of incremental bad news on the financial sector. U.K. mortgage lender Bradford & Bingley announced that it is selling its retail deposits, branch network and related employees to Abbey National. Additionally, the governments of Belgium, Luxembourg and the Netherlands announced an 11.2 billion euro bailout of Fortis.
The French CAC 40 Index is receding 3.03% compared to a 2.77% slippage by the German DAX Index, while the U.K.'s FTSE 100 Index is declining 2.89%.
U.S. Economic Reports
The unfolding week assumes significance, given the scheduled release of a few key first-tier economic reports during the week. The markets are likely to focus on the personal income and spending report for August, the results of the Institute for Supply Management's manufacturing and non-manufacturing surveys for September and the Labor Department's non-farm payrolls report for September.
Additionally, traders will also sift through the Conference Board's consumer confidence index for September, the NAPM-Chicago's business barometer for September, and the Commerce Department's construction spending and factory goods orders reports for August. The regularly scheduled weekly jobless claims report and the oil inventory reports may also elicit some reaction from the markets.
Consumer confidence is poised to recede after showing some semblance of a recovery in the previous month. A rise in the unemployment rate, hurricane damage to the U.S. Gulf of Mexico region and the continuing turmoil in the financial market may have impacted confidence. Wachovia Securities expects consumer spending to contract in the second half of the year.
The ISM's manufacturing index is likely to linger around the cut-off mark of '50'. The mixed readings of the regional manufacturing indexes confound the outlook for the sector. The prices paid index should continue to decline, given the lower oil prices that prevailed for most of September. Imports and exports, which increased in August, may slowly begin to show weakness.
Most economists predict incremental weakness for the labor markets, with employment conditions impacted by worker displacement due to hurricanes Ike and Gustav and the strike at Boeing. Wachovia expects job losses in manufacturing, construction and financial services sectors. However, job growth in the healthcare and government sectors should help offset some of the declines. The unemployment rate is likely to have stayed around the previous month's level. Barclays expects a 0.3% month-over-month increase in average hourly earnings.
The Commerce Department reported that personal income rose 0.5% in August compared to the 0.2% growth expected by economists. Meanwhile, personal consumption expenditure remained unchanged, softer than the 0.2% growth expected by economists.
Spending stalled after a mere 0.1% growth in the previous month, as spending on non-durable goods fell 0.6% compared to 0.5% growth in the previous week. Spending on durable goods increased 1.4%, reversing the 3.1% decline in July, while spending on services slowed to a 0.1% rate. The core Personal Consumption Expenditure Index rose 2.6% year-over-year, up from 2.5% in the previous month.
Economists had expected an increase in the personal income for August due to increases in average hours worked and average hourly earnings. Disposable personal income, which is personal income less current taxes, is likely to decline due to the fading impact of the tax rebate stimulus. Slackness in retail spending was overcome to some extent by an increase in vehicle sales, and therefore personal spending is expected to see some strength.
Stocks in Focus
Wachovia Securities is likely to be in focus after the FDIC announced that Citigroup will acquire all banking operations of Wachovia (WB). The deal was clinched in concurrence with the FDIC, the Federal Reserve Board and the U.S. Treasury Department.
Meredith Corp. (MDP) could react to its announcement that it has appointed Joseph Ceryanec as its Vice President and CFO, effective October 20th. Circuit City (CC) is likely to be in focus after it reported a loss of $1.45 per share compared to a loss of 38 cents per share in the same period last year, as sales declined 10% to $2.39 billion. The consensus estimates had called for a loss of $1.04 per share on revenues of $2.53 billion. The company also withdrew its previous outlook for 2009.
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