The major U.S. index futures are pointing to a lower opening on Friday. The rout in commodity prices and the continued trickling in of negative news from corporations, including job cuts should serve to aggravate investor fears over a prolonged downturn. Additionally, the employment report released by the Labor Department showed worse than expected job losses. These negative catalysts could lead to liquidation by traders, thereby generating additional selling pressure. Nonetheless, there is a possibility that traders take heart on expectations of more actions from the government due to the spate of negative developments on the macroeconomic and corporate front.
U.S. stock showed a lack of direction for much of the trading session on Thursday before plunging sharply in late trading. Trepidation ahead of Friday's non-farm payroll numbers, a fear accentuated by job cut announcements from companies, contributed to the late-day sell off. The Dow Industrials declined 215.45 points or 2.51% to 8,376 and the S&P 500 Index receded 25.52 points or 2.93% to 845, while the Nasdaq Composite Index fell 46.82 points or 3.14% to 1,446.
Twenty-five of the thirty Dow components ended the session lower, with Alcoa (AA) (down 13.24%), General Motors (GM) (down 16.12%), Citigroup (C) (down 5.37%), Caterpillar (CAT) (down 5.37%), Intel (INTC) (down 6.52%) and Merck (MRK) (down 5.52%) leading the slide. On the other hand, Home Depot (HD) rose 2.02%, JP Morgan Chase (JPM) gained 2.74%, McDonald's (MCD) closed up 2.17% and Wal-Mart Stores (WMT) rose 1.34%.
Among the sub-indexes, the Amex Securities Broker/Dealer Index fell 3.49% compared to a 1.31% decline by the KBW Bank Index. The Dow Jones Utilities Average ended down 5.06% and the Amex Biotechnology Index was off 2.10%. The Amex Oil Index and the Philadelphia Oil Service Sector Index ended down 5.56% and 9.60%, respectively, while the Amex Gold Bugs Index fell 3.25%.
In the technology space, the Philadelphia Semiconductor Index slipped 5.77% and the Amex Disk Drive Index receded 6.56%, as chipmaker AMD (AMD) warned of a 25% sequential decline in sales for the fourth quarter. Hardware, software and networking stocks also came under significant selling pressure. On the other hand, the S&P Retail Index and the Philadelphia Housing Sector Index gained 1.46% and 2.70%, respectively.
Although the CBOE Volatility Index has currently come off its all-time high, still it remains elevated. The index, which hit a closing high of 80.86 on 20th November, is now trading around $63.50. The index is a market estimate of expected constant 30-day volatility, calculated by weighting the S&P 500 Index CBOE option bid/ask quotes spanning a wide range of strike prices for the two nearest expiration dates. Historically, the volatility index moves in the opposite direction of the S&P 500 Index and the Dow Industrials. With the index now trading at higher levels, some analysts predict a bursting of the fear bubble. A high degree of volatility is something that cannot be sustained or is likely to persist for long, as value investors will begin to hoard, as volatility increases and the market begins to show signs of a bottom.
On the economic front, the Labor Department said that jobless claims declined to 509,000 in the week ended November 29th from 530,000 in the previous week. Meanwhile, factory goods orders declined 5.1% in October following a 2.5% decline in September. Durable goods orders were revised down to represent a decline of 6.9% from the earlier reported 6.2% drop. The core capital goods orders were also revised down to show a drop of 5%.
Even as people have come to terms with the official confirmation of a recession in U.S., apprehension remains over the length and the depth of the recession. IHS Global Insight expects a 5% decline in real GDP in the fourth quarter and negative growth through mid-2000 and only anemic positive growth in the second half, which would put the length of the current recession between 18 and 24 months. The firm expects a peak-to-trough GDP decline of 2.5%, while the worst in the post-war period was the short and sharp recession of 1957-58, when the peak-to-trough decline was 3.7%.
Uphill Journey for Automakers
The outlook seems to be bleak for the automakers, with the Big three fighting it out with the Congressional leaders for at least $34 billion in loans, an increase from the $25 billion they had pleaded for when they were in Capitol Hill the last time. The captains of the auto companies appeared contrite in a six-hour hearing at the Senate Banking Committee and are expected to plead their cause at a House Financial Services Committee hearing today.
Senators discussed having an oversight board and also had reservations about the funds needed by the auto companies to avoid going under. In a surprising move, the United Auto Workers union had said on Wednesday that the union would make major concessions with respect to job security provisions and financing for retiree health care in its labor contracts with the three automakers.
Currency, Commodity Markets
Crude oil futures are easing $0.36 to $43.31 a barrel after declining $3.12 to a 4-year low of $43.67 a barrel in Thursday's session. Commerzbank believes that falling supplies from OPEC and Russia should be enough to stabilize prices.
Gold futures are currently advancing $0.40 to $765.90 an ounce. In the previous session, the commodity fell $5 to $765.50 an ounce. A stronger dollar and falling oil prices are weighing on the gold. Additionally, a moderation in inflationary pressures are pushing up real interest rates. In the medium term, gold may find support due to increasing demand from China, which is looking to diversify its foreign exchange reserves.
On the currency front, the U.S. dollar is trading at 92.17 yen compared to the 92.24 yen it was worth at the New York session's close on Thursday. The dollar is currently valued at $1.2738 compared to yesterday's $1.2777.
Asia
Stock markets across the Asia-Pacific region closed mixed on Friday as oil traded near four-year lows and traders remained cautious ahead of the key U.S. jobs data scheduled for release later in the day. The stock markets in China and South Korea closed higher on hopes that their respective governments would announce additional economic stimulus measures, while the Japanese and Australian markets finished in negative territory ahead of the key U.S. data.
Although Japan's Nikkei 225 average held above the unchanged line for the better part of the session, the index closed down 6.73 points or 0.08% at 7,918. Major bank stocks closed weaker, with Mitsubishi Financial UFJ Group plunging 5.4% after the bank said that it is planning to price a billion-share capital increase common stock offering early next week.
However, brokerages and retailers posted strong gains. Komatsu, the world's second-biggest earth-moving equipment maker, fell 3.8% after the company said that it would suspend operations of power shovel plants at home and abroad for two to four days per month from December.
Toshiba rose 0.7% after the company said that it was looking at its operating schedule for the year-end and considering suspending some chip-making lines, but it denied a media report that the company would halt chip production at two plants for nine days due to weak demand.
South Korea's Kospi hovered in positive territory throughout the session before closing up 21.6 points or 2.1% at 1,028. Top steel maker POSCO jumped 5.7% and carmakers gained ground on the back of reports that the government is considering granting extensive tax cuts to struggling local automakers. However, Doosan Corp declined 2.3% on reports that it is considering selling its liquor unit.
The Chinese stock market closed higher for the third straight trading session amid hopes that a meeting of top economic planners early next week would produce more government action to aid the economy. The benchmark Shanghai Composite Index ended up 17.15 points or 0.9% at 2,019.
Hong Kong's Hang Seng Index opened higher and moved sideways for the rest of the session. At the close of trading, the index was up 336.31 points or 2.49% at 13,846. Among market leaders, HSBC Holdings surged 3.6% and China Mobile jumped 3.1%.
In the property sector, Sun Hung Kai Properties fell 0.6%, but Cheung Kong rose 3.1% and Hopson Development soared 7.9%. Offshore oil producer CNOOC lost 1.0% and refiner Sinopec dropped 1.1%, while PetroChina advanced 0.8%.
Australia's All Ordinaries remained below the unchanged for much of Thursday's session barring a brief spell above the unchanged line in late afternoon trading. The index pulled back sharply in late trading to shed 40.9 points or 1.2% to 3,427.
Mining stocks were mostly lower. Fortescue Metals sank 9.4% after the iron ore miner suspended contracts on about two-thirds of its iron ore shipments in a bid to switch the burden of freight costs to customers in China. On the other hand, Felix Resources surged 36.6% after the coal miner confirmed that it is being eyed by prospective suitors. Oil and gas supplier Woodside Petroleum lost 2.1% and Santos plummeted 9.0%. Among gold miners, Newcrest Mining advanced 1.7%, but Lihir Gold declined 2.2%. Bank and retail stocks ended on a mixed note.
Europe
The major European averages are declining on Friday, with the French CAC 40 Index and the German DAX Index receding 4.34% and 4.01%, respectively, while the U.K.'s FTSE 100 Index is posting a 2.46% loss.
U.S. Economic Reports
A Labor Department report showed that non-farm payroll employment fell by 533,000 in November, steeper than the 325,000-job loss expected by economists. The weakness that has been plaguing the economy has hit the job market hard, which is likely to increase the length and the depth of the recession foreseen, given the link jobs have with income and spending. The previous month's job loss was revised down to show a loss of 320,000 jobs.
The unemployment rate based on the household survey rose 0.2 percentage points to 6.7%, lower than the 6.8% rate expected by economists. Meanwhile, the average hourly earnings rose $0.07 or 0.38% to $18.30.
The goods producing sector lost 163,000 jobs, with the construction and manufacturing sectors losing 82,000 and 85,000 jobs, respectively. Meanwhile, the service-providing sector lost 370,000 jobs and retail trade jobs contracted by 91,000. While the professional and business services and leisure and hospitality sectors lost 136,000 and 76,000 jobs, respectively, employment in the educational and health services and government sectors expanded by 52,000 and 7,000, respectively.
The U.S. Federal Reserve is expected to release its monthly consumer credit report at 3 PM ET on Friday. Consumer credit for October is likely to show an increase of $1.5 billion.
In September, consumer credit increased at an annual rate of 3.25% or $6.9 billion to $2.59 trillion. Revolving credit, tied to credit card loans rose $0.9 billion to $971.4 billion, while non-revolving credit tied to auto loans climbed $5.9 billion to $1.62 trillion.
Stocks in Focus
Guess, Inc. (GES) may come under selling pressure after it lowered its full year earnings guidance to $2.27-$2.32 per share from its earlier estimate of $2.47-$2.53 per share. The company also lowered its revenue guidance to $2.03-$2.07 billion from its earlier estimate of $2.06-$2.11 billion. Analysts expected earnings of $2.42 per share on revenues of $2.08 billion. The company expects fourth quarter net revenues of $500-$540 million and earnings of 50-56 cents per share. The consensus estimates had called for earnings of 70 cents per share on revenues of $500-$540 million.
Microsoft (MSFT) may react to its announcement that it hired former Yahoo executive Qi Lu as president of the online services group. Novell (NOVL) may gain ground after it reported that its fourth quarter adjusted earnings were 6 cents per share, in-line with the consensus estimate. On a reported basis, the company posted a loss of 5 cents per share, flat with last year. Revenues were almost flat at $244.7 million.
Yum Brands (YUM) may be in focus after it reaffirmed its 2008 adjusted earnings per share growth estimate of 12%. Analysts, on average, estimate earnings per share of $1.90, which translates to growth of 9.5%.
Big Lots (BIG) could react to its third quarter results, which showed that income from continuing operations was 15 cents per share compared to 14 cents per share in the year-ago period. Net sales fell 0.9% to $1.02 billion. Analysts expected earnings of 16 cents per share on revenues of $1.03 billion. The company expects non-GAAP income from continuing operations of 90-99 cents per share for the fourth quarter and $1.79-$1.88 per share for the full year. The Street estimates earnings of $1.01 per share for the fourth quarter and $1.97 per share for the full year.
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