The major U.S. index futures are pointing to a higher opening on Wednesday. Even as uncertainty has been keeping sentiment subdued since early last week, intermittent positive economic readings have given some reason to cheer. Earlier in the day, the Commerce Department reported a strong increase in durable goods orders, with a measure considered to be proxy for capital spending showing resurgence. The positive report lends support to the theory of stabilization before the economy begins a slow and painful sojourn towards recovery.
That said, there are other catalysts as well that could dictate today's market movement, including a housing market report, the 5-year note auction by the Treasury Department and the release of the post-meeting policy statement by the Fed.
In its economic outlook released today, the Organization for Economic Co-operation and Development said the slowdown in OECD economies is reaching a bottom. But the recovery is likely to be weak and fragile and the economic and social damage caused by the crisis is likely to be long lasting. The OECD revised its GDP projections upward for most of the large emerging economies and the U.S., although it is less optimistic about the euro area.
Trading on Tuesday reflected extreme caution, while at the same time suggesting that traders are hopeful despite the uncertainty surrounding an economic revival. The major averages opened Tuesday's session higher, as bargain hunters thronged the market looking to capitalize on the previous session's steep declines. However, uncertainty surrounding the economic recovery and caution ahead of the Fed decision and the release of a slew of economic reports contributed to a lack of conviction.
Consequently, the major averages slumped to their intra-day lows in early afternoon trading before regaining some ground and showing uncertainty thereafter. At the close of trading, the major averages were mixed, with the Dow Industrials receding 16.10 points or 0.19% to 8,323 and the Nasdaq Composite Index falling 1.27 points or 0.07% to 1,765, while the S&P 500 Index ended up 2.06 points or 0.23% at 895.
The breadth among the Dow components was even, with 15 stocks ending lower, while the remaining 15 stocks closed higher. Boeing (BA) acted as a drag on the Dow by declining 6.46% after it said it said there would be another delay in the first flight of its 787 Dreamliner. However, Bank of America (BAC) (up 2.43%), Caterpillar (CAT) (up 1.98%), JP Morgan Chase (JPM) (up 2.13%) and AT&T (T) (up 2.11%) were among the notable gainers.
Among the sector indexes, the NYSE Arca Airline Index fell 1.47% and the S&P Retail Index moved down 1.83%. Meanwhile, the KBW Bank Index and the NYSE Arca Securities Broker/Dealer Index ended up about 1% each. The NYSE Arca Oil Index gained 1.38%, the Philadelphia Oil Service Index rose 1.40% and the NYSE Arca Gold Bugs Index rallied 4.24%. The Dow Jones U.S. Basic Materials Index advanced 1.93%.
On the economic front, existing home sales came in at a seasonally adjusted annual rate of 4.77 million units in May, representing a 2.4% month-over-month increase from 4.66 million in April. Single-family sales rose 1.9% and multi-family sales climbed 6.1%, with both readings showing increases for the second straight month. The median existing home price fell 16.8% year-over-year to $173,000, although it rose 3.8% month-over-month. Existing home inventories fell to 3.798 million from 3.978 million in April, with the months of supply declining to 9.6 from 10.1 in April.
The proportion of foreclosure sales fell to 33% in May from around 45%-50% seen in recent months. According to economists, slightly improving affordability and distressed sales are helping to some extent, offsetting the weakness stemming from weak demand. Although going forward home sales will receive a lift from the up to $8,000 tax credit for first time buyers, rising mortgage rates are likely to act as a dampener.
Fed Decision in the Cards
The FOMC will make an announcement concerning its decision on the monetary policy at 2:15 PM ET.
At its April meeting, the Fed maintained its key fed funds target rate unchanged at a range of 0%-0.25%. The FOMC noted that the economy continued to contract, with the pace of contraction slowing somewhat. Despite the stabilization in consumer spending, the committee noted that spending continued to be constrained by job losses, lower housing wealth and tight credit.
Although the Fed is expected to keep interest rates unchanged, all eyes will be on the central bank to see if it will bring about any change in its asset purchase program. The central bank is not expected to alter the size of its purchase of mortgage and government bonds, but it could choose to extend the period of the current program.
Long term, the markets have priced in a 75 basis point increase in the Fed rates before the end of next year. However, economists perceive this expectation as overly optimistic. Even if the economy improves, the unemployment rate will continue to grow, resulting in high idle capacity. So, at least until the second half of next year, we may not see a change in interest rates from the current depressed levels.
Currency, Commodity Markets
Crude oil futures are declining $0.69 to $68.55 a barrel after advancing $1.74 to $69.24 a barrel on Tuesday. After rising $3.30 to $924.30 an ounce in the previous session, gold futures are moving up $3.70 to $928 an ounce.
On the currency front, the U.S. dollar is trading at 95.395 yen after it weakened to 95.225 yen at the close of New York trading on Tuesday. The dollar is trading at $1.4061 versus the euro.
Asia
The major Asian markets ended in the positive territory on Wednesday ahead of announcement of the Fed rate decision. Japan's Nikkei 225 Average opened sharply higher at 9,597 compared to its previous close of 9,550, led by electronics makers. However, weakness in retail stocks and concerns about global recovery prospects limited the upside as investors preferred to stay on the sidelines ahead of the FOMC announcement. The index finally closed at 9,590, representing a gain of 40.71 points or 0.43%. The broader Topix Index of all first section issues ended at 902, up 0.77 points or 0.09%.
On the economic front, a report released by the Ministry of Finance revealed that Japan's trade surplus plunged to 299.83 billion yen in May from JPY 341.1 billion recorded during the same period of the previous year. Exports tumbled 40.9% on a yearly basis to 4.02 trillion yen in May, while imports declined 42.4% to 3.72 trillion yen.
Softbank Corp. gained more than 6% following the news that the company is planning to raise its dividend payment from the year beginning 2011. Oil refiner Showa Shell Sekiyu KK gained more than 6% after it said it will build solar power plants in Saudi Arabia. Among other oil stocks, Impex gained 0.98% and Nippon Oil Corp. advanced 2.61%. Among retailers, Seven & I Holdings Co., lost 2.2% after the company stated that it would bear part of the cost to throw away expired foods. However, financials ended in the negative territory
In Australia, the All Ordinaries Index opened unchanged from its previous close at 3,793 and slipped below the unchanged line in early trading. The firming up of commodity prices and a rally in resource stocks helped recover the losses amid low volume as investors preferred to stay away from the markets. The index finally ended with a gain of 9.20 points, or 0.20%, at 3,802. The benchmark S&P/ASX 200 Index followed a similar trend and ended lower at 3,807, representing a gain of 10.2 points, or 0.27%.
Mixed trend was witnessed among the resource stocks following a modest rise in commodity prices in the international market. On the other hand, financials ended weak on growth concerns. ANZ Bank slipped 0.19%, Commonwealth Bank Australia lost 0.51%, National Australia Bank fell 1.11% and Westpac Banking edged down 0.05%.
In Hong Kong, the Hang Seng Index opened higher at 17,583 compared to its previous close at 17,538 and continued to trade in positive territory on optimism about global recovery. The index ended with a gain of 353.78 points, or 2.02%, to close at 17,892.
Resource, property and financial stocks advanced following sharp losses in recent sessions. Property stocks advanced on bargain hunting at lower prices, while financial stocks also rose.
In South Korea, the benchmark KOSPI Index ended in positive territory, led by technology stocks and bargain hunting amid recovery hopes. The index ended at 1,364, representing a gain of 3.25 points, or 0.25%.
Market-leader Samsung Electronics advanced 0.87% after reporting an alliance with U.S. chip-maker Numonyx B.V. to develop a shared standard for a next-generation memory chip. LG Display gained 2.72% following favorable comments from local brokerage house.
Bargain hunting at lower levels helped shipbuilders end in positive territory. Hyundai Heavy Industries climbed 1.08% and Samsung Heavy Industries gained 2.14%
In India, the stock market ended in the positive territory amid short covering ahead of the expiry of derivative contracts for June on Thursday. The BSE Sensex gained 98.72 points or 0.69% to close at 14,324, and the broader Nifty index ended higher with a gain of 45.95 points, or 1.08% at 4,293.
Among the other major markets in the region, China's Shanghai Composite Index advanced 29.60 points or 1.02% to close at 2,922, Taiwan's Weighted Index gained 182.61 points or 2.95% to close at 6,380, the Strait Times Index in Singapore added 52.86 points or 2.37% to close at 2,279 and Indonesia's Jakarta Composite Index rose 81.29 points, or 4.25% to close at 1,996.
Europe
The major European averages are advancing solidly on Wednesday after showing weakness in the previous two sessions. The French CAC 40 Index and the German DAX Index are gaining 1.32% and 1.39%, respectively, while the U.K.'s FTSE 100 Index is moving up 0.63%. Banking stocks received support from the European Central Bank's move to lent 442.241 billion euros in a 371-day operation at a fixed rate of 1%.
U.S. Economic Reports
A report released by the Commerce Department showed that new orders for manufactured durable goods rose 1.8% month-over-month in May to $163.9 billion following an upwardly revised 1.8% increase in April. Economists had looked forward to a 0.9% decline in durable goods orders for May from the originally reported 1.7% increase for April.
Machinery orders, which rose in three of the past four months, showed the biggest increase of 7.7%. However, shipments fell 2.1% and unfilled orders declined by 2%. Inventories at the end of the month were down 0.8%. Orders for non-defense capital goods orders, excluding aircrafts,- a key measure for capital spending climbed 4.8% following a 2.9% increase in the previous month. Shipments of this category of goods edged up 0.3%.
The Commerce Department is due to release its new home sales report for May at 10 AM. The consensus estimate calls for an increase in new homes sales to an annual rate of 360,000.
New home sales rose 0.3% month-over-month in April to 352,000. However, annually new home sales were down 34%. The median price of a new home was $209,700, up from $202,000 in the previous month, but it was down from $246,400 in the year-ago period. The months-supply of new homes was 10.1 months compared to 10.6 months in March and 10.4 months in April last year.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET.
Crude oil stockpiles declined 3.9 million barrels to 357.7 million barrels in the week ended June 12th. Despite the decline, crude oil inventories remained above the upper limit of the average range.
Gasoline inventories increased by 3.4 million barrels, but stockpiles were still below the lower limit of the average range. Distillate inventories rose by 0.8 million barrels and were above the upper limit of the average range. Refinery capacity utilization averaged 85.8% over the four weeks ended June 12th compared to 84.8% in the previous week.
Earnings
American Greetings (AM) said its first quarter revenues were $412.92 million, lower than $428.30 million last year. Net income declined to $9.96 million or 25 cents per share compared to $13.33 million or 27 cents per share in the year-ago period.
Monsanto's (MON) third quarter net sales fell to $3.16 billion from $3.54 billion last year. The company's ongoing earnings per share also declined to $1.25 from $1.46 in the year-ago period. Analysts estimated earnings of $1.17 per share on revenues of $3.45 billion. The company said it continues to expect 2009 ongoing earnings per share of $4.40-$4.50 compared to the $4.40 per share consensus estimate.
Stocks in Focus
Oracle (ORCL) is likely to see some strength after its quarter adjusted net income came in at 46 cents per share, ahead of the 44 cents per share estimate of analysts. Sales declined to $6.86 billion. New software license sales, an indicator of future revenue streams, fell 13% to $2.74 billion. The company expects first quarter adjusted earnings of 29-31 cents per share on a 1%-4% revenue decline. Analysts, on average, estimate earnings of 30 cents per share on an estimated 5% drop in revenue.
Apogee (APOG) could be in focus after it reported that its first quarter revenues declined 24% to $180.9 million. The company reported net earnings of $7.52 million or 27 cents per share compared to $10.20 million or 36 cents per share last year. The consensus estimates called for earnings of 27 cents per share on revenues of $195.01 million.
Jabil Circuit (JBL) receded in Tuesday's after hours session despite reporting third quarter adjusted earnings of 4 cents per share, exceeding the 3 cents per share consensus estimate. Revenues declined to $2.62 billion from $3.09 billion but came in-line with the consensus estimate. For the fourth quarter, the company expects an adjusted profit of 2-12 cents on revenues of $2.5 billion to $2.7 billion. Analysts expect earnings of 9 cents per share on revenues of $2.72 billion.
H.B. Fuller (FUL) is likely to move in reaction to its announcement that it reported second quarter earnings of 36 cents per share compared to 41 cents per share last year, as revenues fell over 16% to $299.2 million. Analysts estimated earnings of 25 cents per share on revenues of $304.4 million. Citing challenging economic conditions, the company said it is reiterating its guidance for a 10%-12% decline in revenues for the full year.
Darden Restaurants (DRI) may also be in the spotlight after it said its fourth quarter sales from continuing operations were $1.98 billion, higher than $1.83 billion last year. The company said its adjusted earnings from continuing operations were 72 cents per share compared to 78 cents per share last year. The Street estimates earnings of 86 cents per share on revenues of $1.98 billion. For the full year 2009, the company expects adjusted earnings per share of $2.75 per share compared to the consensus estimate of $2.71 per share.
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