The major U.S. index futures are pointing to a higher opening on Wednesday. Even as domestic economic data stifled a rally on Tuesday, economic reports from Asia seem to be encouraging. The Bank of Japan's tankan survey revealed an uptick in sentiment, although they are at depressed levels. At the same time, Chinese manufacturing data lent credence to the theory that we may be close to a bottom and stabilization in economic conditions. Amid hope and apprehensions, the markets are most likely to confine themselves to recent trading ranges.
Among the two reports released earlier in the day, a report released by the Mortgage Bankers' Association showed a dip in mortgage application volumes and a private sector survey showed a steeper-than-expected job losses in the private sector in June. With so much economic reports to digest in today's session, volatility should rule the roost. The oil space may see activity in reaction to the weekly oil inventory report of the EIA, which is likely to have a bearing on the price of oil.
After opening modestly higher on Tuesday, stocks took as a nosedive following the release of a report showing an unexpected drop in the consumer confidence index for June. The selling pressure moderated by late morning trading and after which the major averages mostly showed sideways movement.
The Dow Industrials ended down 82.38 points or 0.97% at 8,447 and the S&P 500 Index moved down 7.91 points or 0.85% to 919, while the Nasdaq Composite Index fell a more modest 9.02 points or 0.49% to 1,835.
Twenty-four of the thirty Dow components ended lower, with Caterpillar (CAT) (down 4.89%) leading the slide. Verizon Communication (VZ), Procter-Gamble (PG) and American Express (AXP) lost over 2% each.
Among the sector indexes, the NYSE Arca Gold Bugs Index fell 3.71%, while the NYSE Arca Airline Index, the NYSE Arca Securities Broker/Dealer Index, the NYSE Arca Networking Index, the Philadelphia Oil Service Index and the KBW Bank Index all lost over 1%.
An Up Quarter After a Long Time
The major averages closed higher in the second quarter after seeing a string negative performances in the past 6 quarters. The Dow Industrials was up 11% in the three month period ended June 30th compared to the 20% gain shown by the Nasdaq's and S&P 500's 20% gain each. The S&P 500 Index, which has been locked in the 882-945 trading range since early March, is likely to preserve the range in the near term, given the support provided by its 50-day and 200-day moving averages. Thereafter, a correction cannot be ruled out.
S&P's Chief Investment Strategist, Sam Stovall believes that the longest and the deepest post-war recession would end by the fourth quarter. The view was echoed by San Francisco Federal Reserve President Janet Yellen, who said in a public speech that the recession will end late this year. However, the Fed president cautioned that it would take more than mere fiscal policy to take the economy on the path to growth. Stovall expects the S&P 500 Index to rise to 1,015 in the next 12 months.
The slow and painful recovery many are foreseeing is likely to be characterized by rising unemployment levels, although inflation is unlikely to pose a problem. Wary consumers are likely to guarded in their spending habits and are more likely to save rather than to spend, resulting in an increase in the savings rate from under 1%.
On the economic front, the S&P Case/Shiller home price index fell 18.1% year-over-year in April compared to expectations for an 18.6% annual decline, and marking the slowest annual rate of decline since October 2008. All twenty of the cities survey showed price declines on a year-over-year basis, while on a month-over-month basis, eight cities reported price gains.
Meanwhile, the ISM-Chicago's survey revealed that the business barometer index rose to 39.9 in June from 34.9 in May. Economists had expected a reading of 39. The new orders index climbed 4.3 points to 41.6 and the order backlog index rose more than 11 points to 37.6. Despite a 4 point increase, the employment index remained at depressed levels at 28.9. The rise in the inventories index for the second straight month seems to support the fact that inventory depletion that characterized much of the fourth quarter of 2008 and the first quarter of 2009 may be coming to an end. Reflecting the recent increase in commodity prices, the prices paid index increased by about 7 points.
The Conference Board's consumer confidence index came as a dampener, as the index unexpectedly fell to 49.3 in June compared to 54.8 in May. While the present situation index fell 5 points to 24.8, marking the lowest level since March, the expectations index declined by 6 points to 65.5. The data suggests that difficult labor market conditions and high debt levels are continuing to weigh on consumers.
Currency, Commodity Futures
Crude oil futures are trading up $1.12 at $71.01 a barrel after receding $1.60 to $69.89 a barrel on Tuesday. After yesterday's weakness, induced by weak demand outlook following the release of the insipid consumer confidence reading, the commodity began to move higher in Asian trading after American Petroleum Institute's weekly inventory report revealed a drawdown in crude oil stockpiles.
Gold futures are currently rising $3 to $932 an ounce. In the previous session, the commodity fell $13.30 to $927.40 an ounce, as the dollar's strength weighed on the precious metal.
On the currency front, the U.S. dollar is trading at 96.68 yen, stronger than the 96.3625 yen it fetched at the close of New York trading on Tuesday. The greenback is currently valued at $1.4117 versus the euro.
The yen continues to weaken, as better-than-expected data released from Japan and South Korea earlier in the day reinforced the recovery theme, increasing the risk preference of traders. The low yielding yen is therefore avoided by traders in favor of risky bets.
Asia
The major Asian markets ended Wednesday's session on a mixed note, with the Japanese, Australian and New Zealand markets closing lower, while the others closed on an upbeat note. The Hong Kong market was closed for a public holiday.
After opening weaker, Japan's Nikkei 225 average recovered by the mid-session following the release of a positive Tankan survey report. The market saw some buoyancy in the afternoon before selling pressure dragged the index lower in late trading. The index closed down 18.51 points or 0.19% at 9,940.
The Bank of Japan's quarterly Tankan survey revealed that confidence among Japan's large manufacturers improved in the second quarter for the first time since December 2006. The diffusion index for big manufacturers posted a score of -48, which was up from the record low -58 in the previous quarter but shy of forecasts for -43. The outlook for the third quarter showed a reading of -30 versus expectations for -34.
Reports of stock offerings generated significant selling pressure. All Nippon Airways slumped about 6% in reaction to speculation of share issue. Commodity stocks also saw weakness. Trading houses retreated despite the strength of the yen. On the other hand, property stocks advanced.
The Indian market ended a highly volatile session notably higher, as encouraging Markit Economics' Purchasing Managers' report on the manufacturing sector more than offset dismal May export data. The BSE Sensex rose to a high of 14,727 in the afternoon before it snapped back some of its gains and finished at 14,645, up 152 points or 1.05%.
Europe
The major European averages are advancing strongly, with commodity and financial stocks providing good support, especially after yesterday's pullback. The French CAC 40 Index, the U.K. FTSE 100 Index and the German DAX Index are all up over 1% each.
In corporate news, Germany's Linde said it has signed a 2 year euro-denominated forward start revolving credit facility, providing about 1.6 billion euros from 2011 onwards. U.K. department store Marks & Spencer said its first quarter group sales rose 2.9%, with U.K. sales rising 1.7% year-over-year. Reports suggested that Lloyds Banking Group is wooing former Citi Chairman Sir Win Bischoff for the post of Chairman.
On the economic front, the German Federal Statistical Office reported that retail sales dropped 2.9% year-over-year in real terms in May compared with a 0.3% drop in April. Economists were looking for a decline of 1.5%. On a month-on-month basis, retail sales increased 0.4% in May after rising 0.5% in April.
U.S. Economic Reports
On the economic front, the Mortgage Bankers' Association reported that the index of mortgage applications volume fell 18.9% in the week ended June 26th, marking the steepest decline since February.
The ADP National Employment report, which sheds light on non-farm private employment, showed that non-farm private employment fell 473,000 in June from May. Economists had estimated a loss of 394,000 jobs for the month.
ADP revised the estimated change of employment from April to May by 47,000 to a decline of 485,000 from the originally estimated job losses of 532,000. In June, employment in the goods producing sector declined 250,000, with the manufacturing sector reporting job losses of 146,000.
The results of the Institute for Supply Management's manufacturing survey, which are based on data compiled from purchasing and supply executives nationwide, are due out at 10 AM ET. Economists expect the index to show a reading of 44.6 for June.
In May, the index rose to 42.8 from 40.1 in April, with the May reading edging past the estimates at 42.3. Although it represented the highest reading since September 2008, it still suggests a contraction in activity. On a very positive note, new orders rose above 50 to 51.1 in May from 47.2 in April, while the order backlog index climbed 7.5 points to 48. However, the employment index remained almost unchanged at 34.3. At the same time, the prices paid index soared 11.5 points to its highest level since September.
The Commerce Department's construction spending report to be released at 10 AM ET is expected to show a 0.6% decline in spending for May.
Construction spending rose 0.8% month-over-month in April, according to a report released by the Commerce Department. Private non-residential construction rose 1.8%, helping to offset weakness in single-family and multi-family housing construction spending, which fell 6.7% and 2.6%, respectively. Public construction spending was down 0.3% in April.
Data on Pending Home Sales, which is a leading indicator of housing market activity released by the National Association of Realtors, is due out at 10 AM ET. A pending sale is one in which a contract was signed but not yet closed. Normally, it takes four to six weeks to close a contracted sale. Pending home sales are expected to remain unchanged in May.
The pending home sales index rose 6.7% month-over-month in April, while economists had expected a mere 0.5% increase. The increase came on the back of a 3.2% monthly gain in March and a 2% increase in February. The Northeast and the Midwest led the gains, showing increases of 32.6% and 9.8%, respectively. On an annual basis, the pending home sales index rose 3.3%.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET.
The inventory report for the week ended June 19th showed that crude oil inventories declined by 3.8 million barrels to 353.9 million barrels, but they were still above the upper boundary of the average range.
Gasoline and gasoline stockpiles increased by 3.9 million barrels and 2.1 million barrels, respectively. While gasoline inventories were in the lower half of the average range, distillate inventories were above the upper boundary of the average range. Refinery capacity utilization averaged 86.3% over the four-weeks ended June 19th compared to 85.8% in the previous week.
Earnings
General Mills (GIS) reported fourth quarter adjusted earnings of 86 cents per share compared to 73 cents per share in the year-ago period. Net sales rose 5% to $3.65 billion. Analysts estimated earnings of 80 cents per share on revenues of $3.69 billion. The company expects fiscal year 2010 earnings to be $4.20-$4.25 per share compared to the consensus estimate of $4.18 per share.
Constellation Brands' (STZ) first quarter comparable earnings per share rose to 3 cents per its Class A share, lower than 20 cents per share last year. On an adjusted basis, earnings were 33 cents per share. Consolidated net sales fell 15% to $792 million. The consensus estimates had called for earnings of 32 cents per share on revenues of $780.86 million. For 2010, the company expects comparable earnings per share of $1.60-$1.70 per share compared to the consensus estimate of $1.62 per share
Stocks in Focus
Pfizer (PFE) may come under selling pressure after it said it discontinued a late-stage study of its cancer drug Sutent for the treatment of metastatic colorectal cancer, as the addition of the drug to the chemotherapy regimen did not demonstrate a statistically significant improvement in the primary endpoint of progression-free survival.
Oracle (ORCL) is likely to be in focus after it announced the pricing of its sale of notes with three maturity periods, worth $4.5 billion. The company intends to use the proceeds for general corporate purpose and future acquisitions, including the acquisition of Sun Microsystems (JAVA).
Kroger (KR) could be in focus after it said it is recalling some of its seasonings sold at its retail stores due to possible salmonella contamination. The recall comes after the company was alerted by its supplier regarding the problem.
Royal Caribbean Cruises (RCL) is also likely to react to its announcement that it has priced an offering of $300 million aggregate principal amount of senior notes due 2015. The company said the notes have been priced at 97.399% of the principal amount.
Albany International (AIN) may be in focus after it announced that it would close a manufacturing plant at its operations in Gosford, New South Wales, Australia. The production at the plant will be transferred to Albany International's St. Stephen, South Carolina, manufacturing facility. The closure will result in the elimination of 61 jobs.
Oshkosh Corp. (OSK) could gain ground after it said the U.S. Department of Defense has awarded the truck maker a contract to supply MARP All Terrain Vehicles for its fighting forces. The initial delivery order for 2,244 M-ATVs is valued at $1.05 billion.
Myriad Genetics (MYGN) is likely to recede after the company lowered its full year total molecular diagnostic revenue guidance to be $326 million from its earlier estimate of $330 million, citing the economic recession that is increasing unemployment levels, resulting in the loss of insurance coverage and patients delaying or canceling doctor visits.
Morgan Stanley (MS) and Mitsubishi UFJ (MTU) may be in focus after they announced that they are expanding the scope of their previously announced strategic alliance to include a global alliance in corporate and investment banking, a commodity-specific initiative and secondment of personnel for sharing of best practices and expertise.
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