Growth Concerns Likely To Keep Sentiment Subdued

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The major U.S. index futures are pointing to a notably lower opening on Wednesday, with sentiment being weighed by the uncertainty surrounding the economic recovery. The FOMC statement released yesterday has aggravated the concerns due to the downbeat assessment of growth by the central bank. The rest of the global markets retreated in reaction to this uncertainty.

The price of oil is moving lower despite the International Energy Agency upwardly revising its global oil demand forecast. Some volatility may prevail amid the release of the weekly inventory report. A report released earlier in the day showed that the trade gap widened due to a decline in exports, which is likely to stir concerns about the growth globally.

U.S. stocks experienced weakness throughout Tuesday's session before closing moderately lower. The major U.S. averages opened sharply lower amid little hope that the Fed has any remaining ammunition to re-ignite the sluggish economic recovery. After languishing in the red, stocks pared their losses in the afternoon following the release of the Fed's policy statement. Nevertheless, the major averages ended the session lower.

The Dow Industrials ended down 28.52 points or 1.24% at 10,644 and the S&P 500 Index closed 6.73 points or 0.60% lower at 1,121, while the Nasdaq Composite fell 28.52 points or 1.24% to close at 2,277.

Twenty-one of the thirty Dow components closed the session lower, with Intel (INTC) (down 4.02%), Travelers Co. (TRV) (down 2.39%), Microsoft (MSFT) (down 2.11%), Bank of America (BAC) (down 2.01%) and Alcoa (AA) (down 2.66%) leading the declines. However, Merck (MRK) rose 1.16%.

Among the sector indexes, the Philadelphia Housing Sector Index slid 2.36% and the Philadelphia Oil Service Index declined 2.26%, while the S&P Retail Index, the NYSE Arca Biotechnology Index, the NYSE Arca Securities Broker/Dealer Index, the NYSE Arca Airline Index and the Dow Jones Transportation Average all ended down over 1%.

In the technology space, the Philadelphia Semiconductor Index declined 2.63%, the NYSE Arca Disk Drive Index lost 2.34% and the NYSE Arca Computer Hardware Index slid 2.39%.

On the economic front, the Labor Department said non-farm productivity fell at a 0.9% annual rate in the second quarter. Annually, productivity was up 3.9%. However, the negativity was offset to some extent by the upward revision to first quarter productivity growth to 3.9%. Unit labor costs, though rising 0.2% quarter-over-quarter, were down 2.8% from the year-ago period.

Some see this as a good sign for the labor market. The strong productivity gains of the past year and a half were due to companies slashing workforce and making their employees work harder. With productivity growth plateauing, demand growth will require the hiring of additional workers.

At the end of its one-day monetary policy meeting, the Federal Open Market Committee left its key interest rates unchanged at 0%-0.25%. Kansas City Federal Reserve President Thomas Hoenig continued to dissent, arguing for a change in the language, as he is of the view that the economy is recovering modestly as projected.

The Fed said in the post-meeting policy statement that the pace of recovery in output and employment has slowed in recent months. This was in contrast to its view in June, when it said the economic recovery is proceeding and the labor market was improving gradually. The committee also dropped its reference to financial conditions as being less supportive of growth. The FOMC also said the pace of the economic recovery is likely to be more modest in the near term than had been anticipated.

Currency, Commodity Markets

Crude oil futures are receding $1.10 to $79.15 a barrel after declining $0.23 to $80.25 a barrel on Tuesday. The International Energy Agency today raised its world oil demand forecast for 2010 and 2011 slightly, attributing the revision to stronger GDP assumptions and baseline adjustments.

The IEA's world oil demand forecast for 2010 is now at 86.6 million barrels per day, a 1.8 million barrels per day or 2.2% increase from the previous year. In July, the demand was estimated at 86.5 million barrels per day. The forecast for 2011 is at 87.9 million barrels per day, up from its earlier estimate of 87.8 million barrels per day.

The upward revision comes despite the weaker economic recovery cutting 2010 and 2011 estimates by 290 kilo barrels per day and 1.2 million barrels per day, respectively.

Gold futures are currently moving up $9 to $1,207 an ounce. In the previous session, the precious metal fell $4.60 to $1,198 an ounce.

On the currency front, the U.S. dollar is trading at 84.935 yen compared to the 85.4402 yen it fetched at the close of New York trading on Wednesday. Against the euro, the greenback is valued at $1.3004 compared to yesterday's $1.3177.

Asia

With the FOMC statement spreading nervousness among traders over the recovery in the U.S., the major Asian markets, with the exception of the Chinese markets, closed lower. Japan's Nikkei 225 average led the declines in the region with a 2.70% drop.
Meanwhile, China released a spate of economic reports. China's consumer price inflation rate accelerated in July as a result of heavy flooding driving up food prices, while other key indicators showed a cooling trend. The National Bureau of Statistics said consumer prices increased 3.3% year-on-year in June.
The statistical office also said industrial production climbed 13.4% year-on-year in July, in line with forecasts. This followed a 13.7% increase in the preceding month.

Japan's Nikkei 225 average opened lower and saw further weakness in early trading before moving sideways for the rest of the session. The index closed down 258.20 points or 2.70% at 9,293. A majority of stocks declined in the session.

In economic news, Japan's core machinery orders rose 1.6% month-over-month in June, according to a report released by the Cabinet Office. The increase was much below expectations for a 5.4% increase. On a year-over-year basis, machinery orders fell 2.3%, while economists expected a 1.5% increase.

A report released by the Bank of Japan showed that the nation's corporate goods price index edged down 0.1% month-over-month in July, while economists had expected prices to remain unchanged.

Hong Kong's Hang Seng Index, which opened higher and managed to hold above the unchanged until the afternoon. Thereafter, the index declined and stayed below the unchanged line to close down 179.06 points or 0.83% at 21,295. Most sector stocks declined in the session.

Europe

The major European markets are retreating sharply, with the French CAC 40 Index and the German DAX Index declining 1.96% and 1.75%, respectively, while the U.K.'s FTSE 100 Index slumping 1.55%.

Among corporate news, Nestle reported that its first-half profits rose 7.5%, as revenues rose 5.9%. Although the company cautioned of higher raw material costs hurting profits, it reiterated its full year forecast.

In economic news, the Office for National Statistics said the number of jobless allowance claimants in the U.K. fell by 3,800 in July. This was well below the decline of 17,000 anticipated by economists. The claimant count totaled 1.46 million in July.

The statistical office also said the unemployment rate was unchanged at 7.8% in the three months to June, in line with expectations. The number of unemployed totaled 2.46 million. Meanwhile, average weekly earnings including bonuses were up 1.3% annually in the June quarter. Economists had forecast a 1.1% increase. Excluding bonuses, earnings rose 1.6%.

Meanwhile, the Bank of England said in its August Inflation Report that inflation will likely remain above the 2% target until the end of 2011 due to the rise in the VAT rate from next year before heading down in 2012.

The bank's monetary policy committee said, however, that the prospects for inflation were "highly uncertain" and that they were "ready to respond in either direction" with monetary policy. It forecasts inflation to be around 1.4% in two years' time on market rates. The central bank also cut its two-year ahead growth forecast for the U.K. economy to just over 3% from around 3.6% in its May report.

U.S. Economic News

With the value of imports increasing and the value of exports falling in the month of June, the Commerce Department released a report showing that the U.S. trade deficit for the month unexpectedly widened to reach its highest level in well over a year.

The report showed that the trade deficit widened to $49.9 billion in June from a revised $42.0 billion in May. The wider deficit came as a surprise to economists, who had expected the deficit to narrow modestly to $42.2 billion from the $42.3 billion originally reported for the previous month.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended August 6th at 10:30 AM ET.

Crude oil inventories fell by 2.8 million barrels to 358 million barrels in the week ended July 30th. Nonetheless, inventories of crude oil remained above the upper limit of the average range.

At the same time, gasoline inventories edged up by 0.7 million barrels and were above the upper limit of the average range. Distillate stockpiles rose by 2.2 million barrels, remaining above the upper boundary of the average range. Refinery capacity utilization averaged 91.2% over the four-weeks ended July 30th compared to 90.6% in the previous week.

The Treasury Budget, a monthly account of the surplus or deficit of the federal government is due to be released at 2 PM ET. The budget is considered an indicator of budgetary trends and the thrust of fiscal policy. Economists estimate a deficit of $169 billion for July.

Stocks in Focus

Earnings

Disney (DIS) reported that its third quarter earnings rose to 67 cents per share from 51 cents per share in the year-ago period. Revenues rose 16% to $10 billion. The consensus estimates had called for earnings of 50 cents per share on revenues of $9.37 billion.

Cree (CREE) said its fourth quarter adjusted earnings came in at 55 cents per share, higher than the 51 cents per share consensus estimate. Revenues rose 79% to $264.6 million compared to the $264 million consensus estimate. The company expects full year adjusted earnings of 56-59 cents per share on revenues of $270 million to $280 million. Analysts estimate earnings of 54 cents per share on revenues of $284 million.

Other Corporate News

WD-40 Company (WDFC) may be in focus after it said it said its 2010 earnings per share is expected to meet or exceed the top end of its previously issued earnings per share guidance of $2.05-$2.14. The company estimates revenues of $313 million to $319 million. Analysts estimate earnings of $2.13 per share on revenues of $317.39 million.

Dow Chemical Co. (DOW) is likely to see some activity after it said its joint venture Dow Corning has entered into an agreement to buy a 49% stake in Timminco Ltd.'s silicon metal manufacturing facility in Quebec for $39.7 million.

SRA International (SRX) may see some buying interest after it said the Department of Defense has awarded the company a re-compete contract to support the receipt and scientific review of research grant applications for its Congressionally Directed Medical Research Programs. If all options are exercised, the contract has a potential value of $100 million.

Aflac (AFL) is likely to react to its announcement that its board has approved a 7.1% increase in its quarterly cash dividend, effective with the fourth quarter payment. The company also said it remains focused on increasing its operating earnings per share by 10% before the effect of foreign currency. The company also announced its intention to resume its share repurchase activities, which were suspended in the fourth quarter of 2008.

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