World Daily Briefing ( Wednesday 16 Dec 2009 )

US Markets
The major U.S. index futures are pointing to a higher opening on Wednesday, with traders likely to be comforted by benign data released earlier in the day. Consumer prices rose in line with expectations and housing starts for November rebounded and reached levels expected by economists. Additionally, evidence of growth solidifying in the rest of the global economies could increase optimism about the economic outlook. Notwithstanding the fairly buoyant sentiment expected in early trading, sentiment could remain subdued as traders look ahead to the Fed’s interest rate decision and the post-meeting policy statement.

U.S. stocks opened Tuesday’s session sharply lower, stung by some worrying economic reports that showed that recent expansion in the manufacturing sector may be slowing down as well as a rise in wholesale price inflation. Although the averages recouped some of their losses in the morning, helped by better-than-expected industrial production data, they declined again in the afternoon to close moderately lower.

The Dow Industrials ended the session down 49.05 points or 0.47% at 10,452, the Nasdaq Composite Index fell 11.05 points or 0.50% to 2,201 and the S&P 500 Index receded 6.18 points or 0.55% to 1,108.

Twenty-two of the thirty Dow components closed the session lower, with Bank of America (BAC) (down 2.82%), JP Morgan Chase (JPM) (down 2.18%), Cisco Systems (CSCO) (down 1.51%), DuPont (DD) (down 1.56%), IBM (IBM) (down 1.11%) and AT&T (T) (down 1.60%) among the worst decliners in the session. However, Disney (DIS) and 3M Co. (MMM) showed some strength.

Among the sector indexes, the NYSE Arca Airline Index fell 2.35%, the NYSE Arca Gold Bugs Index receded 2.03% and the S&P Retail Index declined 1.18%. The NYSE Arca Broker/Dealer Index slipped 1.29% compared to a 2.90% drop by the KBW Bank Index. On the other hand, the Morgan Stanley Healthcare Provider Index rose 2.24%.

Yesterday, the Labor Department reported that producer prices rose 1.8% month-over-month in November. The core producer price inflation rate was 0.5%, faster than the 0.2% increase in the previous month. Energy prices climbed 6.9% compared to a 0.5% increase in food prices. Inflationary pressure in the pipeline are also building up, as suggested by the 1.4% monthly advance in intermediate goods prices.

Meanwhile, the New York Fed’s manufacturing survey showed a slowdown in the pace of expansion in the manufacturing sector in the region, with the manufacturing index declining to 2.6 in December from 23.5 in November. The new orders index declined 14.5 points to 16.7, while the backlog orders index fell to –21.1 from –2.6 in November. The employment index slipped back into negative territory, dropping to –5.3 from the month-ago’s 1.3.

Quelling some of anxiety was the Federal Reserve’s industrial production report, which showed a 0.8% month-over-month increase in output in November compared to the 0.5% growth forecast by economists. Capacity utilization rose to 71.3% from the month-ago’s 70.6%. The increase in output was helped by a 1.8% surge in production by the motor vehicle/parts sector. Machinery and electronics production as well as mining output improved from the month-ago levels.

Fed’s Year-end Meeting-No Surprise Likely

With uncertainty clouding recovery prospects, not much change is expected from the Fed, which is remaining extremely benevolent. Although the dollar has been trading higher in anticipation of the Fed signaling that rate revision may kick in soon, the central bank is unlikely to put the fledgling growth it risk. The Federal Reserve Open Market Committee, the monetary policy setting arm of the Fed, is scheduled to make an announcement regarding its near-term direction of monetary policy at 2:15 PM ET following the end of its 2-day monetary policy meeting.

Most economists are resigned to the idea that the Fed will not make any change to the statement suggesting that rates will be kept at exceptionally low levels for an “extended period.”

At its November 3rd-4th meeting, the FOMC decided to hold the key fed funds rate unchanged at its historically low levels, a decision that was widely expected. Contrary to the expectations of some analysts, the central bank retained the phrase 'extended period' while referencing its views on maintaining the fed rate at exceptionally low levels, given the current economic conditions.

Canadian, Commodities Markets
Bay Street Likely To Pause For Fed's Rate Call

Canadian stocks will look to add to this week's modest gains Wednesday morning, but trading is likely to be subdued as the world awaits the latest interest rate call from policy makers in the US.

Markets paused on Tuesday in anticipation of the Federal Reserve's next move. The S&P/TSX Composite Index edged lower by 4.67 points at 11,541.02, paring a small fraction of its gains from the previous session.

Toronto's main index hit a yearly high back on December 3, but has since limped along as commodity prices leveled off.

While the Fed is universally expected to hold its key rate near zero to avoid snuffing out fragile economic expansion, all eyes will be on the central bank's accompanying statement for hints about when an exit strategy may be implemented.

The Fed will likely suggest that the economic recovery for Canada's biggest trading partner is picking up steam, but that exceptionally low interest rates are in the cards for "an extended period."

Energy stocks will be in focus with the release of the weekly energy inventory report by the Energy Information Administration at 10.30 a.m. ET. A predicted drawdown in crude stockpiles could provide support for oil prices and energy shares.

In corporate news, Bank of Nova Scotia and HSCB Holdings are among bidders for a stake in Siam City Bank Pcl, Thailand's seventh-biggest bank, Bloomberg reported this morning, citing people familiar with the matter.

In a filing with the U.S. Securities and Exchange Commission, Potash Corp. of Saskatchewan, Inc. disclosed that it entered into a $2.5 billion revolving term credit facility on December 11, 2009

Azure Dynamics Corp. said that it has finalized the terms of its offering of common shares of the company. The offering is scheduled to close on or about December 22.

The company, which specializes in hyrbid vehicle tech, said it will sell 83.3 million to 166.7 million shares at C$0.18 per share.

Livingston International Income Fund said that a group led by Canada Pension Plan Investment Board has increased their acquisition offer to C$9.50 a unit from C$8 a unit.

West 49 Inc. said it has secured a new vendor relationship with Volcom Inc. and intends to introduce Volcom branded apparel in all West 49 stores this coming Spring.

Crescent Point Energy Corp. announced that it has entered into an agreement with Penn West Energy Trust to acquire certain assets in southwest Saskatchewan.

Currency, Commodity Futures

Crude oil futures are edging up $0.52 to $71.21 a barrel after rising on Tuesday after a nine-session slump. In the previous session, the commodity advanced $1.18 to $70.69 a barrel.

After edging down $0.80 to $1,123 an ounce on Tuesday, gold futures are currently gaining $7.80 to $1,130.80 an ounce.

On the currency front, the U.S. dollar is trading at 89.706 yen compared to the 89.51 yen it fetched at the close of New York trading on Tuesday. Against the euro, the dollar is trading at $1.4540.

Asia Markets
Asian Markets End Mixed In Lackluster Trading

Mixed trading was witnessed among the markets across Asia on Wednesday as traders remained in the sidelines in lackluster trading awaiting Fed announcement. The markets in India, Japan, Indonesia, and Singapore ended in positive territory, while the markets in Australia, China, Hong Kong, Taiwan and South Korea ended in negative territory. Japanese Nikkei index rose to a 7-week high on reports that the Government might delay the implementation of strict capital adequacy norms.

In Japan, the benchmark Nikkei 225 Index gained 93.93 points, or 0.93%, to 10,177, while the broader Topix index of all First Section issues was up 13.66 points, or 1.54%, to 898.

On the economic front, data released by the Ministry of Economy, Trade and Industry revealed that index measuring tertiary industrial activity rose to 96.8 in October, up 0.5% compared to the previous month, and was in line with analysts' expectations, after having declined by a revised 0.6% in the previous month.

Banking stocks led the gains in the market following news that the government might consider giving some more time for banks to adhere to the strict capital adequacy norms. This news has resulted in considerable easing of fears related to raising of funds by banks that has haunted the stocks in the recent past. Mizuho Financial soared 15.82% on huge volumes, Sumitomo Mitsui Financial surged up 14.34%, Mitsubishi UFJ Financial rose 4.91% and Resona Holdings climbed 3.59%.

Shipping stocks also ended in positive territory after recent losses. Kawasaki Kisen gained 2.08%, Mitsui OSK Lines rose 2.40% and Nippon Yusen climbed 5.06%.

Real estate stocks ended higher on speculation that banks might extend more loans for property sector with the likely delay in implementation of stringent capital adequacy norms. Mitsubishi Estate climbed 4.36%, Sumitomo Realty & Development rose 3.10%, Mitsui Fudosan gained 2.44% and Tokyu Land Corp. surged up 5.95%.

Automotive stocks also ended higher on weaker yen. Toyota Motor Corp. advanced 1.62%, Honda Motor added 0.66%, Nissan Motor rose 2.07%, and Mitsubishi Motors gained 0.77%.

Trading companies also ended in positive territory. Toyota Tsusho Corp. advanced 1.24%, Sumitomo Corp also advanced 1.24%, Marubeni Corp. gained 2.07%, and Itochu Corp. added 0.47%.

In Australia, the benchmark S&P/ASX200 Index slipped 11.60 points, or 0.25% to close at 4,662, while the All-Ordinaries Index ended at 4,676, representing a loss of 11.70 points, or 0.25%.

On economic front, the Australian Bureau of Statistics revealed that the country's gross domestic product was up a seasonally adjusted 0.2% in the third quarter of 2009 compared to the previous quarter. Analysts had expected for a 0.4% increase during the quarter after recording 0.6% increase in the second quarter. On an annualized basis, GDP was up 0.5% percent - again missing expectations for a 0.7% gain.

Oil stocks advanced following news that the lenders for the joint venture LNG project in Papua New Guinea, in which both Santos and Oil Search have stakes, have agreed for funding US$14 billion for the project. Rise in crude oil prices in the international market also lifted stocks. Santos gained 1.91% and Oil Search surged up 3.08%. Origin Energy added 0.69% while Woodside Petroleum remained unchanged from previous close.

Mixed trading was witnessed among metals and mining stocks. BHP Billiton slipped 0.12%, Rio Tinto edged down 0.07%, Fortescue Metals fell 0.68%, Gindalbie Metals lost 2.05%, and Mincor Resources declined 3.10%. However, Iluka Resources advanced 1.75%, Murchison Metals climbed 2.96% and Oz Minerals added 0.43%.

Gold stocks ended in negative territory. Lihir Gold declined 2.12% and Newcrest Mining lost 1.34%.

Bank stocks ended mixed. While ANZ Bank managed to end in positive territory with a gain of 0.33%, Commonwealth Bank of Australia edged down 0.09%, National Australia Bank slipped 0.14% and Westpac Banking declined 0.84%.

Retail stocks ended in negative territory. David Jones lost 1.11%, Harvey Norman slipped 0.70%, JB Hi-Fi fell 1.36%, Wesfarmers edged down 0.27% and Woolworths shed 0.37%.

In Hong Kong, the Hang Seng Index ended in negative territory with a loss of 202.18 points, or 0.93% at 21,612, as property stocks continued its downward slide on concerns about tough measures by Chinese government to control property prices. Speculation that rising US dollar might result in outflow of foreign funds also impacted market sentiment. As many as 35 of the 42 components in the index ended in negative territory, led by banks, china-related shares and property stocks.

In South Korea, the KOSPI Index snapped its 5-day winning streak and ended in negative territory with a minor loss of 1.61 points, or 0.10%, at 1,664, as traders preferred to lock in gains and move to the sidelines ahead of the key interest rate decision and announcement of the FOMC later in the day in the U.S. Volume was relatively less in lackluster trading.

Short covering after 3-days of losses and some bargain hunting, buoyed by gains in European stocks and U.S index futures, helped the Indian market end moderately higher on Wednesday. The BSE Sensex finished at 16,913, up 36 points or 0.21%, while the S&P CNX Nifty rose 9 points or 0.18% to 5,042.

Among other major markets in the region, China's Shanghai Composite Index slipped 19.25 points, or 0.59%, to close at 3,255 and Taiwan's Weighted Index declined 56.02 points, or 0.72%, to close at 7,752. However, Indonesia's Jakarta Composite Index gained 27.81 points, or 1.11%, to close at 2,522, and Singapore's Strait Times Index rose 15.23 points, or 0.54%, to close at 2814.

European Markets
The major European markets are trading higher in Wednesday’s session, with optimistic economic readings resulting in a buying surge. While the French CAC 40 Index and the German DAX Index are moving up 0.72% and 1.09%, respectively, the U.K.’s FTSE Index is rising 0.15%.

On the economic front, a survey by Markit Economics showed that the euro zone’s purchasing managers’ index rose to a 21-month high in December. The flash purchasing managers’ index rose to 51.6 in December from 51.2 in the previous month. Economists had estimated a reading of 51.5. The services business activity index rose to 53.7 from 53 in the previous month. Consequently, the composite output index rose 0.5 points to 54.2.

At the same time, German manufacturing activity rose to its highest level in 19 months, according to Markit Economics’ survey. The flash manufacturing PMI increased to 53.1 in December from 52.4 in the previous month. Economists had expected a reading of 52.6.

A report releases by the U.K. Office for National Statistics showed that the number of people claiming jobseekers’ allowance in the U.K. fell 6,300 in November compared to a revised increase of 5,900 in October. Economists had expected an increase of 12,500 for the month.

U.S. Economic News

On the economic front, the Labor Department reported that the consumer price index for November rose 0.4% compared to the previous month. Core consumer prices remained unchanged following an increase of 0.2% in October. The consensus estimates called for a 0.4% increase in the headline consumer price index, while the core consumer price index that excludes food and energy was expected to have risen 0.1%.

The rate of price increase of energy quickened to 4.1% in November compared to 1.5% growth in the previous month, with the recent month’s improvement reflecting higher gasoline prices and higher fuel oil prices. Food prices rose a more modest 0.1%.

The Commerce Department reported that housing starts rose 8.9% month-over-month in November to a seasonally adjusted annual rate of 574,000. The reading came in line with expectations, although the previous month’s starts were upwardly revised by 2,000.

Single-family housing starts rose 2.1% to 482,000 units. At the same time, building permits, a leading indicator of future construction activity, rose 6%, although they are down 7.3% from the year-ago period.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended December 11th at 10:30 AM ET.

In the week ended December 4th, crude oil stockpiles fell by 3.8 million barrels. Notwithstanding the decline, crude oil inventories remained above the upper limit of the average range.

Gasoline stockpiles rose by 2.2 million barrels, with inventories remaining above the upper limit of the average range. Distillate stockpiles rose by 1.6 million barrels. Refinery capacity utilization averaged 80.1% over the four weeks ended December 4th compared to 79.8% in the previous week