US & World Daily Markets Financial Briefing 09-02-2011

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Major Averages Posting Modest Losses In Early Trading

Stocks are seeing modest weakness in early trading on Wednesday, giving back some ground after trending higher in recent sessions. Selling pressure has remained relatively subdued, however, limiting the downside for the major averages.

The early weakness comes as traders cash in on some of the recent strength in the markets, although there is not much momentum behind the downward move amid a lack of economic news. Traders may be waiting on congressional testimony from Federal Reserve Chairman Ben Bernanke.

Biotechnology stocks have moved mostly lower, with Illumina (ILMN) leading the way to the downside after reporting its fourth quarter result after the close of trading on Tuesday. Auriga U.S.A also downgraded its rating on Illumina to Hold from Buy.

While weakness is also visible among airline, oil, and brokerage stocks, most of the major sectors are showing only modest moves.

The major averages have moved off their lows for the young session and are currently posting only modest losses. The Dow is down 3.33 points or less than 0.1 percent at 12,229.82, the Nasdaq is down 4.28 points or 0.2 percent at 2,792.77 and the S&P 500 is down 2.79 points or 0.2 percent at 1,321.78.

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TSX Edges Down At Open Wednesday

Toronto stocks edged down at open Wednesday amid selling in base-metals stocks. The S&P/TSX Composite Index was down 17.67 points or 0.13 percent to 13,874.85.

The Diversified Materials Index was down nearly 1 percent. Teck Resources slipped nearly 3 percent after it said its fourth quarter profits were impacted by one time refinancing costs.

Apparel manufacturer Gildan Activewear shed close to 4 percent despite reporting improved first quarter net earnings.

Meanwhile, TMX Group surged close to 12 percent after announcing plans to merge with London Stock Exchange in an all-share merge valued about $3.20 billion.

Fertilizer maker Agrium Inc. was up over 3 percent after reporting a surge in its fourth-quarter net earnings at $158 million or $1.00 per share from $30 million or $0.19 per share last year.

Potash Corp. moved up nearly 1 percent.

Airlines operator WestJet Airlines gained over 8 percent after reporting fourth quarter earnings of C$47.91 million or C$0.33 per share, up from C$20.18 million or C$0.14 per share last year.

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European Stocks Seen Subdued

European stocks are seen opening flat-to-lower on Wednesday, tracking subdued Asian cues following China's latest interest rate hike late Tuesday to rein in inflation which is becoming a serious problem.

Most Asian stocks declined on Wednesday, metals dropped and gold prices are barely changed, while crude prices edged up half a percent after ending lower for a fourth day in New York overnight.

The euro rose against the dollar and yen as investors shrugged off China's rate hike, the third such move from Beijing in four months. The Dow futures are declining 14 points as investors turn their focus to Bernanke's testimony before the House Budget Committee on the state of the economy and the fiscal challenges later tonight.

Chinese stock market, which reopened today following a week's break for the Chinese New year, is currently down 0.66 percent, dragged down by property stocks, while Japan's Nikkei average is down 0.17 percent.

On the macro-economic front, U.K. permanent job placements rose at the fastest pace in six months in January, according to the results of a new survey. The Recruitment and Employment Confederation - KPMG report on jobs found temporary staff placements jumped at the strongest rate in seven months in January, reflecting a further rise in vacancy levels at employers.

According to the British Retail Consortium, overall shop price inflation in the United Kingdom rose by 2.5 percent from a year earlier in January following the 2.1 percent annual expansion in December. "Rising commodity prices continue to push up food inflation, now to its highest for a year and a half," said Director General Stephen Robertson.

Meanwhile, a report from the German Federal Statistical Office showed that German trade balance developed a surplus of 14 billion euros in December, whereas the current account surplus climbed to 17.6 billion euros. Traders await trade data from the U.K. later in the day for signals on the pace of economic recovery. The U.K. visible trade balance is seen logging a deficit of 8.6 billion pounds, down slightly from the 8.7 billion-pound shortfall in November.

In corporate news, TMX Group Inc., which owns and operates the Toronto Stock Exchange, confirmed that it is in advanced talks with London Stock Exchange Group regarding a possible merger of equals.

Swedish agribusiness company Syngenta AG reported a slight decline in profit for fiscal 2010, hurt by one time charges.

French drugmaker Sanofi-Aventis said its fourth-quarter net income slumped to EUR 437million from EUR1.21 billion in the year-ago period

The European markets extended gains on Tuesday amid a mixed batch of economic data and steady commodities prices. While German industrial output came in weaker than expected, data from the U.K. revealed that retail sales improved. The FTSE 100 edged up 0.67 percent, the CAC 40 added 0.43 percent and the DAX advanced 0.54 percent.

On Wall Street, stocks ended mostly higher on Tuesday amid some upbeat corporate news from McDonald and additional news on the merger-and-acquisition front. The major averages rose about half a percent each to end near their best levels of the day.

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Selling Continues; Indian Market Falls To 7-month Low

Apprehensions that high inflation and recent interest rate hikes will impact corporate earnings in the coming quarters dragged the Indian market sharply lower on Wednesday. After flip-flopping early in the session, the 30-share BSE Sensex witnessed a free-fall to a seven-month low of 17,508 in the afternoon before recouping some of its loss and ending 183 points or 1.03 percent lower at 17,593. The 50-share Nifty fell by a modest 0.72 percent to 5,274.

An apparent slump in investor confidence amid renewed selling by foreign funds weighed on second-line stocks. The BSE mid-cap index fell 3.64 percent and the small-cap index lost 4.30 percent. In the broader market, declining shares outpaced gainers in the ratio of 4.5:1 on the BSE.

Telecom stocks fell sharply after sector regulator TRAI recommended a sharp increase in charges for 2G spectrum. Bharti Airtel closed off the day's low, losing 0.27 percent, while Idea Cellular lost over 3 percent and Tata Teleservices lost 10 percent.

Reliance Communication, India's second-largest listed mobile phone operator by sales, plunged 14 percent to a record low after a Jaipur-based auditor that had examined the books of the company as part of a government-ordered investigation, reportedly accused the Anil-Ambani group company of harassment.

Shares of other group companies such as Reliance Power, Reliance Capital, Reliance Infrastructure and Reliance MediaWorks ended down between 9 percent and 19 percent.

Property firm DB Realty slumped 6 percent, a day after the Central Bureau of Investigation arrested the company's managing director Shahid Balwa in connection with an investigation related to the 2G spectrum scam. Other realty stocks such as Sobha Developers, Indiabulls Real Estate, HDIL, Ackruti City, Unitech, Orbit Corp and Parsvnath Developers lost between 4 percent and 20 percent.

Software services provider Mastek plummeted 9 percent on reports that it is seeking opportunities in the insurance sector. TCS fell 2.70 percent and Wipro edged down half a percent, while bellwether Infosys rose a percent.

Mangalore Refinery and Petrochemicals plunged 8 percent to a 52-week low despite reporting a 21 percent rise in its quarterly net profit. Monnet Ispat fell over 4 percent on disappointing results. Hanung Toys shed 3.77 percent despite posting strong quarterly earnings.

In the auto sector, Maruti Suzuki, Ashok Leyland, Bajaj Auto, Tata Motors and Hero Honda Motors lost between 2 percent and 5 percent. However, Mahindra & Mahindra climbed 4 percent after reporting a 78% rise in its third-quarter net profit.

Among healthcare stocks, Natco Pharma lost 11 percent after it challenged the patent for Tamiflu in the U.S. Fortis Healthcare eased half a percent despite strong quarterly results. Sun Pharmaceutical Industries added 3 percent on bargain hunting after falling nearly 10% in recent sessions.

Allied Digital fell 10 percent, extending its recent losses in light of the recent income tax raid on its premises. State-run oil marketing firm BPCL fell 2.45 percent after its quarterly profit halved from a year earlier. HPCL lost 2.66 percent and IOC ended down 2.25 percent.

Infrastructure-related stocks saw broad-based selling on concerns over rising interest and input costs. Larsen & Toubro fell 1.25 percent, Jaiprakash Associates plunged nearly 11 percent, Nagarjuna Construction declined 2.38 percent, Hindustan Construction slumped about 7 percent and GMR Infrastructure ended down 12 percent.

Mortgage lender HDFC gained 3.16 percent on reports that it will sell its investment in unlisted companies to private equity firms by March. Everonn Education rallied 4 percent on strong Q3 earnings.

Elsewhere, the other Asian markets closed mostly in the red on Wednesday amid worries about the impact of China's latest interest rate hike. Japan's Nikkei eased 0.17 percent, Hong Kong's Hang Seng fell 1.36 percent and South Korea's KOSPI declined 1.17 percent. Chinese stock market, which reopened after a long holiday, ended down 0.92 percent.

European stocks fluctuated, tracking losses in Asia and weaker-than-expected fourth-quarter earnings from drug maker Sanofi-Aventis. The U.S. index futures were in the red.

Base metal prices were mixed, while crude prices rose nearly a percent after ending lower for a fourth day in New York overnight. The euro was a tad higher against the dollar after data showed German exports rose for a second straight month in December.

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BoE Set To Keep Rates On Hold

Weak economic activity is likely to weigh on the assessment of a majority of British policy makers, discouraging them from a rate hike this week. Despite inflation running above the 2% target, the Bank of England is all set to maintain status quo until the recovery gains footing.

The nine-member Monetary Policy Committee led by governor Mervyn King is expected to retain the Bank Rate unchanged at 0.5%. This is the lowest since the central bank was established in 1694. Policy makers are also likely to maintain the size of quantitative easing at GBP 200 billion.

The central bank is slated to announce the decision on February 10 at 7.00 am ET.

The latest meeting is expected to see a deepening dissent, as more members are likely to clamor for an increase in rates. In January, policy maker Martin Weale joined Andrew Sentance in seeking a quarter point rate hike. Weale and Sentance said elevated inflation rate poses a significant risk to inflation expectations.

In January, members wanted to wait to assess recent developments portrayed in February's Inflation Report, which is due next week. In a speech, Deputy Governor Charles Bean said the BoE may need to act on interest rates if commodity prices continue to rise.

Inflation rose to 3.7% in December, hitting an eight-month high. It has stayed above the 2% target for 13 straight months and is expected to exceed 4% with an increase in sales tax.

Inflation high for now, but barring more shocks, it should fall next year, Mark Cliffe, ING Group chief economist assessed. He said BoE may delay hiking rates until 2012, but if they don't, further rises will come slowly.

Further, the economy shrank for the first time in more than a year in the fourth quarter, raising concerns over the ability to resist a fiscal squeeze. Gross domestic product fell unexpectedly by 0.5% sequentially, following a 0.7% expansion in the third quarter.

But private sector activity recovered from a cold weather in January, according to the Purchasing Managers' survey conducted by Markit. Manufacturing, services and construction sectors all showed expansion in January.

Business lobbies and think tanks have been urging the BoE to refrain from a rate hike. The Ernst & Young ITEM Club on January 17 said the BoE should retain the rate until the economy makes a full recovery.

Businesses need a prolonged period of low interest rates to cope with pressures emanating from fiscal squeeze, the British Chambers of Commerce said. If the economy weakens, the MPC must be prepared to consider a further increase in its QE, it added.

If the recovery regains momentum quickly, a near-term rate rise will come back on the agenda, Vicky Redwood at Capital Economics said. "But we think it more likely that the recovery remains weak and rates stay exceptionally low."

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