US & World Daily Markets Financial Briefing 10-08-2010

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Stocks Sharply Lower In Mid-Morning Trading

Stocks are down by steep margins in mid-morning trading on Tuesday, as an unexpected drop in second quarter productivity has prompted early selling in the markets. Meanwhile, there was little reaction to the day's inventories data and traders are now awaiting the Federal Reserve's interest rate decision this afternoon.

In recent news on the economic front, the Commerce Department said that wholesale inventories edged up by 0.1 percent in June following a 0.5 percent increase in May. Economists had been expecting wholesale inventories to show a more significant increase of about 0.4 percent.

Initial weakness came after the Labor Department reported that labor productivity fell by 0.9 percent in the second quarter following an upwardly revised 3.9 percent increase in the first quarter. Economists had expected productivity to edge up by 0.1 percent compared to the 2.8 percent growth that had been reported for the previous quarter.

A jump in hours worked contributed to the unexpected decrease in productivity, which is a measure of output per hour. The decrease also follows five quarters of strong productivity growth.

Meanwhile, the report also showed that unit labor costs rose by 0.2 percent in the second quarter compared to a revised 3.7 percent decrease in the first quarter. Labor costs had been expected to increase by about 1.4 percent.

This afternoon, all eyes will be on the Fed's much awaited policy statement at about 2:15 p.m. ET. With interest rates widely expected to be kept unchanged, the focus will be on the Fed's assessment of economic conditions and any hints to further quantitative easing measures.

Overseas, China's trade surplus for July rose to an 18-month high of $28.7 billion compared to a surplus of $20.7 billion in June. A sharp decline in imports due to some tightening measures implemented domestically led to the higher surplus.

On the corporate front, Research In Motion's (RIMM) BlackBerry messenger services will not be banned by Saudi Arabia's Communication and Information Technology Commission amid positive developments in the completion of regulatory requirements by the Smartphone maker.

The major averages have moved well off their worst levels of the day in recent trading but remain sharply lower. The Dow is down 110.88 points or 1 percent at 10,587.87, the Nasdaq is down 34.84 points or 1.5 percent at 2,270.85 and the S&P 500 is down 12.74 points or 1.1 percent at 1,115.05.

Sector News

Semiconductor stocks are among the morning's worst performers, driving the Philadelphia Semiconductor Index down by 2.8 percent. The index has sunk to its lowest intraday level in just over one week amid a downgrade of sector bellwether Intel.

Steel stocks are also under pressure, with the NYSE Arca Steel Index posting a loss of 2.7 percent, pulling back off of yesterday's three-month closing high.

Electronic storage, railroad, housing and oil service stocks are also posting notable losses amid a broad based sell-off.

Stocks Driven By Analyst Comments

Intel is notably lower after Robert W. Baird downgraded the stock from Outperform to Neutral. The broker also lowered its target on the stock from $30 to $22. Shares are currently down by 3.9 percent, setting a one-month intraday low.

Northrop Grumman is also on the downside after analysts at FBR Capital Markets downgraded the stock from Outperform to Market Perform. The stock is down by 2.4 percent, pulling back off of the six-week closing high set on Monday.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region ended on the downside Tuesday. Hong Kong's Hang Seng Index slid by 1.5 percent while Japan's benchmark Nikkei 225 edged down by 0.2 percent.

Meanwhile, the major European markets are mixed. The French CAC 40 Index and the German DAX Index are up by 0.3 percent and 0.2 percent, respectively, while the U.K.'s FTSE 100 Index is down by 0.9 percent.

In the bond markets, treasuries are little changed. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, is trading at 2.831 percent, posting a gain of less than one basis point.

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TSX Poised To Open Lower Amid Falling Commodities; RIM May Recover

Toronto stocks may open lower Tuesday amid falling commodities prices and weak cues from the global equity markets. Traders might prefer the 'wait-and-watch' game ahead of an interest rate setting meeting by the U.S. Federal Reserve later today.

On Monday, the S&P/TSX Composite Index added 63.59 points or 0.54% to 11,863.56, to advance to its 7-week high.

The price of crude oil moved down after economic data from China signalled the nation's red-hot economy is cooling off.

Preliminary trade data from China today revealed the country's crude oil imports retreated to 18.8 million tons in July from a record high of 22.1 million tons a month ago. Crude for September was down $1.40 to $80.08 a barrel.

The price of gold slipped below $1,200 after advancing in the past seven of eight sessions. Gold for December delivery moved down $7.60 to $1,195.00 an ounce.

Blackberry maker Research In Motion may be in play amid reports that Saudi Arabia's telecoms regulator has decided not to go ahead with a planned ban on BlackBerry messenger services as mobile companies operating in the kingdom have satisfied certain regulatory requirements.

In corporate news from Canada, gold and silver mining company Gammon Gold reported improved second quarter net earnings of $0.08 per share compared to $0.03 per share last year. Analysts were expecting the company to report earnings of $0.07 per share this quarter.

Gold and copper producer Northgate Minerals reported lower second-quarter net earnings of $0.01 per share, compared to net earnings of $0.02 per share in the like period last year. However on an adjusted basis, net loss was $0.02 per share, compared to net income of $0.04 per share in the same quarter last year.

Gold mining company Golden Star Resources reported improved second quarter net income of $0.029 per share compared to net income of $0.002 per share in the year ago period.

Gold explorer Vista Gold dipped into the red in second quarter, reporting net loss of $0.09 per share, compared to net earnings of $0.11 per share in the prior year quarter.

Mineral mining company European Goldfields slipped into the red in second quarter, reporting net loss of $0.10 per share, compared to a profit of $0.01 last year.

Commercial Forest plantation operator Sino-Forest Corp. reported improved second-quarter net income of $0.26 per share, up from $0.23 per share in the same quarter last year. For fiscal 2010, capital expenditures are expected to be around $1.300 billion for plantation acquisitions, replanting and maintenance, and approximately $30 million for the development of manufacturing facilities integrated with plantation operations, the company said.

Communications solutions provider Wi-LAN Inc. reported second-quarter net loss of C$0.06 per share, compared to loss of C$0.01 per share last year. Excluding certain items, proforma earnings for the quarter declined to C$0.01 per share from prior-year's proforma earnings of C$0.03 per share. Further, Wi-LAN maintained its fiscal 2010 forecast, and still expects proforma earnings to be within the range of C$8.0 million to C$11.0 million and revenues within the range of C$43.0 million to C$47.0 million. The company declared dividend of C$0.0125 per common share.

In economic news Statistics Canada said the New Housing Price Index (NHPI) rose 0.1% in June, after advancing 0.3% in the previous month. On a yearly basis, the NHPI was up 3.3% in June following a 2.9% increase in May.

In another report, Canada Mortgage and Housing Corp. said housing starts in the nation fell to a seasonally adjusted annualized rate of 189,200 units in July from a revised 192,300 in June. Analysts were expecting for 186,500 starts in July.

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Asian Markets End In The Red Ahead Of FED Meeting

Asian markets ended the trading session Tuesday on a weak note, despite positive cues from Wall Street in the previous session, as traders remained cautious ahead of the FOMC announcement later in the day that might provide more clues about the economic health in the US and the global economy. Better-than-expected trade surplus data from China following drop in imports, and disappointment from Bank of Japan related to no mention of measures for arresting dollar's weakness against the yen also impacted market sentiment. Volumes were relatively weaker as most of the traders preferred to stay away in the sidelines.

In Japan, the benchmark Nikkei 225 Index fell 21.44 points, or 0.2%, to 9551, while the broader Topix index of all First Section issues slid 2.94 points, or 0.3%, to 855.

On the economic front, the policy board of the Bank of Japan unanimously decided to retain the overnight call rate at 0.10%, in line with market expectations. The BOJ also held off from unveiling further easing measures, despite fears the strong yen could derail the export-driven recovery. The bank once again repeated its vow to fight deflation and promised to maintain the extremely accommodative financial environment.

A preliminary report released by the Japan Machine Tool Builders Association revealed that machine tool orders surged 144.8% year-on-year in July, following 143.8% rise in June. The report further noted that domestic orders increased 101.7%, while external orders rose 176.1% during the month.

Real estate stocks ended in negative territory. Sumitomo Realty & Development declined 2.33%, Mitsui Fudosan lost 1.24%, Mitsubishi Estate fell 1.08%, Tokyu Land Corp. slipped 1.18% and Heiwa Real Estate was down 1.85%.

Mixed trading was witnessed among shipping related stocks. Mitsui OSK Lines managed to end in positive territory with a gain of 0.17%. However, Kawasaki Kisen Kaisha slipped 0.56% and Nippon Yusen declined 1.41%.

Mixed trading was also witnessed among trading stocks. Sumitomo Corp. advanced 0.79% and Mitsui & Co. Ltd added 0.25%. Sojitz Corp. remained unchanged from previous close. However, Toyota Tsusho Corp. edged down 0.15%, Mitsubishi Corp. declined 0.87%, Marubeni Corp. shed 0.62% and Itochu Corp. was down 0.41%.

In Australia, the benchmark S&P/ASX200 Index declined 54.20 points, or 1.18%, and closed at 4,541 points, while the All-Ordinaries Index ended at 4,563, representing a loss of 52.60 points, or 1.14%.

On the economic front, data released by the National Australia Bank revealed that business confidence slipped to its lowest level in more than a year in July. The confidence level slid to 2 in July from 4 in June The bank attributed sharp fall in new orders as the primary reason for the decline, albeit partly offset by the boost in mining sector following the compromise agreement struck on the resource super tax.

Banks ended in negative territory after National Australia Bank provided a cautious outlook for the year after reporting first quarter results which were in line with analysts' estimates.

ANZ Bank declined 2.03%, Commonwealth Bank of Australia slipped 0.55%, National Australia Bank lost 2.20% and Westpac Banking was down 2.18%. Investment banking company Macquarie Group fell 1.81%.

Mining and metal stocks also ended weaker. BHP Billiton slipped 1.97%, Rio Tinto shed 1.89%, Fortescue Metals declined 0.65%, Gindalbie Metals plunged 4.63%, Iluka Resources edged down 0.18%, Macarthur Coal slumped 4.11% and Murchison Metals was down 4.34%.

Oil stocks also ended in negative territory. Woodside Petroleum fell 2.33%, ROC Oil plunged 6.02%, Oil Search Ltd slipped 1.34% and Origin Energy was down 0.31%. However, Santos Ltd bucked the trend and ended in positive territory with a gain of 1.04%.

Mixed trading was witnessed among gold stocks. While Lihir Gold managed to remain unchanged from previous close, Newcrest Mining ended in positive territory with a marginal gain of 0.06%.

In Hong Kong, the Hang Seng Index ended sharply lower at 21,474, down 327.99 points, or 1.50%, as traders resorted to profit taking at higher levels and moved to the sidelines ahead of the key Federal Reserve meeting in the US. Economic data from mainland China which revealed that trade surplus surged to a 18-month high in July following moderation in imports raised concerns that the Chinese economy is slowing down its growth. Almost all the stocks ended in the negative territory, taking cues from other markets in the neighboring region.

Profit taking following recent sharp gains weighed on the Indian market on Tuesday. Subdued global cues ahead of the U.S. Federal Open Market Committee (FOMC) meet also dampened sentiment. The 30-share BSE Sensex fell 68 points or 0.37% to finish at 18,220 and the 50-share Nifty closed at 5,461, down 25 points or 0.46%.

Among the other major markets open for trading, China's Shanghai Composite Index plunged 77.26 points, or 2.89% to 2,595, Taiwan's Weighted Index declined 57.75 points, or 0.72%, to close at 7,977, Indonesia's Jakarta Composite Index slipped by 25.44 points, or 0.83%, to close at 3,057, and Singapore's Strait Times Index ended in negative territory with a loss of 10.77 points, or 0.36%, at 2,984.

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The major European markets are trading mixed amid some volatility on Tuesday. The French CAC 40 Index and the German DAX Index are rising 0.61% and 0.26%, respectively, while the U.K.’s FTSE 100 Index is receding 0.73%.

In economic news, Germany’s consumer price inflation accelerated to 1.2% in July from 0.9% in June. The reading represented an upward revision to the preliminary estimate of 1.1%. On a monthly basis, consumer prices rose at a 0.3% rate compared to the 0.1% increase in the previous month.

A separate report showed that Germany’s wholesale price inflation rose 5.3% in July compared to the 5.1% growth in the previous month. However, on a monthly basis, wholesale prices fell 0.3% following a 0.2% drop in the previous month.

A report from the U.K. Office for National Statistical Office showed that U.K.’s trade deficit narrowed to 7.4 billion pounds in June from a deficit of 7.8 billion pounds in May. The narrowing was aided by a faster rate of increase in exports than the imports.

Meanwhile, French industrial production fell 1.7% month-over-month in June following a 1.9% increase in May. Economists had expected a more modest decline of 0.2%. Manufacturing output fell 1.3%, marking the first drop for the year.

U.S. Economic News

The Labor Department released a report showing an unexpected decrease in labor productivity in the quarter, as a significant increase in hours worked in the second quarter outpaced an increase in output.

Productivity fell by 0.9% in the second quarter following an upwardly revised 3.9% increase in the first quarter. Economists had expected productivity to edge up by 0.1% compared to the 2.8% growth that had been reported for the previous quarter.

Meanwhile, the Labor Department also said that unit labor costs rose by 0.2% in the second quarter compared to a revised 3.7% decrease in the first quarter. Labor costs had been expected to increase by about 1.4%.

The Commerce Department is due to release its wholesale inventories report at 10 AM ET. Economists expect wholesale inventories at the end of June to show a 0.4% increase.

In May, wholesale inventories saw a 0.5% month-over-month increase. However, the previous month's increase was downwardly revised to show 0.2% growth. Wholesale sales fell 0.3%, marking the first decline since February 2009.

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Earnings

Ambac Financial Group (ABK) reported a second quarter loss of 20 cents per share compared to a loss of $8.24 per share in the year-ago period. The company reported revenues of $381.17 million compared to negative revenues of $476.88 million last year. The company also said it may have to seek insolvency protection, as it has insufficient capital to finance its debt service and operating expense requirements beyond the second quarter of 2011.

Meanwhile, MBIA (MBI) reported second quarter net income of $6.32 per share compared with $4.30 per share last year. Revenues totaled $2.08 billion, sharply higher than $992.10 million in the year-ago period.

THQ, Inc. (THQI) reported a loss of 21 cents per share on a non-GAAP basis for its first quarter compared to a profit of 10 cents per share last year. On a non-GAAP basis, the company’s revenues were $160.3 million, lower than $233.9 million last year. Analysts estimated a loss of 24 cents per share on revenues of $161.04 million. The company also said it continues to expect break-even results on a non-GAAP basis for the full year and revenues of $845 million to $865 million. Analysts expect a loss of 1 cent per share on revenues of $850.91 million.

Other Corporate News

Raytheon (RTN) may see some buying interest after it said the U.S. Air Force has selected the company’s GBU-53/B for the Small Diameter Bomb increment II program. The contract is valued at $450 million and delivery is expected to begin in 2013.

UAL Corp. (UAUA) is likely to see some activity after it announced that the load factor for its United Airlines unit rose 0.3 points year-over-year to 87.2%, as traffic and capacity increased 2.1% and 1.8%, respectively.

Laboratory Corp. of America (LH) is also expected to be in focus after it said its board authorized the buyback of up to an additional aggregate of $250 million shares of its common stock.

Novell (NOVL) could see weakness after it lowered its third quarter net revenue guidance to $197 million to $199 million from its previous guidance of $205 million to $210 million. The company also lowered its non-GAAP operating margin guidance to 13%-15% from its previous guidance of 15%. The muted outlook was attributed to customer uncertainty related to the company’s board’s ongoing review of various alternatives to enhance stockholder value.

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