US & World Daily Markets Financial Briefing 19-10-2010

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Stocks are notably lower in mid-morning trading on Tuesday, as China's rate hike spurred an upward move in the dollar which has substantially weakened equities. The unexpected news out of China overshadowed the day's strong quarterly results from the likes of Bank of America (BAC) and Coca-Cola (KO).

The major averages have all moved off of their lows in recent dealing, but still remain firmly in the red. The Dow is down by 105.88 points or 1 percent at 11,037.81, the Nasdaq is down by 28.07 points or 1.1 percent to 2,452.59 and the S&P 500 is down by 10.85 points or 0.9 percent at 1,173.86.

The decline in U.S. stocks comes as China's central bank raised its key interest rates unexpectedly by 25 basis points in a bid to cool accelerating inflation and overheated economy. The People's Bank of China hiked the one-year benchmark deposit rate to 2.50 percent from 2.25 percent and the one-year lending rate to 5.56 percent from 5.31 percent. It was China's first tightening move since December 2007.

In earnings news, Bank of America reported adjusted third-quarter net income of $0.27 per share on revenues of $26.7 billion. Wall Street analysts expected the company to report earnings of $0.16 per share on revenues of $27.15 billion for the quarter.

Coca-Cola Co. posted adjusted third-quarter net income of $0.92 per share, topping expectations for $0.89 per share for the quarter. Revenues for the quarter were $8.43 billion, beating projections called for $8.30 billion for the quarter. The company also said that it expects to repurchase about $2 billion in shares by the end of 2010.

Further, Johnson & Johnson (JNJ) said its third-quarter net earnings rose to $1.23 per share from $1.20 per share in the same quarter last year. Analysts expected the company to report earnings of $1.15 per share. Sales to customers for the quarter declined to $14.982 billion and were short of estimates for $15.18 billion.

The company raised its earnings guidance for full-year 2010 to $4.70 - $4.80 per share, reflecting recent currency exchange rates. Analysts expect the company to report earnings of $4.70 per share for fiscal 2010.

New York-based investment banking firm Goldman Sachs Group, Inc. (GS) announced third quarter earnings of $2.98 per share, exceeding expectations for $2.28 per share. Net revenues for the quarter were $8.90 billion, firmly topping projections for $7.92 billion.

After the closing bell on Monday, Apple Inc. (AAPL) said that its fourth quarter profit jumped 70 percent from last year, driven by strong computer, iPhone and iPad sales. The company's quarterly earnings per share breezed past Wall Street expectations along with its quarterly sales.

IBM Corp. (IBM) said that its third-quarter profit increased 12 percent over last year, reflecting healthy results from its hardware, software and services businesses, as well as expanded margins.

Quarterly earnings came in well ahead of the analysts' expectations, as did revenues. Looking ahead, the company raised its earnings outlook for fiscal year 2010 for the second time.

On the economic front this morning, the Commerce Department reported that housing starts rose by 0.3 percent in September to a yearly rate of 610,000 units. The jump surpassed average economist estimates for the rate to rise to 579,000.

On the other hand, building permits fell 5.6 percent to an annual rate of 539,000. The drop was steeper than expected, with economists projecting the rate to fall to 565,000 from 571,000 initially reported last month.

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Bay Street stocks were lingering in the red Tuesday morning, as commodities prices fell after China surprisingly hiked its key interest rates for the first time in nearly three years. Downbeat comments by the Bank of Canada, which left its key rates unchanged today, also weighed on trader sentiment.

The BoC said it now expects the economic recovery to be more gradual than it had projected in its July Monetary Policy Report, with growth of 3.0 % in 2010, 2.3% in 2011, and 2.6% in 2012.

Earlier today, China's central bank said it would raise benchmark one-year deposit and lending rates by 25 basis points each to 2.5 percent and 5.56 percent, respectively.

The S&P/TSX Composite Index was down 57.42 points or 0.45% to 12,610.59, after hitting an intraday low of 12,544.

The price of crude oil moved down Tuesday morning, with crude for November shedding $1.74 to $81.34 a barrel. After the markets close today, the API will release its weekly U.S. crude oil inventories data.

In the oil patch, Cenovus Energy (CVE.TO) lost close to 2%. Canadian Natural Resources (CNQ.TO), Imperial Oil (IMO.TO) and Nexen Inc (NXY.TO) slipped over 1% each.

The price of gold witnessed its steepest fall in recent days, with gold for December delivery plummeting $31.90 to $1,340.20 an ounce.

Among gold stocks, Centerra Gold (CG.TO), Eldorado Gold (ELD.TO) and Kinross Gold (K.TO) lost around 4% each.

Gold miner Argonaut Gold (AR.TO) said it would acquire Pediment Gold (PEZ.TO) for about $123 million. While the shares of Argonaut plummeted over 9%, Pediment soared over 30%

In the base-metals space, a host of stocks including Equinox Minerals (EQN.TO), Lundin Mining (LUN.TO) and Thompson Creek Metals (TCM.TO) were down over 3% each.

Meanwhile, financial stocks recovered from early losses as traders digest encouraging earnings reports from south of the border. Bank of America (BAC) said its third-quarter net loss widened to $7.7 billion or $0.77 per share, from $2.2 billion or $0.26 per share in the year ago quarter. However, excluding one-time items the bank earned $0.27 per share, beating analysts' expectations for an earnings of $0.16 per share.

Goldman Sachs said it earned $1.74 billion or $2.98 per share in third quarter, compared to $3.03 billion or $5.25 per share in the year ago period. Nonetheless, earnings were much higher than the $2.32 per share analysts had predicted.

Bank of Montreal (BMO.TO), Manulife Financial (MFC.TO) and Sun Life Financial (SLF.TO) were up around 1% each.

Fertilizer maker Potash Corp. (POT.TO) added nearly 2% after reports said Norwegian fertilizer firm Yara International may be open for buying assets from Potash.

Specialty food manufacturing company Premium Brands Holdings (PBH.TO) gathered close to 3%. The company said it acquired WA based SK Food Group Inc. for approximately $42.5 million and noted this would be immediately accretive to its earnings per share and cash flow per share.

Software services provider Constellation Software (CSU.TO) was up 1% after it said it acquired the health clinical business of GFI Business Solutions Inc. to expand its business in Quebec.

Diagnostics solutions provider Spectral Diagnostics (SDI.TO) said it has initiated its U.S. pivotal trial of Toraymyxin, a therapeutic hemoperfusion device that removes endotoxin from the bloodstream, for patients with severe sepsis. The stock rose nearly 8%.

In economic news from the U.S., the Commerce Department said construction of new homes and apartments rose 0.3% in September from August to a seasonally adjusted annual rate of 610,000. Meanwhile, the number of building permits issued to build new homes, a sign of future activity, fell 5.6% from a month earlier.

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The European markets are lingering in negative territory in mid-morning deals Tuesday, as weaker commodities prices continue to drag miners lower, while technology stocks are under pressure after Apple issued a soft earnings guidance. Meanwhile, bank stocks are moving up ahead of earnings reports from U.S. bank - Goldman Sachs - which is scheduled to report before the U.S. markets open.

Meanwhile, U.S stock futures are pointing to a marginally lower open Tuesday. Yesterday, U.S. stocks closed up after Citigroup Inc. (C) said it swung to a profit in third quarter, reporting net income of $2.15 billion, compared with a loss of $3.24 billion in the year ago quarter. On a per share basis, the company reported net income of $0.07, in comparison with a loss of $0.27 in the year-ago quarter, beating analysts' estimates for net income of $0.06 per share.

Elsewhere, Asian markets ended mixed.

In the commodities market, crude for November delivery is easing $0.24 to $82.84 a barrel. Traders await clues from the data on housing starts and building permits due out from the U.S. later today, to gauge the situation in the housing market in the U.S., the world's largest economy. After the U.S. markets close today, the API will release its weekly U.S. crude oil inventories data.

Elsewhere, the price of gold is down, with gold for December delivery, the most actively traded contract, easing $3.50 to $1,368.60 an ounce.

In economic news from the euro zone, the ZEW indicator of economic sentiment for Germany dropped to minus 7.2 in October from minus 4.3 in the previous month, indicating analysts are apprehensive about the country's economic prospects. Economists had forecast a score of -7.0. In contrast, the current conditions index surged by 12.7 points to 72.6, well over expectations for a score of 64.0.

The European Central Bank said the euro zone recorded a seasonally adjusted current account deficit of 7.5 billion euros in August, which was almost twice as large as the 4.1 billion euro-deficit recorded a month earlier and represents the largest current account deficit recorded since September last year. On the other hand, the surplus in the goods account narrowed to 0.9 billion euros from 2.9 billion euros, while the service account surplus came in at 1.5 billion euros.

Meanwhile, euro zone construction output dropped a working day adjusted 8.5% year-on-year in August, after a revised 6.9% decline in July, data from Eurostat showed.

Among stocks, the world's largest maker of ball bearings SKF AB is up around 8% after it said it agreed to buy Lincoln Industrial Corp. for $1 billion.

The U.K.'s second-largest software company Autonomy Corp. is adding nearly 4% after reporting a 10% jump in its third quarter revenues to $211 million.

Advertising group Havas SA recorded organic revenue, which excludes acquisitions and mergers, of 368 million euros for the quarter. Nine-month sales by the same standard rose 2.9% to 1.1 billion euros. The stock is moving up over 5%.

Semiconductors products maker Soitec is up nearly 4% after reporting a 46% increase in first-half revenue to 137.3 million euros.

The U.K.'s largest hotel and restaurant operator, Whitbread Plc is rising nearly 1% as its first-half operating profit moved up to 168.4 million pounds from 127 million pounds a year earlier.

Meanwhile, Aeroports de Paris is slipping over 1% even after it said that its passenger traffic increased by 5.2% in September from a year earlier.

Shares of the Swiss iron ore producer Ferrexpo Plc is easing 0.50% even after UBS AG rated the stock as 'Buy'.

The FTSE 100 is currently down 0.22%, the CAC 40 is easing 0.05% and the DAX is edging down 0.04%.

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A liquidity squeeze due to the Coal India's Rs 15,000-crore initial public offering and fears that the RBI may stem rupee rise weighed on the Indian market Tuesday. The 30-share Sensex ended an extremely volatile session down 186 points or 0.92% at 19,983, with 24 of its components edging lower. The broader Nifty lost nearly 50 points or 0.80% to close at 6,027. However, stock-specific action was noticed in the small-cap and mid-cap space.

Among heavyweights, Infosys (down 3.05%), Hindalco Industries (down 2.23%), DLF (down 2.19%), Tata Steel (down 2.01%) and SBI (down 1.44%) bore the brunt of the selling.

On the flip side, Hero Honda Motors rose 1.53%, Cipla gained 1.51%, ACC added 0.63%, Maruti Suzuki edged up 0.22%, ICICI Bank rose 0.19% and Tata Motors ended up 0.10%.

Biocon soared 13% to a fresh 52-week high after the company said it had entered into a $350-million strategic global agreement with Pfizer Inc for marketing the former's insulin products. Emami added a percent on acquisition- related news. BPCL edged up 0.94% after the state-run oil firm announced a gas discovery in offshore Mozambique.

Bharat Forge advanced 0.76% on reports that it is diversifying into coal mining. ING Vysya Bank climbed 9% on reporting a 41% rise in its second-quarter net profit. Nitin Fire Protection Industries rose 1.10% after the company fixed November 8 as the record date for a 5-for-1 stock split.

Zee Entertainment Enterprises added 1.66% after the media firm proposed to launch 2-3 new niche channels in categories like golf and food by the end of this fiscal year.

Sesa Goa tumbled 3.60% on profit taking after its second-quarter consolidated profit more than doubled to Rs.385 crore versus Rs.166 crore in the year-ago quarter. Larsen & Toubro gave off a percent despite a brokerage upgrade and a new order win. Bajaj Auto reversed its early gains to end down 0.62% on reporting a better-than-expected 69% rise in second-quarter net profit.

SpiceJet fell 3.33% to Rs.75.55 after the budget airline said Sun TV founder Kalanithi Maran has hiked his stake in the airline via an off-market transaction at Rs.47.25 per share. SBI, which launched its Rs.1,000-crore retail bond issue on Monday, ended down 1.44%.

Natco Pharma eased 1.44% after blood cancer drug Revlimid's manufacturer Celgene Corp. filed a lawsuit against Natco in connection with the Indian company's application to the U.S. health regulator to sell Lenalidomide capsules. Cadila Healthcare lost 1.44% despite reporting a surge in quarterly net profit.

Elsewhere, the other Asian markets fluctuated between positive and negative terrain before ending mixed on Tuesday, as commodity prices eased and the dollar edged higher. China's Shanghai Composite average advanced 1.58% to close near a 6-month high as the central authorities vowed to maintain "stable and relatively fast economic growth" in the next five years.

European stocks reversed initial losses in the afternoon trade and the Dow futures trimmed losses, as investors awaited earnings reports from Bank of America, Goldman Sachs and other top U.S. companies later in the day.

Meanwhile, in a significant development, Brazil reportedly raised its so-called IOF financial operations tax on incoming fixed-income investment for the second time this month, to 6% from 4%, to curb foreign exchange inflows and stem its currency's strength.

Brazil's tax move comes a day after Thailand imposed a 15% withholding tax on capital gains and interest payments for government and state-owned company bonds.

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The euro continued to level off versus the dollar on Tuesday, after the Chinese surprised the markets with their first rate hike since in almost three years.

The euro slipped below $1.3800 versus the dollar, hitting a weekly low in moving away from a recent 8-month high of $1.4025. Despite this week's pull back, the euro remains well off June's 4-year low of 1.1805.

With the Chinese choosing to cool down their red-hot economy, tackle inflation, and let its currency strengthen a bit, the dollar was the big winner on a day that saw risk aversion pick up.

The dollar was also supported by speculation that the Federal Reserve's expected quantitative easing measures will not be as large as initially presumed.

Elsewhere, the Japanese government downgraded its view of the economy for the first time in 20 months amid slowing exports and weakening global demand.

"The economy has recently entered a lull," the Cabinet Office said in its latest monthly report, cutting last month's assessment that the economy is "picking up."

The euro remained choppy versus the yen, giving back early gains to fetch Y112.80. Back in August, the euro hit a 9-year low of Y105.71 but has since been holding steady.

In economic news from Europe, German investor confidence slumped more than expected in October, according to research firm ZEW institute. The fall reflects growing fears that uncertain conditions in overseas economies could hamper the German recovery.

The ZEW index of economic sentiment fell to minus 7.2 from minus 4.3 in September, the lowest reading since January last year. The reading is well below the historical average of 27 points and also lower than forecasts for a score of minus 7.

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