| LastUpdated 8/27/2008 9:24:25 AM
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Strong Durable Goods Orders Could Quell Anxiety Over Oil’s Rally
The major U.S. index futures are pointing to a higher opening on Wednesday. A sharp jump in durable goods order growth should encourage market participants and trigger some buying interest. However, a rise in the price of oil ahead of the weekly oil inventory report and amid the approach of hurricane Gustav towards the U.S. Gulf of Mexico region should stir anxiety over inflationary pressures and mute some of the optimism.
U.S. stocks showed a lack of direction during trading on Tuesday, with the major averages moving back and forth across the unchanged line before ending the session in a mixed fashion. The upside was led by energy stocks, which rose on an increase in oil prices. Additionally, a better-than-expected consumer confidence reading and an unexpected increase in new home sales encouraged the markets.
The Dow Industrials showed volatility throughout the session before closing up 26.62 points or 0.23% at 11,413. Meanwhile, the S&P 500 Index, which managed to hold above the unchanged line for most of the morning, saw some weakness in late afternoon trading. Nevertheless, the index recouped its losses in the last hour of trading to close up 4.67 points or 0.37% at 1,272.
The Nasdaq Composite, which saw significant weakness in the afternoon, dipping to an intra-day low of 2,346, recovered some of the lost ground to end down just 3.62 points or 0.15% at 2,362.
Among the Dow components, AIG (AIG) rebounded by 4.58%, Citigroup (C) rose 1.31%, Home Depot (HD) advanced 1.73%, Merck ended up 1.20% and Exxon Mobil (XOM) rallied 1.58%. On the other hand, Boeing (BA) fell 0.95% and General Motors (GM) receded 0.89%. Microsoft (MSFT) and Pfizer (PFE) declined 1.41% and 1.18%, respectively.
The Dow Jones Utility Average gained 1.08%, while the Amex Oil Index and the Philadelphia Oil Service Sector Index advanced 1.18% and 2.17%, respectively. However, the Amex Airline Index fell 4.06% and the KBW Bank Index moved down 2.78%. The Philadelphia Housing Sector Index receded 0.89% compared to a 0.98% drop by the Philadelphia Semiconductor Index.
Of the two housing reports released on Tuesday, the S&P Case-Shiller survey showed that the national composite home prices fell 15.4% year-over-year and declined at a 2.3% quarterly rate in the second quarter. All 20 cities surveyed showed declines compared to the previous year, while 9 of the 20 cities showed monthly increases in prices.
Meanwhile, the Commerce Department’s new home sales report showed a 2.4% monthly increase in new home sales for July to an annualized rate of 515,000 units. However, the previous two months’ sales were revised down, resulting in a net reduction of 46,000 for the previous two months. The median sales price of new homes was down 6.3% year-over-year in July. Meanwhile, inventories of new homes edged down to a 10.1-month supply rate. Regionally, new home sales jumped 38.9% in the Northeast and rose 9.9% in the West. On the other hand, sales in the Midwest and South fell 8.2% and 2.5%, respectively.
The Conference Board’s consumer confidence index rose 5 points in August to 56.9, marking the second consecutive months of gains. While the expectations index increased 10.1 points to 52.8, the current conditions index declined 2.6 points to 63.2. Much of the optimism is traced back to the recent pullback in energy prices.
Meanwhile, the minutes of the August 5th FOMC meeting showed that most members were of the view that the next move in interest rates will be towards the upside. However, the members don’t seem to share a unanimous view about the extent and timing of the policy move. The FOMC expects weak growth for the rest of the year before it recovers modestly next year. Additionally, the members expect weak consumer spending due to difficult, credit, labor and housing market conditions. While most members expect headline inflation to slow in the coming quarter, the core inflation rate is expected to edge down during 2009. Given the fact that some of the members do not view the current policy stance as particularly accommodative, the FOMC is most likely to remain on hold this year.
Currency, Commodity Markets
Crude oil futures are currently rising $1.83 to $118.10 a barrel after they advanced $1.16 to $116.27 a barrel on Tuesday. Gold futures are currently up $5.10 to $833.20 an ounce, adding to the strength seen in the previous session, when it gained $2.40 to $828.10 an ounce.
Among currencies, the U.S. dollar is currently trading at 109.6 yen, weaker than the 108.9655 yen it was worth at the close of New York trading on Tuesday. Meanwhile, the greenback is currently valued at $1.4721 versus the euro.
Asia
Stock markets across the Asia-Pacific region closed mixed on Wednesday. In late Asian trading, oil prices edged above the $117 a barrel mark, rising for the third straight day, on fears that Tropical Storm Gustav could strengthen to hurricane levels. Energy stocks gained on higher oil prices, but exporters fell as the dollar eased against major Asian currencies.
The Japanese market closed lower, extending Tuesday's losses. Investors remained cautious ahead of a series of key economic data scheduled for release on Thursday and Friday in the U.S. and Japan. The benchmark Nikkei 225 index closed down 25.75 points or 0.2% at 12,753.
Property stocks fell after homebuilder Sohken Homes said Tuesday that it had filed for court protection and exporters declined as the yen strengthened against the dollar. Exporters also declined in the session.
Mitsubishi Electric gained 0.8% after a Nikkei report said that Japan's third-largest integrated maker of electronics products plans to invest more than 10 billion yen and nearly triple its production capacity for highly efficient solar cells by the end of March 2012.
The South Korean market finished marginally higher on bargain hunting. The benchmark Korea Composite Stock Price Index or KOSPI closed up 3.67 points or 0.25% to end at 1,494.
Steel and telecom stocks led the gainers. Top steel maker POSCO climbed 2.0% and fixed-line operator KT soared 3.5%. However, technology stocks lost ground, with market heavyweight Samsung Electronics losing 1.9% and Hynix Semiconductor plummeting 3.7%.
Shipyard stocks were lower after Hyundai Heavy Industries plunged 2.9%, as a Merrill Lynch analyst questioned the company's rationale for its bid to acquire smaller rival Daewoo Shipbuilding & Marine Engineering. Daewoo Shipbuilding closed up 1.9%.
The Chinese market closed lower for a second day, as investors remained cautious amid concerns about government action to support the markets. The benchmark Shanghai Composite Index closed down 7.94 points or 0.34% at 2,342.
The Hong Kong market closed sharply higher, extending gains in the afternoon as heavyweight China Mobile surged up after reporting better-than-expected first-half earnings. The benchmark Hang Seng index closed up 408.06 points or 1.94% at the day's high of 21,465.
Oil producers CNOOC and PetroChina gained ahead of their first-half results and following a rise in crude oil prices. China COSCO Holdings, Jiangxi Copper and Tsingtao Brewery outperformed after their results announcements.
China Mobile rose 3.5%, CNOOC jumped 3.8%, PetroChina gained 3.4%, China COSCO soared 8.2%, Jiangxi Copper surged 9.5% and Tsingtao Brewery climbed 7.0%.
The Australian stock market closed slightly higher after posting marginal losses on Tuesday. Energy stocks gained on higher oil prices, but financial stocks were weak on credit crunch concerns. The All Ordinaries index lost 5.5 points or 0.11% to finish 5,088.
Europe
The major European markets are showing mixed sentiment in Wednesday’s session. While the French CAC 40 Index is down 0.26%, the German DAX Index is losing 0.40%. The U.K.’s FTSE 100 Index is moving up 0.48%.
On the economic front, the German Federal Statistical Office released a report on the index of import prices, which showed a 9.3% increase in June from the year-ago period. The increase marked the fastest rate of growth since November 2000. Excluding crude oil and mineral oil products, the index of import prices was up 3.5%. On a month-over-month basis, the index of import prices rose by 0.6%. Meanwhile, the index of export prices climbed 3.3% year-over-year in July.
U.S. Economic Reports
A Commerce Department report showed that durable goods orders rose 1.3% in July to $219.3 billion following a 1.3% increase in June. Economists had looked forward to flat durable goods orders for July. Excluding transportation, new orders rose 0.7%. New order growth excluding defense orders was 2.8%.
Transportation equipment contributed to the bulk of the growth, with order growth of 3.1% to $57.5 billion. Shipments of manufactured durable goods orders rose 2.5%, while unfilled orders and inventories were up 0.8%, each. Non-defense capital goods orders, excluding aircrafts rose 1.3% in July, reversing the 0.3% decline in the previous month.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET on Wednesday. While the report is expected to show a continued increase in crude oil inventories, gasoline inventories are expected show another significant decrease.
The EIA's weekly inventory report for the week ended August 15th showed that crude oil stockpiles rose by 9.4 million barrels to 305.9 million barrels, and inventory levels are now in the middle of the average range for this time of the year. Gasoline inventories declined by 6.2 million barrels, while distillate stockpiles rose by 0.5 million barrels. Refinery capacity utilization averaged 86.4% in the four weeks ended August 15th compared to 86.8% in the previous week.
Stocks in Focus
Eli Lilly (LLY) and Amylin Pharma (AMLN) could be in focus after the companies disclosed the death of four new patients who had consumed their diabetes medication Byetta. The disclosure comes on the heels of an announcement by the FDA a week back of two Byetta patients who died of acute pancreatitis. The companies said the FDA was aware of the additional deaths and did not report them, as they involved patients suffering from a milder form of pancreatitis.
Aflac (AFL) is likely to see some strength after it said it has entered into an agreement with Goldman Sachs (GS) for repurchasing $825 million worth of Aflac common shares. The company said Goldman Sachs would deliver the shares in December 2008 and January 2009, with final settlement occurring upon the termination of the agreement in February 2008.
Bristol-Myers (BMY) and Pfizer (PFE) could move in reaction to their announcement that the results from their Phase III trials of their blood clot drug, apixaban did not meet the study’s primary endpoint. Therefore, the company said a U.S. regulatory filing for the drug would not be submitted in 2009, as previously indicated.
Gen-Probe (GPRO) may react positively to its announcement that its board has approved the buyback of $250 million worth of shares.
On the other hand, J. Crew (JCG) may recede after the retailer lowered its full year earnings guidance to $1.44-$1.54 per share from its earlier estimate of $1.70-$1.75 per share. Analysts, on average, expect earnings of $1.71 per share for the year. The company also said it expects third quarter earnings of 28-33 cents per share, lower than the consensus estimate of 46 cents per share. J. Crew also reported second quarter earnings of 28 cents per share, lower than 32 cents per share in the year-ago period. Revenues climbed 10% to $336.3 million. Analysts, on average, estimated earnings of 32 cents per share on revenues of $337.9 million.
Mattel (MAT) came under selling pressure in Tuesday’s after hours session after it was awarded $100 million in a copyright violation lawsuit against MGA. The amount was well short of the $1.8 billion claimed by the company’s attorneys.
Hain Celestial Group (HAIN) is likely to react to its announcement that its adjusted fourth quarter earnings came in at 34 cents per share, ahead of the consensus estimate of 32 cents per share. Sales were up 25% to $278.3 million, also above the mean analysts’ estimate of $264.3 million. The company’s full year revenue guidance was also above the consensus estimate.
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