Markets May Show Lackluster Trading Ahead of Wednesday's Rate Decision - RTTNews Daily Market Analysis

Tuesday, June 24, 2008; Posted: 09:22 AM

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(RTTNews) - The major U.S. index futures are pointing to a lower opening on Tuesday. Warnings from companies such as UPS (UPS | Quote | Chart | News | PowerRating) should aggravate fears plaguing investors over the impact the rising fuel prices may have on the bottom line of corporations. Additionally, traders may wait in anxiety over tomorrow's interest rate decision amid expectations of a hawkish message from the central banks. The markets may also stay tuned to the Conference Board's consumer confidence index to be released shortly after the markets open.

U.S. stocks showed significant volatility throughout Monday's session amid a surge in oil prices. The Dow Industrials and the S&P 500 Index were seen moving back and forth across the unchanged line before ending on a mixed note. While, the Dow ended down merely 0.33 points at 11,842, the S&P 500 closed up 0.07 points at 1,318.

After seeing some strength in early trading, the Nasdaq Composite surrendered its gains before trading below the unchanged line for much of the reminder of the session. The technology-weighted index closed near the lows of the session, dropping 20.35 points or 0.85% to 2,386.

Among the sectors, the Dow Jones Transportation Average declined 1.94% and the Amex Airline Index tumbling 7.03%. The Amex Securities Broker/Dealer Index and the KBW Index declined 2.38% and 2.95%, respectively. Retail, housing, technology and biotech stocks also came under selling pressure. However, the Dow Jones Utility Average advanced 0.93%. The Philadelphia Oil Service Sector Index and the Amex Oil Index gained 4.63% and 2.64%, respectively, while the Amex Gold Bugs Index gained 0.55%.

Signaling a lack of momentum, the Dow, which recovered from a slump mid-March, has given back most of its gains since then. The index has pulled back away from its 50-day and 200-day moving averages and both the averages are trending lower, which are clear signs of bullishness. On the downside, the key levels to watch for are its March lows of around 11,740 and its January lows of 11,640. In the eventuality of a pick up in buying momentum, the index is expected to face stiff resistance around 12,138.

Currency, Commodity Markets

Oil is extending its gains and is trading at $137.99 a barrel, representing a gain of $1.25. On Monday, the commodity gained $1.38 to $136.74 a barrel, as a terrorist insurgency in Nigeria lent support.

Gold is strengthening by $5.20 to $892.40 an ounce after the precious metal tumbled $16.50 to $887.20 an ounce in the previous session.

On the currency front, the U.S. dollar is trading at 108.126 yen, firming up further from the 107.84 yen it fetched at the close of New York trading on Monday. Against the euro, the dollar is trading at $1.5574.

Asia

The stock markets across the Asia-Pacific region closed mixed on Tuesday ahead of the U.S. Federal Reserve's two-day meeting scheduled to begin later in the day. Financials were under pressure on lingering U.S. credit market worries and inflation fears, which have been heightened due to the relentless rise in crude oil prices.

Japanese stocks closed mixed after drifting between positive and negative territory, tracking the flat finish on Wall Street overnight, as selling on fresh worries of U.S. financial turmoil offset bargain hunting of oversold stocks by investors. The key Nikkei index has tumbled nearly 600 points over the past three trading sessions.The benchmark Nikkei 225 index fell 7.91 points or 0.1% to finish at 13,849.56, extending Monday's 0.6% decline.

Losses by steel and chemical makers offset gains among insurers and auto stocks. Steel stocks lost ground on news that Rio Tinto bagged an 85% price hike from Chinese steel maker Baosteel Group for annual shipments of its iron ore. Nippon Steel fell 2.5% and JFE Holdings dropped 2.2%. Strong crude oil prices hurt rubber product and chemical makers. Bridgestone lost 2.4%, Mitsui Chemicals plunged 3.2% and Shin-Etsu Chemical declined 0.9%.

Automakers were mixed after the dollar strengthened against the yen. Honda Motor jumped 2.7% and Mazda Motor gained 0.9%, while Toyota Motor dropped 1.5%. Insurers rebounded, with Millea Holdings gaining 1.7% and Sompo Japan Insurance edging up 0.1%.

Big banks were also mixed, with Mizuho Financial adding 0.4%, Mitsubishi UFJ Financial edging up 0.1% and Sumitomo Mitsui Financial slipping 0.4%.

Mitsubishi Motors added 0.5% after the Nikkei newspaper reported that the Japanese automaker plans to enter the South Korean auto market before the end of the year.

The South Korean market closed lower for the fourth straight session, but off the day's lows as investors bought oversold electronics and financial stocks. The key KOSPI index dropped nearly 1% in early trade on inflation fears. The KOSPI index closed down 4.75 points or 0.3% at 1,710.84.

Steel makers lost ground, with industry leader POSCO falling 1.9% increase to the price hike announced for its steel products. Smaller rival Hyundai Steel lost 0.5%. Brokerages declined due to the key index's recent losses. Samsung Securities fell 0.6% and Woori Investment & Securities lost 1.3%.

In the banking sector, Korea Exchange Bank plunged 2.1% despite a Seoul appeals court clearing Lone Star, the largest shareholder, of stock price manipulation in connection with its 2003 takeover of the bank's card unit, while top lender Kookmin Bank climbed 0.7%.

Among other gainers, market heavyweight Samsung Electronics edged up 0.2% and its consumer electronics rival LG Electronics climbed 1.6%. Samsung Fire and Marine rose 1.2%.

Europe

The major European markets are trading lower on Tuesday. The French CAC 40 Index and the German DAX Index are down 1.12% and 1.54%, respectively, while the U.K.'s FTSE 100 Index is declining 1.08%.

In continuing with the recent downbeat reports on the German economy, the GfK consumer climate index sagged. The forward-looking indicator for July is forecast to be 3.9, while the index for June was revised down to 4.7 points, representing a loss of about 6 points. On a more negative note, the Gfk downgraded its previous forecast for real private consumption from 1%. The indicator for income expectations fell 3 points to 7.2, while the income expectations index fell 3 points to -23.7.

U.S. Economic Reports

The Federal Reserve is scheduled to meet for a two-day meeting ending on Wednesday to discuss the near-term direction of monetary policy. The Federal Monetary Policy Committee consists of seven Governors of the Federal Reserve Board and five Federal Reserve Bank Presidents.

At its April meeting, the Fed decided to reduce interest rates by 25 basis points to 2%. The Committee acknowledged in the post-meeting policy statement that economic activity remains weak. The Committee also hinted at an end to its interest rate easing campaign by saying, "The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity." Additionally, the Fed left out a reference to 'downside risks' to the economy.

The minutes of the meeting released in May suggested that the Fed is unlikely to ease policy in response to information suggesting that the economy was slowing further, or even contracting, in the short-term unless economic and financial developments indicated a significant weakening in the outlook.

The FOMC reduced its central tendency outlook for growth in 2008 to 0.3%-1.2% from its previous estimate of 1.3%-25. The forecast for 2009 is more or less unchanged at 2%-2.8%. The Fed also raised its core PCE inflation forecast for 2008 and 2009, while its inflation forecast for 2010 remains unchanged at 1.7%-1.9%.

The Conference Board is scheduled to release its consumer confidence report for June at about 10 am ET on Tuesday. The report, which is based on a survey of 5,000 US households, is expected to show that the consumer confidence index eased to 56 in June.

The consumer confidence index for May declined to a 15-year low of 57.2. According to Sherry Cooper of BMO Capital Markets, the current level of confidence is usually associated with recessions. The expectations index as well as the present situations index receded during the month

Stocks in Focus

Kroger (KR | Quote | Chart | News | PowerRating) may react to its announcement that its first quarter sales rose 11.5% to $23.1 billion, while net earnings increased to 58 cents per share from 47 cents per share in the year-ago period. The consensus estimates had called for earnings of 55 cents per share on revenues of $22.32 billion. The company raised its earnings and identical sales guidance for 2008.

ConAgra (CAG | Quote | Chart | News | PowerRating) may see buying interest after it said it expects third quarter earnings to be stronger than its earlier estimate of 30-35 cents per share. Analysts estimate earnings of 36 cents per share for the quarter.

United Parcel Service (UPS | Quote | Chart | News | PowerRating) could come under selling pressure after it lowered its second quarter earnings estimate to 83-88 cents per share from its earlier estimate of 97 cents to $1.04 per share. Analysts are expecting earnings of 97 cents per share for the quarter.

Cooper Tire & Co. (CTB | Quote | Chart | News | PowerRating) could be in focus after it announced a reduction in its second quarter production forecast for its North American facilities. The company attributed the action to reduced tire demand and anticipated shortages of certain raw materials. The anticipated production shortfall is expected to cost the company $12-$14 million in the quarter.

General Mills (GIS | Quote | Chart | News | PowerRating) may move higher after it announced board approval for an increase in its quarterly dividend to 43 cents per share, which works out to an annualized rate of $1.72 per share, a 10% increase over the prior year.

Google (GOOG | Quote | Chart | News | PowerRating) is expected to react to a report that said the company is planning to launch a tool to track Internet usage. According to the report, the tool will aid advertisers in finalizing ad placement by providing them information about which sites their target audiences frequent. Additionally, the company is facing a litigation from a startup company called LimitNone, which has alleged that Google's tool used for transferring employee's email and contact information from MS Office to Google Apps copies its elements.

Washington Post (WPO | Quote | Chart | News | PowerRating) could also be in the spotlight over its announcement that its Executive Editor Leonard Downie will resign in the fall of 2008. The company has not named any replacement for Downie.

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