Stocks May Be Weighed Down By Oil's Climb and Concerns over Financial Firms - RTTDaily Market Analysis

Fri. July 11, 2008; Posted: 09:34 AM

(RTTNews) - The major U.S. index futures are pointing to a lower opening on Friday. Global cues are markedly negative, with the European markets trading significantly lower. Oil is climbing sharply on the back of geopolitical tensions and this should trigger extreme anxiety among traders. Additionally, reports that Freddie Mac (FRE | Quote | Chart | News | PowerRating) or Fannie Mae (FNM | Quote | Chart | News | PowerRating) is facing the threat of being bailed out are likely to aggravate concern over the health of financial firms. Traders are also likely to focus on the consumer sentiment index of the University of Michigan's to be released after the markets open.

Although stocks showed a lack of direction in Thursday's session and was seen moving back and forth across the unchanged line, they managed to close higher. The major averages saw some volatility through the speeches by Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson. Thereafter, by the mid-session they moved into positive territory only to give back their gains in late afternoon trading. The markets staged a recovery in late trading to close with notable gains.

A drop in jobless claims for the recent reporting week, deal news and buoyancy in the oil space due to the rally in the price of oil served to generate positive sentiment in the markets on Thursday. The Dow Industrials advanced 81.58 points or 0.73% to 11,229 and the S&P 500 Index rose 8.71 points or 0.70% to 1,253, while the Nasdaq Composite gained 22.96 points or 1.03% to 2,258.

Among the sectors, the Amex Oil Index and the Philadelphia Semiconductor Index gained 1.47% and 2.65%, respectively. The Philadelphia Semiconductor Index rose 1.36% and the Software holders Index moved up 1.57%. However, the Amex Airline Index slipped 1.53% compared to a 3.18% decline by the S&P Retail Index. The Philadelphia Housing Sector Index receded 1.34%.

While testifying before the Housing Financial Services Committee, Bernanke and Paulson focused on regulatory issues. Bernanke called for consolidated supervision of commercial and investment banks, with the regulator vested with the authority to set standards of capital, liquidity holdings and risk management. Bernanke also argued for the need for the Fed to have explicit oversight authority of systemically important payment and settlement systems. Additionally, the Fed Chairman reiterated that new tools are needed for ensuring an orderly liquidation of a systemically important securities firm that is on the verge of bankruptcy.

Currency, Commodity Markets

The price of oil is rising $4.84 to $146.49 a barrel after the commodity saw significant strength in the previous session after. On Thursday, a barrel of oil rose $5.60 to $141.65. The rally in oil prices came about only towards the end of the New York session, as traders went long on the commodity on hopes that geopolitical tensions and supply constraints will keep prices elevated.

Yesterday, terrorist threats to clamp down on U.K. interest in Nigeria after U.K. pledged support to the Nigerian government in their crusade against the militants served to exert upward thrust on energy prices.

Gold futures, which advanced $13.40 to $942 an ounce on Thursday, are currently gaining $19.70 to $961.10 an ounce.

On the currency front, the U.S. dollar is trading at 106.20 yen compared to the 107 yen it fetched at the close of New York trading on Thursday. The dollar is currently valued at $1.5867 versus the euro.

Asia

Stock markets across the Asia-Pacific region closed mostly higher Friday after Wall Street finished in positive territory Thursday. After a directionless morning session, most Asian markets moved into positive territory after the New York Times reported that the U.S. government was considering taking over the two top mortgage finance companies Freddie Mac and Fannie Mae. However, India's Sensex plunged 3.3%. The Japanese market closed slightly lower, reversing Thursday's marginal gains. The 225-issue Nikkei Stock Average lost 27.52 points or 0.21% to finish at 13,039.69 after the key index briefly fell below the 13,000 mark. The index has lost 1.5% over the week.

On the economic front, the Ministry of Economy, Trade and Industry said in its latest report that Japan's industrial output rose by a seasonally adjusted 2.8%, slower than the initial estimate of 2.9%. Meanwhile, the cabinet office said that Japanese consumer confidence slumped to the lowest on record. The Cabinet Office's quarterly consumer sentiment index worsened to 32.3 on a seasonally adjusted basis in June from 36.5 in March.

Major banks pared early losses and moved into positive territory. Property counters fell as investors locked in profits following two days of gains. Oil-related stocks gained. Toyota Motor dropped 1.8% after the automaker said that it would cut back operations at three U.S. factories for about three months to accelerate a production shift in North America towards smaller cars amid plunging demand for large cars. Shinsei Bank lost 3.0% after reports said that the bank is in final talks with General Electric to buy its Tokyo-based consumer finance unit.

The South Korean market closed higher, extending Thursday's 1.2% gains. The benchmark Korea Composite Stock Price Index or KOSPI rose 30.08 points or 1.96% to finish at 1,567.51.

Tech exporters and automakers posted significant gains. Banks rebounded, with Kookmin Bank gaining 2.1% and Shinhan Financial surging 3.4 %. POSCO rose 2.2%. The world's fourth-largest steel maker said that its second-quarter earnings climbed to a record high on cost-saving efforts, solid demand and higher steel prices.

The Chinese market closed lower for a second day, led by property stocks. The benchmark Shanghai Composite Index closed down 18.82 points or 0.65% at 2,856.63. After rising about 9% in the first three days of the week amid strong first-half earnings forecast by blue chip banks and property developers, the key index finished the week with 7.0% gains. The key index posted gains for the first week after seven weeks of losses.

The Hong Kong market closed higher, led by Hong Kong Exchanges and Clearing, telecom heavyweights China Mobile, mainland banks and Chalco. The benchmark Hang Seng index closed up 362.77 points or 1.66% at 22,184.55. For the week, the index has gained 761 points or 3.55%.

The Australian market closed higher, led by the resources sector. The All Ordinaries index gained 47.3 points or 0.9% to finish at 5,067.8.

Banks closed weak. Higher base metals prices overnight boosted the big miners. Index leader BHP Billiton surged 4.0% and Rio Tinto jumped 3.6%. Gold miners finished firmer on higher gold prices in Sydney. Lihir Gold soared 6.3% and Newcrest Mining gained 5.5%.

Among energy stocks, Woodside Petroleum jumped 4.7%, Oil Search gained 1.9% and Santos climbed 2.7%. Retailers continue to be under pressure after the release of negative consumer confidence data on Wednesday.

Europe

The major European markets are trading lower on Friday. The French CAC 40 Index and the German DAX Index are receding 2.10% and 2.11%, respectively, while the U.K.'s FTSE 100 Index is losing about 1.31%.

U.S. Economic Reports

On the economic front, the U.S. Commerce Department released a report that showed that the deficit on trade in goods and services narrowed to $59.8 billion in May from a revised deficit of $60.5 billion for April. Economists expected the deficit for May to widen to $62.2 from the originally reported deficit of $60.9 billion for April.

Exports increased $1.4 billion to $157.6 billion compared to a $0.7 billion increase in imports to $217.3 billion. Overall, the deficit on trade in goods declined $0.5 billion to $72.5 billion, while the services surplus increased $0.2 at $12.7 billion.

The export and import prices report for June showed that imports remained flat and exports increased at a faster pace. In June, the import price index was up 2.6%, the same pace as in the previous month. Petroleum and non-petroleum import prices were up 7.4% and 0.9%, respectively.

Export prices rose at a 1% rate, faster than the 0.4% rate in the previous month. Agricultural exports climbed 2.2% compared to a 0.9% rise in exports of non-agricultural commodities.

The University of Michigan's preliminary report on consumer sentiment index for July is scheduled to be released at 10 AM ET on the same day. Consumer confidence is expected to tick down in the month, with economists forecasting a modest dip in the index to 55.5 in July from 56.4 in the previous month.

Stocks in Focus

General Electric (GE | Quote | Chart | News | PowerRating) is likely to be in focus after it said it reported earnings of 51 cents per share compared to 52 cents per share in the year-ago period. Revenues rose to $46.89 billion from $42.38 billion, exceeding the $45.31 billion consensus estimate. Earnings from continuing operations were 54 cents per share, in-line with the consensus estimate.

Wynn Resorts (WYNN | Quote | Chart | News | PowerRating) is expected to react to its announcement that it expects operating income of $18-$22 million from its Las Vegas property compared with $63.4 million the property earned in 2007. The downside is due to its lower-than-expected hold percentage. However, the company expects an increase in its operating income from its Macau property to $100-$106 million compared with $53.2 million a year-ago. The company also announced a $500 million increase in its previously approved $1.2 billion buyback.

Lawson Software (LWSN | Quote | Chart | News | PowerRating) may be in focus after it said its first quarter adjusted earnings are likely to be 6-7 cents per share on sales of $195-$200 million. Analysts estimate earnings of 8 cents per share on revenues of $205.19 million. The company's full year guidance of 43-47 cents per share in adjusted earnings and $920-$925 million in revenues are also short of analysts' estimate.

Long Drug Stores (LDG | Quote | Chart | News | PowerRating) is likely to move in reaction to its announcement that its same store sales for June were up 1.1%, primarily due to a calendar shift that included 'Memorial Day.'

General Electric (GE | Quote | Chart | News | PowerRating) could also be in the spotlight after it announced The company also announced an agreement to sell its Japanese GE Money unit to Shinshei Bank for $5.4 billion.

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