Markets May Be Encouraged By Continued Support For Financial Firms - RTTNews Daily Market Analysis

(RTTNews) - The major U.S. index futures are pointing to a higher opening on Monday. The commodity rally is continuing and this should benefit commodity-related stocks. Notwithstanding talks of a rescue package circulating in the Street since last Thursday, no concrete measures have been announced thus far as Congress debates and deliberates on the feasibility and viability of such a package. Some degree of relief may be expressed at the news of a partial buyout offer for Morgan Stanley (MS | Quote | Chart | News | PowerRating) hours after the Federal Reserve agreed to grant the firm and its peer Goldman Sachs (GS | Quote | Chart | News | PowerRating) bank holding company status.

U.S. stocks finished the week ended September 19th narrowly mixed, as government-led rescue measures helped to offset much of the negativity generated by the developments on the financial front. On Monday, the markets retreated sharply against the backdrop of multiple developments among financial firms. Lehman announced its intention to file for bankruptcy, while Merrill Lynch (MER | Quote | Chart | News | PowerRating) agreed to sell itself to Bank of America (BAC | Quote | Chart | News | PowerRating).

However, the markets rebounded on Tuesday, with the Dow advancing over 100 points amid the Federal Open Market Committee's decision to hold interest rates unchanged. The major averages slumped on Wednesday, as the focus shifted to AIG (AIG | Quote | Chart | News | PowerRating), which many believed was on the brink of going under. Promptly, the Federal Reserve announced an $85 billion bailout loan for the insurer.

On Thursday, stocks advanced sharply in late trading as the Street began speculating about a bailout package from the government. The major averages advanced yet again on Friday, as traders were convinced of the government's resolve to back the financial firms to the hilt.

In the week ended September 19th, the Dow Industrials fell 0.29%, while the Nasdaq Composite and the S&P 500 Indexes gained 0.56% and 0.27%, respectively.

Among the sub-indexes, the Amex Securities Broker/Dealer Index and the KBW Bank Index rose 7.62% and 16.25%, respectively for the week. The Amex Gold Bugs Index gained 11.46% compared to a 6.6% advance by the Philadelphia Housing Sector Index. The Philadelphia Semiconductor Index advanced 3.65% for the week, while the Amex Airline Index ended up 4.32%. On the other hand, the S&P Retail Index fell 2.97% and the Dow Jones Utility Average posted a weekly loss of 1.62%.

Friday's rally has pushed the Dow further up into its recent trading range of 10,950-11,725. The index just stopped short of its 50-day moving average of 11,394. An uncertain outlook is likely to result in a continued lackluster phase, with alternating sessions of strength and weakness.

Currency, Commodity Markets

Crude oil futures are seeing further strength and are trading up $1.63 at $106.18 a barrel after they experiencing a volatile trend in the week ended September 19th. Last week, the commodity settled up $3.37 or 3.33% at $104.55 a barrel.

Oil saw significant weakness in the first two trading sessions of the week in reaction to the problems plaguing the financial sector in the U.S., which tempered growth expectations. However, the black gold rebounded on Wednesday on the release of data that showed a drop in petroleum inventories for the latest reporting week. After seeing modest strength on Thursday, oil climbed sharply again on Friday, thereby recouping all its early week losses.

Meanwhile, gold futures are currently trading up $18.90 at $883.60 an ounce. In the previous week, the precious metal climbed $100.20 or 13.11% to $864.70 an ounce. The strength in the previous week was attributed mainly to the dollar's weakness and the risk aversion that drove investments into safe-haven bets.

On the currency front, the U.S. dollar eased 0.5% against the yen to 107.45 yen in the previous week, while the greenback fell 1.7% against the euro in the week ended September 19th to $1.4466

Currently, the dollar is trading at 106.6850 yen and is worth $1.4594 versus the euro.

Asia

Stock markets across the Asia-Pacific region closed mostly higher on Monday, led by China and Australia, on the back of the U.S. government's $700 billion bailout plan to rescue banks from billions of dollars in risky mortgage debt. Asian financial stocks rallied, lifting the benchmarks for a second consecutive trading session.

Japan's Nikkei 225 average opened higher and rose sharply in early trading. The index gave back some of the gains before moving sideways. The index closed up 169.73 points, or 1.4%, at 12,091.

On the economic front, the minutes of the Bank of Japan's monetary policy meeting held in August showed that the board members felt that the outlook for the U.S. economy is uncertain because of falling housing prices and volatility in global financial markets. The board voted unanimously to keep its key overnight call rate target unchanged at the meeting. It kept interest rates on hold again at 0.5% at a subsequent review last week.

Meanwhile, an index measuring industrial activity in Japan increased 0.8% in July, in line with analyst expectations, following a revised 1.0% monthly decline in June, the Ministry of Economy, Trade and Industry said.

Nomura Holdings surged up 9.6% on news that the Japanese brokerage has won an auction for the entire Asian operations of bankrupt U.S. investment firm Lehman Brothers Holdings. Inpex Holdings soared 9.7% after crude futures shot up Friday.

Among sea transporters, Kawasaki Kisen gained 3.1%, Mitsui OSK Lines jumped 3.8%, and Nippon Yusen surged 4.4%.

In the financial sector, Mizuho Financial Group rose 2.9%, Sumitomo Mitsui Financial Group climbed 2.6%, and Mitsubishi UFJ Financial gained 4.2%. Insurer Sompo Japan Insurance rose 2.1% and Mitsui Sumitomo Insurance soared 7.4%. Among exporters, Honda Motor climbed 5.1%, Toyota added 3.2%, electronics giant Sony gained 4.5%, machinery maker Komatsu advanced 3.6% and Canon rose 2.1%.

The South Korean Kospi opened sharply higher, but it gave back most of its early gains before ending up merely 4.56 points, or 0.31% at 1,460. Steel makers and lenders led the overall gains. POSCO rose 2.5% and top lender Kookmin Bank surged 4.7%. Hyundai Engineering & Construction soared 4.6%, while leading automaker Hyundai Motor advanced 2.4%.

Tech exporters and telecom stocks finished in negative territory. Hynix Semiconductor shed 2.7% and KTF, the nation's second-largest mobile carrier, tumbled 4.1% after prosecutors sought an arrest warrant for its Chief Executive Cho Young-ju on suspicions of taking kickbacks from suppliers.

The Chinese market closed sharply higher, extending Friday's 9.5% rally, after regulators announced additional measures to support the markets. China's securities regulator announced Sunday that listed firms will no longer be needed to obtain prior approval for share buybacks. Last week, regulators cancelled the stamp duty on share purchases and the sovereign wealth fund announced plans to buy shares in state-owned banks. The benchmark Shanghai Composite Index closed up 161.32 points or 7.77% at 2,236.

Hong Kong's Hang Seng Index opened higher, but it surrendered all its early gains and fell into negative territory within the first hour of trading. Thereafter, the index staged a recovery before trading with a modest gain for the rest of the session. The index gained 304.47 points or 1.58% to 19,632.

Among commodity-related stocks China Cosco soared 11.7% and China Shipping Development surged 15.3% following a four-day rally on the global freight index.

Chinese financials extended Friday's sharp rally, with top lender ICBC gaining 3.9% and China Construction Bank climbing 0.6%. Bucking the trend, China Citic Bank plunged 5.6% on last week's reports that its parent CITIC Group was in deal discussions with Morgan Stanley.

Australia's All Ordinaries opened unchanged and traded flat before spiking sharply an hour into trading. Thereafter, the index moved sideways before ending up 209.4 points, or 4.3% at 5,050.

Babcock and Brown soared 54.7% and Australia's largest investment bank Macquarie surged 5.2%. Among major banks, ANZ Banking Group jumped 8.1%, National Australia Bank climbed 5.7%, Commonwealth Bank rose 4.5%, and Westpac added 4.9%. Takeover target St George Bank gained 3.1%. Insurance stocks also closed higher, with QBE Insurance surging 7.0% and Insurance Australia Group advancing 5.1%.

Global miner BHP Billiton soared 12.1% and Rio Tinto jumped 9.3%. Gold stocks also posted strong gains, with Lihir Gold surging 8.2% and Newcrest Mining advancing 6.9%. Energy stockks closed mixed. Oil Search lost 1.6%, but Santos added 1.4% and Woodside Petroleum gained 5.4%.

Europe

The major European markets, which have been showing a volatile trend thus far in the session, is currently trading on a positive note. While the German DAX Index is gaining 0.25%, the French CAC 40 Index and the U.K.'s FTSE 100 Index are rising 0.22% and 0.20%, respectively.

U.S. Economic Reports

The upcoming week's economic reports may pale in significance before the continuing turmoil in the financial industry. Nevertheless, traders may stay tuned to comments from Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Henry Paulson during their testimonies scheduled for the week. Specifically, traders may watch how the dislocations in the financial markets have altered the Fed Chairman's current assessment of risks. Additionally, the markets could focus on the existing and new home sales reports for August, given their anxieties over a recovery in the housing market.

Traders could also look forward to the Commerce Department's report on durable goods orders for August and the final reading of the University of Michigan's consumer sentiment index for September. Some degree of attention is also likely to be bestowed on the final second quarter GDP growth estimate of the Bureau of Economic Analysis and the regularly scheduled weekly oil inventory and jobless claims reports.

Existing home sales are likely to show a pullback following an unexpected increase in July. The expectations gain strength due to the fact that pending home sales have been erratic in recent months. Normally, pending home sales lead existing home sales by 1-2 months. Even if there is some strength in sales, it has to come from foreclosure sales.

Meanwhile, new home sales could climb due to the approach of the expiration of the Federal Housing Administration down-payment assistance, which should expedite sales. The program, which will be effective until September 30th, is expected to temporarily boost sales in August and September, although it is likely to drag sales lower in October and November.

Economists expect a decline in new orders for durable goods due to a likely decline in civilian aircraft orders. Additionally, core capital goods orders, which are the non-defense capital goods orders excluding aircrafts, could also show weakness. Dallas Fed President Richard Fisher is due to speak on the U.S. economy and finance industry in Texas at 11:30 AM on Monday.

Stocks in Focus

CarMax (KMX | Quote | Chart | News | PowerRating) is expected to be in focus after it reported that its second quarter sales declined 13% to $1.84 billion. Net earnings fell to 6 cents per share from 29 cents per share in the year-ago quarter. The recent quarter's earnings included an 8 cents per charge. The consensus estimates called for earnings of 8 cents per share on revenues of $1.93 billion.

General Motors (GM | Quote | Chart | News | PowerRating) may react to its announcement that it will draw down the remaining $3.9 billion of its $4.5 billion secured revolving credit facility. The company said the action would help it maintain financial flexibility. The company also said it intends to use the funds to retire $750 million of debt maturities due in October and pay for restructuring efforts at Delphi.

Ambac Financial (ABK | Quote | Chart | News | PowerRating) may come under incremental selling pressure after it said the near term impact of any downgrade by Moody's would be to increase the pressure on its financial services business, which includes its Guaranteed Investment Contracts and its swap obligations.

Fannie Mae (FNM | Quote | Chart | News | PowerRating) could be in focus over its announcement of organizational changes. The company said its three line of businesses, namely Single-family Mortgage Guaranty, Capital Markets and Housing and Community Development would report directly to the President and CEO, Herbert Allison Jr., while the Technology and Operations would report to the Chief Operating Officer, Michael Williams. Separately, the company announced the resignation of its Chief Business Officer, Peter Niculescu, Executive Vice President and General Counsel Beth Wilkinson, Executive Vice President and Chief Information Officer, Rahul Merchant and Senior Vice President for Government and Industry Relations Duane Duncan.

Goldman Sachs and Morgan Stanley could react to the announcement from the Federal Reserve late Sunday that it has approved applications for the two firms to become bank holding companies. The approval has been issued pending a statutory 5-day anti-trust waiting period. Essentially, these two behemoths will now function like commercial banks, advancing loans and accepting deposits.

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