Stocks Look Ripe for Profit Taking; Manufacturing Survey Results in Focus - RTTNews Daily Market Analysis

(RTTNews) - The major U.S. index futures are pointing to a lower opening on Monday. The spate of economic reports due out this week could keep nervous traders in tenterhooks. The major averages have run up significantly in the past week, which makes the markets ripe for some degree of consolidation at least in the near terms. The scheduling of key economic reports such as the ISM's manufacturing report and the Commerce Department's construction spending report for the day is expected to introduce volatility in the markets.

U.S. stocks rebounded in the holiday-shortened week ended November 28th due to encouraging governmental actions. Fears over a potential bankruptcy filing by Citigroup (C) vanished on Monday after the U.S government announced a bold bailout package for the troubled financial services company. The major averages advanced significantly in reaction to the development, with the Dow Industrials gaining close to 400 points.

On Tuesday, the government acted again, this time unveiling a massive plan that covers among other things, the financing of consumer loans. Despite the announcement, the gains were muted on Tuesday, with the major averages closing on a mixed note. While the Dow and the S&P 500 Index advanced, the Nasdaq Composite ended down, weighed down by Cisco Systems (CSCO | Quote | Chart | News | PowerRating), which announced plant closures in a bid to rein in costs.

The major averages advanced solidly on Wednesday as well as on the truncated session on Friday following the 'Thanksgiving Holiday' on Thursday. Optimism over fresh action that can have a lasting impact following the nomination of eminent persons to top positions by president-elect Barack Obama served to alleviate much of the apprehensions.

During the week, the Dow Industrials and the S&P 500 Index advanced 9.73% and 12.03%, respectively, while the Nasdaq Composite gained 10.92%.

Among the sector indexes, the Amex Airline Index and the KBW Bank Index were up 23.75% and 29.69%, respectively for the week. While the Amex Biotechnology Index rose 37.73% for the week, the Philadelphia Housing Sector Index gained 34.56%. The Dow Jones Transportation Index, the Amex Biotechnology Index, the Philadelphia Semiconductor Index and the Amex Oil Index were up about 10% each during the week. Meanwhile, the Philadelphia Oil Service Sector Index, the Amex Gold Bugs Index and the S&P Retail Index advanced more than 15% each.

Currency, Commodity Markets

Crude oil futures are easing $2.73 to $51.70 a barrel after OPEC announced that it has decided to delay a decision to cut production following an emergency meeting over the weekend. The next full meeting of the conclave is scheduled to be held on December 17th. Last week, expectations that OPEC will trim production kept oil prices afloat, as the commodity rose $5.10 or 10.34% to $54.43 a barrel.

Meanwhile, gold futures are declining $26 to $793 an ounce. In the week ended November 28th, the precious metal gained $27.20 or 3.44% to $819 an ounce.

On the currency front, the U.S. dollar closed the week ended November 28th on a weak note. Expectations of an interest rate cut by the European Central Bank when it meets this week led to the strengthening of the dollar against the euro late in the week, especially after the flash estimate of euro zone inflation for November came in tamer than expected. Nevertheless, the dollar ended the week down 0.8% against the euro at $1.2691. The dollar also fell about 0.5% against the yen to 95.52 yen, as the stock market strength last week led to the unwinding of carry traders, thereby pushing up demand for the yen to repay yen-denominated loans.

Currently, the dollar is trading at 93.975 yen and is worth $1.2619 versus the euro.

Asia

Stock markets across the Asia-Pacific region closed mixed on Monday after Wall Street ended higher for a fifth day on Friday, as investors locked in profits from the previous week's rally. The markets were also exercising caution ahead of a slew of central bank policy meetings scheduled for the week and key U.S. data due out this week. Crude oil prices fell in Asian trading on Monday after OPEC deferred a decision to reduce output for another two weeks. Japan's Nikkei 225 average opened lower and declined sharply in early trading. Thereafter, the index traded sideways before closing down 115.05 points or 1.35% at 8,397.

On the economic front, the latest provisional report of the Ministry of Health, Labor and Welfare showed that total labor cash earnings in Japan declined for the first time in ten months. Total cash earnings were down 0.1% year-over-year in October compared to a revised increase of 0.2% in September.

Tech exporters declined, while automakers also fell on the back of a plunge in domestic auto sales in November. Toyota Motor fell 1.8%. Honda Motor plunged 2.9% after a top executive of the company said that it would have a tough time meeting its lowered annual profit forecasts due to an increasingly severe sales environment.

Among commodity-related stocks, Mitsubishi Corp edged up 0.1% and Mitsui & Co rose 0.7%, while oil and gas miner Inpex Holdings sank 4.4% and Nippon Oil fell 1.4%. Banking stocks showed mixed sentiment. NTT DoCoMo gained 3.7% after the Nikkei business daily reported that Carlyle-controlled firm Willcom Inc would launch low-priced mobile data services using DoCoMo's network in early 2009.

South Korea's Kospi, which showed weakness in the morning, showed volatility till late trading. Thereafter, selling pressure intensified, dragging the index lower to end down 17.5 points or 1.6% at 1,059.

Steel makers, financials, energy stocks and automakers closed in negative territory. POSCO fell 1.9%, Shinhan Financial Group tumbled 3.3%, and refiner SK Energy and top automaker Hyundai Motor shed 1.2% each. However, machinery maker Doosan Heavy Industries climbed 4.6%. In the tech sector, Hynix Semiconductor climbed 2.6%, rising for a fifth consecutive session.

The Chinese stock market closed higher, led by property developers and appliances stocks, as bargain hunting picked up following news that China Merchants Property Development successfully sold 450 million new shares and after reports indicated that the central government would expand a rebate scheme nationwide to encourage rural residents to buy domestic appliances. The benchmark Shanghai Composite Index closed up 23.5 points or 1.3% at 1,895.

Ignoring a weak start, the Hong Kong's Hang Seng Index moved into positive territory by early trading. The index traded sideways for the rest of the session before ending up 220.6 points or 1.6% to close at 14,109.

Among market leaders, HSBC Holdings advanced 0.8% and China Mobile jumped 2.3%. Offshore oil producer CNOOC surged up 4.0% and PetroChina climbed 2.7%, while refiner Sinopec fell 2.5%.

Australia's All Ordinaries traded below the unchanged line for the bulk of the session, with the index ending down 53.7 points or 1.5% to 3,619.

A private sector measure of inflation in Australia recorded a drop of 0.6% in November. The TD Securities/Melbourne Institute inflation gauge showed that inflation for the full year dropped 0.9% to 3.0%, the lowest reading since September 2007. The month-over-month inflation reading registered a 0.2% drop in October.

In the resources sector, Rio Tinto sank 8.4% and BHP Billiton shed 3.6%. Fortescue Metals Group soared 21.4% on speculation that BHP Billiton might make a takeover bid after abandoning its merger with Rio Tinto last week.

Banks also finished lower. Westpac plunged 5.3% after St George Bank shares were transferred to Westpac as the final implementation in its A$15 billion takeover. Commonwealth Bank lost 3.2%, National Australia Bank fell 2.9% and ANZ Banking Group shed 2.8%. Gold mining, energy, retail and insurance stocks closed on a mixed note.

Europe

The major European markets are trading lower on Monday. The French CAC 40 Index and the German DAX Index are declining 2.77% and 3.02%, respectively, while the U.K.'s FTSE 100 Index is edging down 2.68%.

A report released by the German Federal Statistical Office showed that German retail sales fell 1.5% year-over-year in real terms in October. Upon adjusted for calendar and seasonal variations, October retail sales fell 1.6%. On a monthly basis, retail sales were down 0.4% in October.

U.S. Economic Reports

The unfolding week's economic calendar is heavily loaded, with a few key economic reports scheduled to be released. The Labor Department's non-farm employment report for November, the results of the Institute of Supply Management's November manufacturing and non-manufacturing surveys and the Fed's Beige Book are likely to be closely watched by traders looking to gain additional clarity on economic conditions.

Additionally, market participants are likely to pay attention to the October construction spending report, the preliminary third quarter productivity & costs report, the Commerce Department's factory goods orders report for October and the Federal Reserve's consumer credit report. The regularly scheduled weekly oil inventory and jobless claims reports and speeches by Fed speakers, including Federal Reserve Chairman Ben Bernanke, are also likely to be on the radar.

Economists are pessimistic about the employment scenario, and therefore, look for the eleventh straight month of job declines, pushing up the jobless rate by a few ticks to 6.8%. Some economists have an above-consensus job loss estimate for November, with IHS Global Insight forecasting a loss of 370,000 for the month.

In-line with the weak trend in the housing market, construction spending is likely to continue to decline, weighed down by the softer single-family housing market. Excluding improvements, construction spending is likely to reveal a steeper decline. The Commerce Department's construction spending report to be released at 10 AM ET on Monday is expected to show a 0.9% decline in construction spending for October. Construction spending declined by a smaller-than-expected 0.3% in September. Spending on private construction edged up 0.1%, but residential construction spending declined 1.3%, as an increase in renovations and multi-family construction partly offset a sharp decline in new single-family construction. Non-residential construction spending rose 1.2%, while spending on public construction declined by 1.3%.

The results of the manufacturing survey of the Institute for Supply Management, which are based on data compiled from purchasing and supply executives nationwide, are also due out at 10 AM ET on the same day. Economists expect the index to show a reading of 38 for November.

In October, the manufacturing index declined to 38.9 from 43.5 in the previous month. The new orders index fell by about 6.6 points to 32.2, while the production index also plummeted to 34.1. The index of new export orders fell 11 points to 41, falling below the '50' level demarcating a contraction and expansion. On a positive note, the prices paid index slumped 16.5 points.

Some economists expect the index to slip below '35' in November, with a sub-35 reading witnessed only 6 times in the past 40 years and the last time being in 1980. IHS Global Insight expects all five component-series to turn in very weak performances. The non-manufacturing survey is also likely to reveal a further deterioration of conditions in the services sector, as weak earnings and downward pressure on capital ratios are battering the financial services industry.

Stocks in Focus

Citigroup is expected to react to its announcement that it will buy highway operator Itinere from Spain-based builder Sacyr for 7.887 billion euros. Additionally, reports suggested that Citi is seeking to sell its Nikko Cordial trust bank for about $416.7 million.

General Motors (GM | Quote | Chart | News | PowerRating) could be in focus after a Wall Street Journal report said the company's board met on Sunday to review a restructuring plan that intends to cut costs and win support for up to $12 billion in emergency funding in a bid to stay afloat amid weakening auto demand and the credit crunch.

Microsoft (MSFT | Quote | Chart | News | PowerRating) and Yahoo (YHOO | Quote | Chart | News | PowerRating) may also be in focus over conflicting reports that are swirling over a potential deal involving the software giant and the search engine. While a London Times report said Microsoft is negotiating a deal to buy the search business of Yahoo, a popular blog, citing an official said to be involved in the deal, precluded the possibility of such an arrangement.

AIG (AIG | Quote | Chart | News | PowerRating) is likely to move in reaction to its announcement that it has reached an agreement with an Abu Dhabi investment company named Aabar to sell its AIG Private Bank. The insurer did not reveal the financial terms of the transaction.

Johnson & Johnson (JNJ | Quote | Chart | News | PowerRating) may come under selling pressure after it announced a deal to acquire Mentor Corp. (MNT | Quote | Chart | News | PowerRating) for $1.07 billion or $31 per share in a cash tender offer.

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