Markets May Pause After Yesterday's Fed-Induced Rally - RTTNews Daily Market Analysis

Wed. December 17, 2008; Posted: 09:21 AM

(RTTNews) - The major U.S. index futures are pointing to a lower opening on Wednesday. After the Fed-induced rally of Tuesday, one can expect a pullback as traders get over the euphoria of the interest rate cut and instead focus on the ground realities of an economy in shambles. Crude oil futures are moving lower despite reports by media that OPEC had agreed for a 2 million barrel-per day cut in its output quota. The price of oil may see some volatility amid the decision and the release of the weekly oil inventory data later in the day.

U.S. stocks held their ground throughout much of Tuesday's session ahead of the Fed's interest decision and embarked on a sharp rally following the central bank's announcement of a reduction in the fed funds rate to a range of 0% to 0.25% from 1% previously. The Dow Industrials ended up 359.61 points or 4.20% at 8,924 and the S&P 500 Index gained 44.61 points or 5.14% to 913, while the Nasdaq Composite advanced 81.55 points or 5.41% to 1,590.

The Amex Securities Broker/Dealer Index and the KBW Bank Index rallied 9.81% and 10.38%, respectively. The Amex Biotechnology Index, the Amex Software Index, the Philadelphia Semiconductor Sector Index, the Amex Oil Index, the S&P Retail Index and the Dow Jones Transportation Average all moved up more than 5% each, while the Amex Airline Index rallied 7.92%. The Amex Gold Bugs Index and the Philadelphia Housing Sector Index jumped over 8% each.

On the economic front, the Labor Department reported that the consumer price index fell 1.7% month-over-month in November, marking the biggest decline since records began in 1947. On a year-over-year basis, the index was up 1.1%. Core consumer price inflation remained unchanged from the previous month and is up 2% year-over-year. The softness reflected a 17% decline in energy prices. Transportation prices dipped 9.8%, dragged down by a 29.5% slump in gasoline prices.

A housing market report released by the Commerce Department showed that housing starts fell 18.9% in November compared to the previous month to an annualized rate of 625,000 units. Annually, housing starts were down 47%. Building permits slipped 15.6% to an annual rate of 616,000, marking the lowest level on record. Construction of new homes is suffering from waning demand and mounting foreclosures.

While announcing an interest rate cut, the FOMC noted that the outlook for economic activity has weakened further, with a deterioration in labor market conditions, a decline in consumer spending, business investment and industrial production and tighter credit market conditions. The Committee acknowledged the diminishing of inflationary pressures and also expressed its view that inflation will moderate further in coming quarters in light of the slowing economic growth.

The Fed also gave assurance that it will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. Additionally, the central bank indicated that it would support the functioning of the financial markets through open market operations. The Fed also said it is contemplating the purchase of longer-term securities. Early next year, the Fed will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses, the statement said.

Currency, Commodity Markets

Crude oil futures are trading up $1 to $44.60 a barrel after ending down $0.91 at $43.60 an ounce on Tuesday. Gold futures are currently rising $9.40 to $852.10 an ounce. In the previous session, the precious metal rose $6.20 to $842.70 an ounce.

On the currency front, the U.S. dollar is trading at 88.555 yen, down from the 89.0585 yen it fetched at the close of New York trading on Tuesday. Against the euro, the dollar is valued at $1.4092 compared to yesterday's $1.4103.

Asia

Stock markets across the Asia-Pacific region closed higher, though off their highs, after the U.S. Federal Reserve cut its key interest rate to a historic low in an effort to perk up the sagging U.S. economy. Oil prices rose above $44 a barrel in Asia on speculation that OPEC will announce a deeper production cut at a meeting in Algeria today. In currency trading, the U.S. dollar traded weaker in the upper 88-yen levels in late Tokyo deals.

Japan's Nikkei 225 average opened higher and moved sideways till the afternoon. Although selling pressure dragged the index lower thereafter, it recovered in late trading to close up 44.50 points or 0.5% at 8,613.

On the economic front, Japan's Cabinet office said in a final report that the leading index declined to 85.2 in October from 89.2 in September. The October reading was revised up from 85.0. A year ago, the leading index was at 96.2. At the same time, the coincident index logged a reading of 97.7, down from 100.1 in September. The lagging index fell to 98.2 from 97.9 in September.

Among property developers, Mitsubishi Estate soared 10% and Mitsui Fudosan gained 4%. Insurance and finance stocks also advanced, while exporters were mixed after the dollar fell against the yen. Oil and gas miner Inpex Holdings advanced 1.4%, but Nippon Mining Holding declined 0.8%. Among other commodity-related stocks, Mitsubishi Corp. closed unchanged, while Mitsui & Co. edged up 0.2%.

South Korea's Kospi opened notably higher, although it surrendered all its gain by late afternoon trading. After languishing below the unchanged line, the index recovered in a last minute buying surge to close up 8.2 points or 0.7% at 1,170.

In the financial sector, Hana Financial Group jumped 6.6%, KB Financial Group surged up 6.2% and Samsung Fire & Marine Insurance gained 3.8%. Among steel makers, POSCO advanced 2.2% and Hyundai Steel advanced 0.6%.

However, automakers retreated after two days of sharp gains. Hyundai Motor shed 1.1% and its affiliate Kia Motors dropped 1.2%. IT exporters finished mixed. Market leader Samsung Electronics added 0.6%, while LG Electronics declined 0.7%. Hynix Semiconductor gained 3.6% on the back of a news report that the U.S. Justice Department has cleared it of charges that it violated anti-trust rules.

The Chinese stock market finished slightly higher, extending its gains for the third day in a row. The benchmark Shanghai Composite Index, which covers both A shares and B shares on the Shanghai Stock Exchange, rose 1.8 points or 0.1% to 1977.

Hong Kong's Hang Seng Index hovered above the unchanged line throughout the session, although it finished off the highs of the session. The index advanced 330.3 points or 2.2% to close at 15,461.

Among market heavyweights, HSBC Holdings added 0.4% and China Mobile jumped 3.3%. In the property sector, Sun Hung Kai Properties surged up 4%, Cheung Kong climbed 0.2%, and Hopson Development soared rose 20%. Offshore oil producer CNOOC surged up 7.4%, Sinopec advanced 3% and PetroChina moved up 3.8%.

Australia's All Ordinaries opened higher and rose further in early trading. The index began a steady decline after the initial upsurge before closing up merely 16.1 points or 0.5% at 3,515.

Mining stocks advanced in the session, while retailers and oil stocks showed mixed sentiment. Banking stocks were weak, as negative sentiment following Commonwealth Bank's capital raising overshadowed the U.S. Fed's rate cut and its pledge of more steps to boost economic activity. Commonwealth Bank was in a trading halt after it was forced to pull an A$2 billion capital-raising being handled by Merrill Lynch at A$27 a share and take the help of a different investment bank at a lower price of A$26 a share.

Europe

The major European averages are trading lower on Wednesday. While the French CAC 40 Index is receding 0.78%, the German DAX Index is declining 0.64%. Meanwhile, the U.K.'s FTSE 100 Index is moving down 0.07%.

On the economic front, the German Federal Statistical Office reported that Germany's consumer price index rose 1.4% year-over-year in November. The year-over-year inflation rates for October and September were 2.4% and 2.9%, respectively. On a monthly basis, the consumer price index was down 0.5%. The tamer inflation rate was due to price decreases for mineral oil products, especially for motor fuels.

Unemployment claims in U.K. recorded the biggest increase in about 17 years, according to a report released by the U.K.'s Office of National Statistics. The claimant count rose 757,000 in November from the previously month's upwardly revised increase of 51,800. Meanwhile, average earnings, excluding bonuses rose 3.3% in the three months ended October compared to 3.3% in the three months ended September.

Meanwhile, Eurostat, the European Union's statistical arm confirmed on Wednesday that the euro area's annual inflation rate was 2.1% in November compared to 3.2% in October.

U.S. Economic Reports

The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET on Wednesday.

Crude oil stockpiles rose by 0.4 million barrels to 320.8 million barrels in the week ended December 5th, 2008. Inventories remain in the upper half of the average range of this time of the year.

Gasoline inventories increased by 3.8 million barrels, but they are just below the lower boundary of the average range. Distillate inventories also rose, climbing by 5.6 million barrels. Refinery capacity utilization averaged 85.7% during the four weeks ended December 5th compared to 85% in the previous week.

Earnings

General Mills (GIS | Quote | Chart | News | PowerRating) reported that its second quarter adjusted earnings were $1.36 per share, ahead of the consensus estimate of $1.23 per share. Revenues were up 8% to $4.01 billion, in-line with the mean analysts' estimate. The company raised its 2009 earnings per share estimate to $3.83-$3.87 per share from its previous guidance of $3.81 to $3.85 per share.

ConAgra (CAG | Quote | Chart | News | PowerRating) said its second quarter declined to 37 cents per share from 50 cents per share in the year-ago period. Revenues were up 10.6% to $3.26 billion. The consensus estimates had called for earnings of 37 cents per share on revenues of $3.16 billion.

Morgan Stanley's (MS | Quote | Chart | News | PowerRating) fourth quarter loss was $2.24 per share, narrower than the loss of $3.61 per share in the year-ago period. Net revenues for the quarter was a negative $1.8 billion compared to a negative $0.4 billion last year. Analysts had expected a loss of 34 cents per share for the quarter.

Stocks in Focus

Adobe Systems (ADBE | Quote | Chart | News | PowerRating) is likely to see some buying interest after reporting adjusted fourth quarter earnings of 58 cents per share. Revenues rose about 0.5% to $915.3 million. Analysts, on average, had expected earnings of 60 cents per share on revenues of $918.3 million. The company reaffirmed its first quarter adjusted earnings estimate of 43-47 cents per share compared to the 44 cents per share consensus estimate. The company continues to expect revenues of $800-$850 million, surrounding the mean analysts' estimate of $842.4 million.

Apple (AAPL | Quote | Chart | News | PowerRating) may move in today's session, as the company gears up present at the Macworld trade show for the last time. Incidentally, the company's charismatic Chairman Steve Jobs is not delivering his keynote address at the annual event in San Francisco this year.

Bristol-Myers Squibb (BMY | Quote | Chart | News | PowerRating) is likely to react to its announcement that it will cut 800 jobs by the end of 2008. The company hopes to save $1 billion by 2012, which is in addition to the savings of $1.5 billion the company announced in December 2007 through the elimination of 4,300 jobs through 2010.

Hovnanian (HOV | Quote | Chart | News | PowerRating) may see weakness after it said its fourth quarter loss available to common shareholders was $5.79 per share compared to a loss of $7.42 per share in the year-ago period. The company noted that the loss for the recent quarter included pre-tax charges of $456.5 million. Revenues declined 48% to $721.4 million, shy of the mean analysts' estimate of $730.38 million.

Leggett & Platt (LEG | Quote | Chart | News | PowerRating) is likely to come under selling pressure after it said it expects a loss of 3-18 cents per share for the fourth quarter. On an adjusted basis, the company expects earnings to be flat or 15 cents per share, a reduction from its earlier estimate for a profit of 15-30 cents per share. The consensus estimate calls for earnings of 23 cents per share for the quarter. The company also lowered its adjusted earnings outlook for the year to 85 cents to $1 per share from its earlier estimate of $1-$1.15 per share. The company attributed the tempered outlook to weak demand for its products.

Liz Claiborne (LIZ | Quote | Chart | News | PowerRating) is also likely to recede after it said it is suspending the payment of its quarterly cash dividend indefinitely in order to enhance its financial flexibility. News Corp. (NWS | Quote | Chart | News | PowerRating) could be in focus after it said it would voluntarily transfer its stock exchange listing in the U.S. from the NYSE to the Nasdaq Global Select Market effective December 29, 2008. The company also said its Class A common stock will trade under the ticker symbol "NWSA" and its Class B stock will trade under the symbol "NWS."

Xilinx (XLNX | Quote | Chart | News | PowerRating) may move to the downside after saying that it now expects its third quarter sales to decline by 6%-10% compared to its previous estimate that called for 2% growth to a 2% decline. The company blamed the shortfall on soft demand in December.

More News: Market Updates | Stock Alerts | All Trading News | Stock Index