Doubts Over 'Recovery In The Making' To Unnerve Traders - RTTNews Daily Market Analysis

(RTTNews) - The major U.S. index futures are pointing to a lower opening on Monday. Weak sentiment, which is apparent currently, seems to be an extension from Thursday's session, when all the major averages declined by more than 2%. Added to the negativity, commodity prices are receding in reaction to muted expectations about growth and the dollar's strength, reflecting a flight to safe haven investments. The impending second quarter reporting season does not hold much promise and therefore, is likely to confound the market outlook further.

Sentiment over the session may also depend on the results of the ISM's services sector survey for June to be released shortly after the markets open.

U.S. stocks closed lower in the week ended July 2nd following a mixed performance in the previous week, when the Dow Industrials and the S&P 500 Index closed lower, while the Nasdaq Composite advanced. Volume remained light throughout the week due to the holiday on Friday. The negative sentiment seen during the week ended July 2nd resulted from a negative reaction to some disappointing economic numbers.

Last Monday, the major averages advanced, as bargain hunters thronged the markets. An unexpected decline in consumer confidence generated selling pressure in the markets on Tuesday, leading to losses.

On Wednesday, the major averages rose, although they closed well of their early highs. However, the selling spree resumed on Thursday, as bigger-than-expected job losses led to a huge sell-off, resulting in the major averages declining by more than 2.5% each.

During the week, the Dow Industrials ended down 1.87% compared to a 2.45% decline by the S&P 500 Index. The Nasdaq Composite lost 2.27% for the week.

Among the sector indexes, the Philadelphia Oil Sector Index declined 5.94% and the NYSE Arca Biotechnology Index slid 5.23% for the week, while the S&P Retail Index fell 4.34%. The NYSE Arca Securities Broker/Dealer Index, the KBW Bank Index, the NYSE Arca Gold Bugs Index and the Dow Jones Transportation Average fell over 3% each. While the NYSE Arca Oil Index ended down 2.34%, the Dow Jones Utility Average and the NYSE Arca Airline Index ended off over 1% each.

The lackluster phase in the markets reflects the uncertainty surrounding the economic outlook. Notwithstanding occasional green shoots, consumers are still guarded, as they remain wary that conditions will deteriorate after government stimulus wanes. Therefore, consumers are not spending as much as they should and corporations are also hesitant to expand production or employment. In the future, declining wage growth and rising interest rates should serve as risks for growth.

Currency, Commodity Futures

Crude oil futures are trading down $3.02 at $63.71 a barrel after the commodity came under significant selling pressure in the week ended July 2nd. Oil slid $2.43 or 3.53% to $66.73 a barrel in the previous week.

Last Monday, oil rose sharply, rising over $2-a-barrel after the U.S. dollar's weakness helped drive oil higher. However, the commodity retreated on Tuesday after a weak consumer confidence reading led to profit taking in oil due to a tempered demand outlook. Oil reversed course and declined modestly on Wednesday amid the release of a mixed weekly oil inventory report.

On Thursday, oil declined sharply, capping a week of volatility, after the weak jobs report drove traders to the safety of safer bets like the U.S. dollar, which in turn proved negative for crude oil, which is denominated in dollars.

Gold futures are trading down $8.30 at $922.70 an ounce

The U.S. dollar advanced against the euro as well as the yen in the week ended July 2nd. The greenback rode on its strength as a safe haven bet, rising 0.9% against the yen to 96 yen and 0.5% against the euro to $1.3984.

Notwithstanding the previous week's strength, Commerzbank expects the currency to weaken in the near term due the ongoing debate about its role as world reserve currency. However, the yen is expected to come under selling pressure due to huge capital outlays out of Japan.

Currently, the U.S. dollar is trading at 95.33 yen and is valued at $1.3906 versus the euro.

Asia

The major Asian markets ended mostly lower, with the exception of the South Korean market, which posted a modest gain on the back of a positive pre-announcement from Samsung Electronics.

Japan's Nikkei 225 average declined for the third straight day, declining 1.38% or 135.20 points to 9,681. Banks and metal stocks saw heavy sell-off, leading the markets lower. Shipping stocks and retail stocks also saw weakness.

Australia's All Ordinaries opened lower and continued to see weakness in morning trading before the index pared back some of its losses to close down 42.40 points or 1.11% at 3,784. Resource stocks tumbled in reaction to softer prices of commodities. Additionally, financial stocks retreated.

South Korea's Kospi ignored some early weakness and traded above the unchanged line for the better part of the session despite witnessing some volatility. At the end of trading, the index was up 8.90 points or 0.63% at 1,429.

Index heavyweight Samsung late Sunday forecast an operating profit for the second quarter ended June 30, 2009, but did not provide any outlook for quarterly net profit. The outlook for operating profit represents an increase from the prior-year quarter and a five-fold increase from the preceding first quarter.

The Indian market slumped on Monday after the Union budget failed to live up to market expectations. Finance Minister Pranab Mukherjee remained silent on key issues like the revamp of fuel policy, a reduction in corporate tax and the disinvestment roadmap while projecting an increase in budget deficit to 6.8 percent of the GDP for FY10 from 6.2% in the last interim budget. After trading firm in early trading, the BSE Sensex plunged to a low of 13,959 before finishing at 14,043, down 870 points or 5.83% from its previous close.

Europe

The major European markets are moving to the downside, as a decline in commodity prices is wreaking havoc on the markets. The French CAC 40 Index and the German DAX Index are receding 1.69% and 1.67%, respectively, while the U.K.'s FTSE 100 Index is moving down 1.32%.

In the lone report of significance, the results of the latest Sentix survey revealed that the headline indicator for the eurozone region unexpectedly fell to minus 31.3 in July from minus 27 in June. Economists were expecting the index to rise to minus 25.

Among the sub indicators, the current situation index fell to minus 53.75 from minus 51.25 in June, while the expectations index stood at minus 5.5, down from a positive reading of 1.25 in the previous month.

U.S. Economic Reports

The unfolding week's economic is fairly light, with very few reports due to be released. The Institute for Supply Management's services sector index for June, the preliminary July reading of the Reuters/University of Michigan's consumer sentiment index, the weekly jobless claims report and the Treasury auction of 3-year notes, 10-year notes and 30-year bonds, scheduled for Tuesday, Wednesday and Thursday, respectively could be closely watched by traders, as they attempt to read the pulse of the economy.

Additionally, the trade balance report for May, the Labor Department report on import and export prices for June, the Federal Reserve's consumer credit report for May and the wholesale inventories report for May are also likely to be on the investors' radar. Traders may also stay focused on comments by Federal Reserve Governor Elizabeth Duke, who is scheduled to make a speech on Thursday. The trade balance report could show a small widening in the trade deficit for May, as import bill for petroleum products is continuing to rise amid the increase in crude oil prices. However, a decline in volume should offset the increase to some extent. Given expectations that the U.S. economy will revive faster than the other economies in the coming months, imports are likely to see a revival before exports.

There is unlikely to be much change in the Reuters/University of Michigan's consumer sentiment index, as still-weak labor market conditions are hurting real income growth and in turn's consumers' morale and their willingness to spend. The ISM is scheduled to release the results of its non-manufacturing survey at 10 AM ET on Monday. The non-manufacturing index is likely to show a reading of 46 for June.

The ISM's services purchasing managers' index came in at 44 in May compared to the expected reading of 45 and the month-ago's 43.7. The business activity index declined 3 points to 42.4. On the other hand, the new orders index declined to 44.4 in May from 47 in the previous month and the index of backlog of orders moved down to 40. On an encouraging note, the employment index moved to its highest level since October despite its meager 2 point-increase.

The June survey is expected to show slightly improved conditions in the sector, although it is still too early to call for an expansion. The sector is expected to have benefited from a rise in the equity markets and a narrowing in credit spreads. However, weakness in freight activity, which is impacted by declining inventory levels, should act as a dampener.

Stocks in Focus

PepsiCo. (PEP | Quote | Chart | News | PowerRating) is likely to be in focus after it said it would invest about $1 billion along with Pepsi Bottling Group (PBG | Quote | Chart | News | PowerRating) in Russia over the next three years. The investment is meant to boost manufacturing and distribution capacity in Russia.

Citigroup (C) could also be in focus after it said it was appointing Stephen Bird and Shirish Apte as chief executives of Asia Pacific region. Bemis (BMS | Quote | Chart | News | PowerRating) may also be in focus after it said it would buy the Food Americas operations of Alcan Packaging from Rio Tinto (RTP | Quote | Chart | News | PowerRating) for $1.2 billion.

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