Stocks May Give Back Some of Friday's Gains; Housing Data in Focus - RTTNews Daily Market Analysis

(RTTNews) - The major U.S. index futures are pointing to a lower opening on Monday. Friday's sharp gains may result in some profit taking. The dollar's strength has led to some weakness in crude oil, which should be encouraging for traders. However, much of the sentiment in today's session depends on the existing home sales report to be released shortly after the markets open. Even if some buying interest emerges in the eventuality of some positive tidings on the housing front, the gains are likely to be short-lived and are unlikely to signal a reversal in trend.

U.S. stocks closed the week ended August 22nd lower despite buoyancy in the commodity space. The weakness was primarily due to worries over the health of financial firms. The major averages surrendered much of the early optimism on Monday and ended down, dragged lower by negative news on the two government sponsored mortgage lenders Freddie Mac (FRE | Quote | Chart | News | PowerRating) and Fannie Mae (FNM | Quote | Chart | News | PowerRating). The markets declined sharply again on Tuesday amid concerns over the credit crisis and inflation. Higher commodity prices drove commodity-related stocks higher on Wednesday, helping to offset the negativity surrounding the economic outlook. Consequently, the markets ended modestly higher on Wednesday.

Ignoring some negative economic readings, the major averages extended their gains in Thursday's session. Stocks advanced solidly on Friday, with all the three major averages advancing more than a percentage each, as traders expressed optimism over a sharp retreat in the price of oil and reports of a possible sale of U.S. investment bank Lehman Brothers (LEH | Quote | Chart | News | PowerRating).

For the week, the Dow Industrials declined 0.27% and the S&P 500 Index fell 0.46%, while the Nasdaq Composite Index moved down a steeper 1.54%.

Among the sub-indexes, the Amex Airline Index declined 8.26% for the week, while the Amex Biotechnology Index, the Amex Securities Broker/Dealer Index and the KBW Bank Index receded over 3% each. The Philadelphia Housing Sector Index posted a weekly loss of 2.94% compared to a 1.88% decline by the Dow Jones Transportation Index. Meanwhile, the Philadelphia Semiconductor Index was off 2.72% for the week.

On the other hand, the Amex Gold Bugs Index gained 8.65% for the week. The Amex Oil Index and the Philadelphia Oil Service Sector Index advanced 3.67% and 5.01%, respectively. The Dow Jones Utility Index rose 2.72% during the week.

State Street Global Advisors expects a real U.S. recovery in the spring to early summer of 2009. Accordingly, the firm projects a stock market recovery in the fall or early next year. By that time, the dollar should have regained its ground and oil prices will have slipped on weak global growth. The Dow is most likely to bounce within a range that is bounded by its mid-July lows and mid-March lows. The lackluster phase is likely to continue until further clarity emerges on the macroeconomic front.

Currency, Commodity Markets

Crude oil futures are currently rising $0.49 at $115.08 a barrel after they advanced 0.6% for the week before, ending at $114.59 a barrel in the week ended August 22nd. The commodity experienced significant volatility last week, as it surged up about 5% on Thursday on the geopolitical tensions surrounding the standoff between the U.S. and Russia. However, the futures gave back as much and more on Friday following an announcement by Russia that the pulling out of its troops from most Georgian territories is almost complete.

Gold futures are currently trading down $10.30 at $823.20 an ounce. In the previous week, the precious metal gained $41.40 or 5.23% to $833.50 an ounce, as the commodity gained strength on the dollar's weakness.

On the currency front, the U.S. dollar weakened against both the yen and the euro last week. The greenback eased 0.38% against the yen to 110.08 yen, while it declined 0.71% against the euro to $1.4792 a euro.

Currently, a dollar is trading at 109.6560 yen and is worth $1.4788 versus the euro.

Asia

Stock markets across the Asia-Pacific region closed higher on Monday, led by Hong Kong, after Wall Street rallied Friday. Financials gained on the back of a report that state-run Korea Development Bank is considering an acquisition of Lehman Brothers, while resource stocks remained weak on lower commodity prices. Exporters rose as the U.S. dollar strengthened against the major Asian currencies.

The Japanese market opened higher and saw further strength in early trading before moving sideways for the rest of the session. The index closed up 212.62 points or 1.68% at 12,879 after losing nearly 500 points during the previous four sessions.

While banks and exporters led the gainers, mining stocks and trading houses fell on lower commodity prices. Sea transporters ended higher, with Kawasaki Kisen rising 3.5%, Mitsui OSK Lines gaining 3.2%, and Nippon Yusen adding 2.4%.

Sanyo Electric gained 1.4% after a report said that the company would disband Sanyo BPL, a 50-50 Indian joint venture that manufactures cathode-ray tube for televisions, in the current fiscal year to March 2009.

The South Korean stock showed erratic movement throughout the session, although holding above the unchanged line for the entire session. The benchmark Korea Composite Stock Price Index or KOSPI closed up 5.2 points or 0.35% at 1,502 after closing below the 1,500 mark for the first time in sixteen months on Friday. A weakening won and a drop in crude oil prices supported exporters and transporters. GS Holdings tumbled 4.3% following a media report that the GS Group will bid for Daewoo Shipbuilding & Marine Engineering along with STX Group. STX Corp plummeted 4.9%. Samsung Engineering soared 3.8% after the company said that it won a 439.2 billion won order for an LNG terminal project.

The Chinese market ignored some early weakness and moved into positive territory within the first hour of trading. The market closed higher, ending a two-day losing streak, led by Sinopec and banks. The benchmark Shanghai Composite Index closed up 8.15 points or 0.34% at 2,413.

The Hong Kong market closed sharply higher on the back of Chinese economic stimulus hopes, strong corporate earnings, lower oil prices and a Wall Street rally. However, turnover remained relatively low, indicating continuing caution on the part of some investors. The benchmark Hang Seng index closed up 712.73 points or 3.5% at 21,104.79.

The Australian market opened unchanged and rose sharply in early trading before moving sideways for the rest of the session. The All Ordinaries index advanced 79.9 points or 1.6% to finish at 5,090.1. Bank stocks advanced strongly, while mining stocks came under selling pressure. Among retailers, David Jones and Woolworths gained jumped 2.8% each, and Coles owner Wesfarmers advanced 1.9%. Electronic retailer, JB Hi-Fi rose 2.6% after the company denied a media report that it was in talks about a possible takeover bid from Australia's top retailer, Woolworths.

Europe

The major European markets are trading lower on Monday after they advanced solidly on Friday on the back of the buoyancy in the U.S. markets. The French CAC 40 Index and the German DAX Index are receding 0.64% and 0.20%, respectively. The U.K. market is closed on account of a public holiday.

U.S. Economic Reports

Among the economic reports to be released in the upcoming week, the markets are likely to stay tuned to two reports on the housing market, a personal income & outlays report for July, the Commerce Department's durable goods orders report and consumer confidence readings of the University of Michigan and the Conference Board. Additionally, traders could focus on the preliminary second quarter GDP report, the results of the NAPM-Chicago's purchasing managers' survey and the regularly scheduled jobless claims and petroleum inventory reports.

Going by the strengthening of the pending home sales index of late, economists expect existing home sales to improve from very depressed levels. That said, a decline cannot be ruled out. Nevertheless, the rate of decline has been stabilizing. Wachovia Securities expects tighter credit standards, higher mortgage rates and an increasing rate of foreclosures to weigh on the housing market for all of 2009. Meanwhile, new home sales could decline, as builders vie with a glut of foreclosed homes to attract buyers.

Consumer confidence is expected to see a mild lift at least due to a drop in gas prices. Nevertheless, there isn't likely to be any significant improvement and consumer confidence is likely to be around these depressed levels in the coming months.

Many economists expect second quarter economic growth to be revised higher due to a narrowing in the trade deficit for June, which is expected to add a full percentage to the already estimated growth. Additionally, wholesale inventories and construction spending reports also point towards higher growth in the quarter. However, not many are optimistic about growth going forward, especially in the third and fourth quarters. Consumer spending is expected to act as a drag on growth.

Durable goods orders are likely to remain little changed. Although aircraft orders could see some strength, defense orders are likely to recede. The weakness in motor vehicle orders are set to continue, while economists expect non-defense capital good orders to see a pullback after their strong gains in June.

Lower contribution to transfer payments by stimulus rebates and weak wage and salary disbursements should result in a decline in personal income for July. Real consumer spending is also likely to show a decline. Global Insight expects a small inflation-adjusted gain of about 0.5% in the consumer spending for the third quarter. The firm also cautioned that there is a risk of third quarter consumer spending showing the first outright decline since the end of 1991. The National Association of Realtors is scheduled to release its report on existing home sales for July at 10 AM ET on Monday. Economists estimate existing home sales of 4.90 million for the month.

In June, existing home sales fell 2.6% to a seasonally adjusted annual rate of 4.86 million units from a 4.99-million unit rate in May. Single-family home sales fell 3.2%, while existing condominium and co-op sales rose 1.7%. On a regional basis, existing home sales declined in the South, Mid-west and Northeast. On the other hand, sales improved in the West.

Housing inventories at the end of June rose 0.2% to 4.49 million existing homes available for sale, representing an 11.1-month supply at the current sales rate, up from a 10.8-month supply in May. The median existing home price declined 6.1% to $215,100 in June from a year-ago.

Stocks in Focus Sears Holdings (SHLD | Quote | Chart | News | PowerRating) is likely to react to its announcement that Maureen McGuire, its Executive Vice President and Chief Marketing Officer, has resigned from the company, effective August 29, 2008.

Citigroup (C) could react to reports that it plans to reorganize the capital market business within its investment bank. A Wall Street Journal report suggested that the business is likely to be reorganized geographically and along product lines.

Precision Drilling (PDS | Quote | Chart | News | PowerRating) is expected to move in reaction to the news that it has agreed to buy U.S.-based drilling company Grey Wolf (GW | Quote | Chart | News | PowerRating) for about $2 billion in cash and stock. The speculation comes close on the heels of Grey Wolf shareholders' rejection of a merger deal with Basic Energy Services (BAS | Quote | Chart | News | PowerRating).

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