Stock Market Commentary for July 8, 2010

Thursday, July 8, 2010

The major U.S. index futures opened and closed higher today, marking their third straight day of gains on Thursday. The weekly jobless report released earlier in the day offered support to the buying momentum witnessed in the past two sessions.

The Dow closed up 120 points at 10,138.99, the SPX closed up 9.95 points to 1070.25, and NASDAQ moved up 15 points to 2175. Gold declined to 1,198. and Silver closed at 17.98 for the day. The US Dollar also held its bottom index range of $83.75.

Gold futures fell slightly Thursday, settling just above six-week lows as stabilizing equities and currency markets had fewer investors seeking solace in the yellow metal.

The most actively traded contract, for August delivery, fell $2.80, or 0.2%, to $1,196.10 an ounce on the Comex division of the New York Mercantile Exchange. Since falling almost 3% at the end of last week, the August contract has traded in a narrow range, staying within $15 an ounce of the $1,200 an ounce mark.

"There's a lack of interest in gold," said Frank Lesh, broker and futures analyst with FuturePath Trading in Chicago. "At the moment, I think we've lost the fear trade."

Jobless claims declined by much more than expected in the recent reporting week, offering some confidence about the slow and steady recovery seen in the labor market. Additionally, an upbeat assessment of the global economic conditions by the International Monetary Fund may aid sentiment. That said, the continuing uncertainty prevent any meaningful gains.

In a hopeful sign for the labor market, the number of U.S. workers filing new claims for unemployment benefits falls 21,000 to 454,000 in the week ended July 3. Economists were expecting claims to drop to 460,000. The four-week moving average falls to 466,000.

"We are seeing some evidence that the U.S. economy and the global economy as a whole is continuing to recover," said Anthony Conroy, head trader for equities at BNY ConvergEx. "It's maybe at a slower pace than some people expected, but it continues to do well." Boosting the stocks, retailers posted their strongest year-over-year growth in same-store sales since March.

With stocks up for three straight days following the declines of recent weeks, "some people are going to say it's a relief rally which is getting a dead cat bounce off the bottom," Conroy noted. Still, he added, "when you get to those levels there's a catalyst to come in. You're starting to see value guys come in."

According to an official at the IMF, the US Economic forecasts may have been `Overly Pessimistic'. Treasury Secretary stresses in a CNBC interview that he wants Congress to hold the top tax rate on dividends at 20%, reasserting an Obama administration proposal thrown into some doubt by mounting pressure on the federal budget.

The International Monetary Fund advised the Obama administration to consider raising taxes and reducing Social Security benefits as ways to contain the U.S. budget deficit and public debt.

The federal budget deficit for the first nine months of the 2010 fiscal year was just over $1 trillion, the Congressional Budget Office reports, reflecting $2.6 trillion in outlays and $1.6 trillion in receipts.

The Obama administration must move more aggressively to contain the U.S. budget deficit and public debt without harming the recovery, including measures to boost tax revenue, the International Monetary Fund said Thursday.

While the outlook for the U.S. economy has improved, the administration is using overly optimistic assumptions in its growth and budget projections, the IMF said in its annual Article IV report.

"We see a less strong growth outlook over the medium term than the authorities," David Robinson, deputy director of the IMF's Western Hemisphere Department, said during a briefing to discuss the report. "Correspondingly, we see over the medium term...a need for more fiscal measures than the authorities at present do."

The administration plans to halve the deficit by 2013 and stabilize the public debt at 70% of gross domestic product by 2015. However, the IMF projects that current policies will push the debt level up to 95% of GDP by 2020 and over 135% by 2030.

So far, the U.S. hasn't had any problems finding buyers for its debt, due in part to a global flight to quality, said Robinson. But the IMF is projecting a rise in Treasury rates over the medium term, partly on expectations that the U.S. government will have to compete with the private sector in the debt market.

"Then I think there will be potential pressures on interest rates, in particular from the amounts of public debt that we see needing to be placed going forward," he said.

The IMF urged the administration to cut the budget deficit by about 8% of GDP by 2015, which is nearly three percentage points more than planned. President Barack Obama has tasked a bipartisan fiscal commission to recommend ways to balance the budget by 2015, but the IMF suggests a small surplus of nearly 1% of GDP by then will be needed to stabilize the debt level.

"On the macroeconomic side, the central challenge is to develop a credible fiscal strategy to ensure that public debt is put--and is seen to be put--on a sustainable path without putting the recovery in jeopardy," the report said.

While some of that adjustment can be reached through spending cuts, the IMF also stressed that some form of tax hikes will be needed--posing a tough challenge for tax-shy American politicians. Possible moves include tinkering with the popular deduction for interest on mortgages, raising energy taxes, and imposing a national consumption tax or financial activities tax, the fund said.

"The timing and composition of the adjustment will need to be carefully designed to minimize the impact on demand while ensuring credibility," the IMF said. The fund endorsed the 2% deficit reduction in the administration's budget for fiscal 2011, but said that should be followed by a commitment to take further steps in coming years and measures to deal with rising entitlement costs.

It urged Congress to ensure that any additional stimulus spending, such as to address stubbornly high unemployment or foreclosures, be carefully targeted.

The IMF raised its U.S. growth forecasts to 3.3% in 2010 and 2.9% in 2011 from estimates in April of 3.1% and 2.6%, respectively. But the IMF warned the potential spillover from sovereign debt turmoil in Europe tips the balance of risks to the downside.

The most recent data that has come out since the report was prepared has probably increased those downside risks, said Robinson. Estimating that the dollar is now "now moderately overvalued from a medium-term perspective," the IMF said other countries will need to allow for greater exchange rate flexibility or appreciation--a possible reference to China's tightly managed currency.

That suggests the dollar will depreciate "moderately" over the next five years, said Robinson.

The recent strength of the dollar isn't helpful, he said, "but it's not a deal breaker for the recovery, either."

The IMF praised the Federal Reserve's management of the financial crisis and expressed confidence in the central bank's ability to manage its exit strategy.

Consumers in the U.S. cut their borrowing a fourth straight time in May as they shore up finances in a lackluster economy. Consumer credit falls at a 4.5% annual rate, dropping $9.1 billion to $2.415 trillion; economists expected a more modest $2 billion drop.

"We continue to expect declines in outstanding credit levels," Miller Tabak analyst Dan Greenhaus said. "The consumer remains quite stressed and with income growth relatively muted and labor improvement few and far between, the consumer remains preoccupied with deleveraging."

Texas may have avoided the excesses of other states partly because of laws enacted after its own property bust in the 1980s. Back then, an oil boom created plenty of investment demand. And thanks to partnerships designed as tax shelters, property investments offered sky-high returns.

The consistently dull message from economic indicators that the global economy is recovering but without much oomph should make for a steady if unexciting market. Instead, Michael Casey notes, we swing from euphoria to utter dread.

Crude oil futures rose Thursday, supported by a drop in U.S. oil stockpiles even as a surprise jump in gasoline inventories raised concerns about demand.

Light, sweet crude for August delivery settled $1.37, or 1.9%, higher at $75.44 a barrel on the New York Mercantile Exchange after rising to $75.90, the highest intra-day price for a front-month contract since June. Brent crude on the ICE futures exchange settled up $1.20, or 1.6%, at $74.71 a barrel.

Futures traded higher throughout the session, receiving an early boost from the American Petroleum Institute's report late Wednesday of a massive decline in oil inventories. The U.S. Energy Information Administration followed by saying Thursday that oil inventories plunged 5 million barrels in the week ended July 2, more than the 1.8-million-barrel drop forecasted by analysts in a Dow Jones survey.

Analysts said the drop in crude inventories kept investors optimistic that overall supplies are tightening, even as the EIA reported a 1.3-million-barrel increase in gasoline stockpiles. Oil inventories shot up during the economic downturn last year, and remain well above average as demand has struggled to recover even as the economy has grown at a healthy pace in 2010.

The rise in gasoline stocks kept the fuel's futures from posting similar gains to crude, with front-month August reformulated gasoline blendstock, or RBOB, settling up 2.58 cents, or 1.3%, to $2.0511 a gallon. Analysts had predicted that gasoline inventories would drop 500,000 barrels.


Canadian Market Update

Toronto stocks closed broadly higher Thursday, following the positive lead of New York. But losses in the gold group kept gains in check.

According to preliminary data, the S&P/TSX Composite Index rose 36.10 points, or 0.32%, to 11433.37. Advances beat declines 799 to 663. Trading volume was 378.5 million shares, down from Wednesday's total of 476.2 million shares. The S&P/TSX 60 Index closed up 2.54 points, or 0.38%, to 670.75.

The Canadian dollar is ending higher Thursday, but down from its session high, as the currency continued to take direction from advancing stocks and crude-oil futures.

The U.S. dollar was at C$1.0456 at 3:11 p.m. EDT (1911 GMT), from C$1.0459 at 8:00 a.m. EDT (1200 GMT) and C$1.0504 late Wednesday.

"The two main criteria by which the Canadian dollar trades are equities and oil," said Jack Spitz, managing director for foreign exchange, financial markets and derivatives at National Bank in Toronto. "Both are showing a fair bit of volatility [Thursday]."

Gains in the Canadian dollar Thursday were consistent with a broad shift back into riskier assets in recent sessions, epitomized by the sharp rally in the Australian dollar.

"The market has been buying risk this week, focused in many respects on the Aussie dollar," Spitz said.

In domestic data on Thursday, Statistics Canada reported that the monthly new housing price index rose 0.3% in May, consistent with market expectations and the eleventh consecutive increase.

The most significant data of the week come Friday, when employment data for June will be released at 7:00 a.m. EDT (1100 GMT). Economists expect that the Canadian economy created 20,000 jobs in June, down somewhat from the 24,700 recorded in May, and that the unemployment rate remained steady at 8.1%.


In European Markets

The European Parliament agreed to what officials described as the world's strictest rules on bankers' bonuses, capping big cash awards in time for 2010 payouts.

Banks and regulators must take "appropriate action" to strengthen banks' resilience against shocks and safeguard the health of Europe's financial system, European Central Bank President Jean-Claude Trichet says.

Europe's largest aerospace group submits its proposal to win a contract to provide the U.S. Air Force with new aerial refueling tankers to replace the USAF's aging fleet of KC-135s. The winner stands to gain orders worth up to $35 billion.

The Euro Bank Stress Test in in development. First, the purpose of the EFSF is to provide financial support to a country in exceptional difficulties, not a handy source of bank capital alone; a sovereign would have to be in dire straights to tap it. Second, while there is a EUR60 billion component funded under the European Union budget, the other EUR440 billion is unfunded.

Some funding is already available. German, Spanish and Greek dedicated bank support facilities total EUR72 billion, and another EUR58 billion might be available from domestic budgets, Credit Suisse estimates. That EUR130 billion sounds adequate, and, based on the limited information available, the stress tests may not be that onerous in any case, meaning there may be little unexpected need for fresh capital.

Greece's Parliament gives final approval to a cornerstone bill that would, among other things, raise the retirement age to 65 for most workers, cut pension benefits, relax rules on hiring and firing employees, and lower basic salaries.

The new Czech central bank governor said uncertainty surrounding the euro zone in the wake of the Greek debt crisis is so great that there is no point considering adopting the common currency for now.

A day after Turkey's highest court decided not to veto proposed amendments to the constitution, removing an element of uncertainty for the economy, the country's central bank chief warned of risks ahead from weak demand in Europe.


South America Markets

The Brazilian real ended stable against the dollar Thursday as rising risk appetite on positive international economic news was offset by profit- taking at home.

The real ended at BRL1.7670 to the dollar on the BM&FBovespa exchange, unchanged from Wednesday's close. Brazil's Central Bank purchased US Dollars at auction for BRL1.7689

An International Monetary Fund report on global growth suggested the recovery has remained intact, although the threat of sovereign-debt-induced financial instability remains real.

The Central Reserve Bank of Peru intervened Thursday in the foreign exchange market to buy $209 million. The central bank has intervened in every trading session since June 18, expect for July 6. On Wednesday, the central bank bought $187 million. The Central Bank intervenes to smooth out volatility in the exchange market. On Thursday the sol ended unchanged at PEN2.825 per dollar.

Colombia's coffee output rose 14% in June to 780,000 60-kilogram bags from 685,000 bags in June 2009, Colombia's National Federation of Coffee Growers, or Fedecafe, said Thursday.
Colombia is the world's largest producer of mild washed arabica coffee. Total output in 2009 fell 32% compared with 2008, to 7.8 million bags.

Coffee production in the first half of this year was 4.0 million bags, down from 4.2 million bags in the first half of 2009. The data are lower than the 4.2 million-4.3 million forecast made by Fedecafe's General Manager Luis Genaro Munoz on Wednesday.

Fedecafe attributed the June increase to the weather and the first output of some fields with renewed coffee bushes. Fedecafe said it expects output in the second quarter will rise compared with the same period in 2009. Coffee exports from Colombia in June fell 1% to 634,000 bags, while exports over the first half of the year fell 20% to 3.5 million bags.



Additional Market Data

Malaysia's central bank raised its key overnight policy rate for the third time this year but warned of an increased risk of a slowdown in global growth, reinforcing the view that it has finished tightening rates this year.