Stock Market Commentary July 7, 2010

US Markets are moving up again and a key indicator SPY is above 106. US Stock Gains accelerate as financials climbed; DJIA gained more than 260 points to close above 10,016. The S&P moved up more than 30 points to 1058, NASDAQ: 2157. Crude oil closed at $74.20 as US equities rally. Gold closed up at $1201/troy ounce, Silver closed at $18.05/ounce.

U.S. stocks rallied broadly Wednesday as a rosy earnings forecast in the financial sector and deal activity in the technology sector boosted investor sentiment. The rally comes as the market attempts to extend Tuesday's gains, bouncing back from a rough June that sent stocks to their lowest point this year. Prior to Tuesday, the Dow had been stuck in a seven-session losing streak on concerns about the global economy thanks to debt troubles in the euro zone and a slowdown in China. Investors are now seeing the upcoming earnings season as having the potential to propel the market out of the slump.

"The next serious catalyst is earnings," said Phil Dow, director of equity strategy at RBC Wealth Management. "The stock market has priced a slowdown and possibly a double dip and my guess is, if you have better than expected earnings coupled with not-terrible guidance, the market could head higher."

Wednesday's stock gains came despite concern overseas over disappointing German manufacturing data. Germany is considered one of Europe's strongest economies, and the drop in manufacturing orders prompted concerns over how economic struggles among its euro-zone counterparts might be impacting the country.

International Council of Shopping Centers and Goldman Sachs Retail Chain Store Sales Index jumps 1% in the week ended Saturday ahead of the U.S. July 4th weekend - from the week before on a seasonally adjusted, comparable-store basis.

Volume of mortgage applications filed in U.S. last week rose a seasonally adjusted 6.7% from the previous week, a second straight weekly increase, on renewed refinance activity in the wake of record low mortgage rates, says MBA.

Speaking to CNBC, Pimco Co-CEO Mohamed El-Erian sounds a word of caution about what he sees as a structural shift in the U.S. economy, noting that unemployment has shifted from being a lagging indicator to a leading indicator.

While the focus of late has been on disappointing U.S. data, nonfarm payrolls and ISM non-manufacturing index spring to mind, it's important not to forget the weak state of the European continent, writes Peter Nurse.

Toronto Indexes, Volume; 3 PM EDT Composite Up 143.09

S&P/TSX Composite 11343.26 up 143.09 or 1.3%
The Canadian dollar ended higher Wednesday as stocks and crude-oil futures rallied and investors showed a renewed willingness to embrace risk.

The U.S. dollar was at C$1.0504 at 3:23 p.m. EDT (1923 GMT), from C$1.0593 at 8:00 a.m. EDT (1200 GMT) and C$1.0561 late Tuesday.

The U.S. dollar dipped to a low of C$1.0476 as equity markets rallied in afternoon trading, its lowest level since June 30, according to EBS via CQG.

"The bounceback in U.S. equities is fairly notable, and that's really giving a boost to the risk-sensitive currencies, and the Canadian dollar is one of them," said Vassili Serebriakov, currency strategist at Wells Fargo Bank in New York.

Substantial gains in crude-oil futures also contributed to the Canadian currency's advance, he said. "It's the familiar twin forces of oil and equities, today," Serebriakov said.


Federal Reserve official blames U.S. economy's difficulties on Washington

A key Federal Reserve official blamed the U.S. economy's current difficulties on Washington-driven uncertainty, and said there was little else the central bank could or should do to add fresh support for growth right now.

"We need clarity" in light of things such as the passage of major health-care and financial regulatory-reform legislation, and that is now lacking, Federal Reserve Bank of Dallas President Richard Fisher told CNBC television Wednesday.

"There is too much confusion" right now and that is leading to slower economic growth, Fisher said, even as he added that he doesn't believe the economy will slip back into recession. Given the source of the economy's cool down, Fisher said the central bank doesn't have much of a role to play at the moment: "This has nothing to do with monetary policy...It's rule making" that needs to be resolved.

Fisher isn't currently a voting member of the interest rate-setting Federal Open Market Committee.

Kansas City Federal Reserve Bank President Thomas Hoenig Wednesday reiterated his belief that the Fed should raise its target rate to 1%, toward a "policy of shooting toward normality," Bloomberg News reported on its website.

"I am not saying raise rates to very high levels, I am saying get it off zero," Hoenig told Bloomberg Radio in an interview. A 1% interest rate would not harm the economy, he said.

Hoenig also lowered to about 3% his expectations for U.S. growth this year, down from a January forecast of nearly 4%, and called for the disposal of assets accumulated during the financial crisis "as reasonably as we can, as quickly as we can."

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said at a the Society for Economic Dynamics Annual Meeting in Montreal, that "A financial institution should be taxed for the amount of risk it creates that is borne by taxpayers,".

The inevitability of future financial crises and the inability of regulatory overhaul to stop it mean banks should be taxed according to the bailout risk they present, a U.S. central bank official said Wednesday.

The official sees this taxation of financial institutions as a way to help deal with the inevitable crises to come.

"No law can completely eliminate the kinds of collective investor and regulator mistakes that lead to financial crises," Kocherlakota said. "These mistakes have taken place periodically for centuries" and "there are strong economic forces that lead policymakers--for the best of reasons--to bail out financial firms. In other words, no legislation can completely eliminate bailouts."



The US Dollar is under attack again, this time by the South American Sucre

Euro slips back into red, trading slightly lower as investors eye upcoming EU bank stress tests. The dollar strengthened slightly against the euro, although the U.S. Dollar Index, which reflects the U.S. currency against a basket of six others, slipped 0.1%. Treasurys were mixed, with the two-year note slightly higher, but the 10-year note lower, lifting the yield on the 10-year up to 2.96%. Gold futures reversed earlier declines to edge higher recently.

The euro has been climbing against the dollar as fears of a double-dip recession in the U.S. have grown and the outlook for U.S. rate hikes has been scaled back. However, the higher the single currency rises, the further it is likely to fall.

Ecuador and Venezuela have conducted their first trade using the "sucre," a virtual currency touted by Venezuela President Hugo Chavez as a way for the region to reduce its dependence on the U.S. dollar.

A statement Wednesday from Venezuela's central bank said the trade involved 5,430 metric tons of rice sent to Venezuela from Ecuador. The cost of the shipment was 1.89 million sucres, equal to about $2.37 million, it said.

"This is a marvelous endeavor because it breaks the hegemony of the dollar and democratizes the economies of our countries," Chavez said, according to the statement. "We're breaking down walls."

Critics call the sucre plan a complicated and cumbersome multi-country barter system.

The financial transaction for the rice trade was conducted Tuesday between Venezuela's state-run Banco de Venezuela and Ecuador's central bank, the statement said.

Members of the Bolivarian Alternative for the Americas, or ALBA, a regional trade group set up by Venezuela and Cuba, announced plans last year to start using the sucre, and it was first put into use in February of this year for a rice shipment to Cuba from Venezuela.

ALBA members include Bolivia, Cuba, Ecuador, Nicaragua, Saint Vincent and the Grenadines and Venezuela.

No sucre currency has actually been printed. Instead, the idea for now is to use the virtual currency for managing debt as ALBA members buy and sell different products from each other.

Chavez, a socialist and frequent critic of the U.S. government and the dollar, has been the biggest promoter of the sucre. Analysts say Venezuela would likely have to be the anchor for the currency given its relative size among ALBA nations.

The sucre is named after Antonio Jose de Sucre, a 19th-century South American liberation hero, although it's also a Spanish acronym for Sistema Unificado de Compensacion de Pagos Reciprocos, the unified system for using the virtual currency.

Chile Stocks Gain 1% On Robust Growth, Tracking US Markets.

Colombia's Central Bank would rather keep its key rate stable "as long as possible," board member Juan Jose Echavarria said Wednesday.

He said the country's low inflation and the strong growth are helping the bank's board in its will to keep interest rate low.

The bank's key rate currently stands at a record low 3%.

The country's consumer price index rose a lower-than-expected 0.11% in June, and the gross domestic product growth was a faster than expected 4.4% in the first quarter of this year.


Brazil is the world's No. 1 sugarcane-based ethanol producer.

Sugar, U.S. stock symbol (SGG) continues to climb.

Brazil's mills are seeing strong demand this week for their physical sugar, but many are waiting to sell, president of Brazilian consultancy Datagro said.

Mills in Brazil--the world's No. 1 sugar producer--are holding on to their sugar in the expectation that sweetener prices could rise further, Plinio Nastari of Datagro, a Sao Paulo-based consultancy specializing in sugar and ethanol, told Dow Jones Newswires.

Most-active October sugar on ICE Futures U.S. edged up 2.2% at 17.06 cents a pound on Wednesday as stocks and commodities across the board rose.

Sugar prices on ICE are likely to strengthen further to above 18.50 cents per pound in the coming weeks as demand remains strong, Nastari said.

As Brazil is the world's top sugar exporter, international sugar prices need to rise above the cost of production in Brazil's center-south region, which accounts for 90% of the country's cane, he said. Otherwise, mills will look for alternatives such as ethanol, he said.

Industry experts estimate that the cost of sugar production is around 15 cents to 17 cents per pound to break even in the center-south region.

Mills have room to stock sugar and can afford to wait for better prices, Nastari said.

The high demand and tight supply is also further contributing to delays for vessels waiting to ship sugar, Nastari said. The waiting time is around three weeks at Santos, the country's main sugar port, he added.

Bruno Zaneti, a risk consultant at consultancy FCStone in Campinas, agreed that mills in the center-south region are in no rush to sell their sugar. "Mills aren't selling [sugar] desperately," he said.

Zaneti said mills already sold good volumes of sugar at over 20 cents per pound earlier in the year. They could therefore focus on delivering these contracts, which provided necessary cash flow at the start of the harvest, he said. Mills can also crush their cane into ethanol to generate cash if needed, he added.

Concerns that mills in Brazil's center-south region may produce lower-than-expected volumes of sugar due to dry weather is also expected to filter into prices. This will help to push sugar prices above 18 cents a pound, Zaneti said.

A sugar broker at brokerage Uniao Corretor in Sao Paulo said premiums for white sugar, or Crystal B-150, saw buyers looking for $120-$125 per metric ton this week against the October sugar contract on ICE. Sellers wanted closer to $130-$135 per ton over the same contract, he said.

In the U.S. Imperial Sugar agreed to pay $6M to settle 2008 explosion case. Imperial Sugar Co. (IPSU) said Wednesday that it agreed to pay $6 million as part of a settlement with U.S. regulators, who cited the company following a deadly 2008 explosion.

The sum, to be paid in four quarterly installments, is less than the $8.7 million originally proposed by the Occupational Safety and Health Administration, or OSHA, in July 2008, Imperial said in a press release.

Fourteen people were killed and others injured on Feb. 7, 2008, when sugar dust sparked a blast at the company's Port Wentworth, Ga., facility near Savannah.


Brazil Exchange Proposes New Corporate-Governance Rules

SAO PAULO (Dow Jones)--Brazil's BM&FBovespa stock exchange Wednesday unveiled a proposal for stiffer regulations of companies that participate in the exchange's corporate-governance framework.

"There was a desire by all parties to revise the rules, and this proposal is a great step forward that will help the exchange maintain its position of global leadership," said Arminio Fraga, chairman of the board of directors of the BM&FBovespa, in presenting the proposal.

Of the 467 companies on the BM&FBovespa, 159 are listed in one of the segments, representing 67% of the market value on the exchange. Of these, two-thirds are listed on Novo Mercado, the segment with the most rigid standards.

The proposed changes presented on Wednesday would affect corporate-governance rules in all three segments.


OPEC members to gradually produce more oil

Energy stocks were also strong as crude-oil futures rose more than 2% to $74 a barrel.

OPEC members will begin to gradually produce more oil over the next 18 months, the U.S. Energy Information Administration said in its monthly short-term energy outlook.

The EIA raised its 2010 OPEC production forecast to 29.51 million barrels a day, up 170,000 barrels a day from the June outlook. In 2011, OPEC's oil output is expected to average 30.07 million barrels a day, up 210,000 barrels a day from the previous forecast.

"After remaining relatively steady for the past four quarters, EIA expects OPEC crude oil production to rise slightly through 2011 to accommodate increasing world oil consumption and maintain the organization's market objectives," the agency said.

Spare production capacity should remain above 5 million barrels a day through 2011, compared with just 1.5 million barrels a day in 2008, when oil prices spiked to nearly $150 a barrel. That year, OPEC production averaged 31.27 million barrels a day.


China Agricultural Bank Making News

Agricultural Bank of China raises the equivalent of US$10.1 billion from the Shanghai portion of its IPO, putting it on track to complete the largest IPO on record by raising up to US$22.1 billion ahead of a dual listing in Hong Kong and Shanghai.