Markets Cautioned by US Jobless Claims Rise

Market Update
Thursday, August 5, 2010

Stocks:

The U.S. Labor Department reported an increase of 19,000 new jobless claims last week, defying economists' average expectations for a decline of 2,000, and reminding investors that U.S. unemployment has remained stubbornly high despite months of growth.

Asia stocks edge up as U.S. data spurs the US Dollar. The Nikkei 225 is up 1.7% to 9,653.92 at 2:00AM EDT. U.S. stocks pushed higher Wednesday, helped by an improving employment picture in the run-up to Friday's official jobs numbers.

The Dow Jones Industrial Average added 44.05, or 0.41%, to 10,680.43, while the S&P 500 rose 6.78, or 0.61%, to 1,127.24. The Nasdaq jumped 20.05, or 0.88%, to 2,303.57. Trading volumes were soft, with about 3.2 billion shares changing hands in New York Stock Exchange Composite volumes, less than the daily average of about 5.4 billion shares.

The bulls were helped Wednesday by a surprise increase in private-sector employment as well as encouraging signs of expansion in the U.S. non-manufacturing sector. Investors are now focusing on Thursday's rate decision from the ECB and Friday's US payrolls report.



Treasurys:

US Treasurys fell after data that showed the U.S. services sector expanded at a better than expected pace in July, fueling hopes the economy will continue to slowly recover and not deteriorate again in the second half of the year. Losses came as equities rose and reversed Treasury market gains posted on Tuesday, when the two-year yield fell to another record low.

Data "suggest that Treasury prices have pushed a little too high," said James Combias, head of U.S. Treasury trading at Mizuho Securities USA Inc.



Forex:

The dollar gained against the yen, euro and UK pound after brighter than expected US data reports contrasted with less optimistic overnight reports in Europe. The dollar recovered in New York trading from an eight-month low against the yen and hovered near its intraday high for the rest of the session. The U.S. Dollar Index, which tracks the greenback against six other currencies, was up 0.4%.


Dow Jones 10,680.43 +44.05 (0.41%)
S&P 500 1,127.24 +6.78 (0.61%)
Nasdaq 2,303.57 +20.05 (0.88%)
Crude Oil 82.30 - 0.21%
Natural Gas 4.72 - 0.36%
Gasoline 2.17 -
Heating Oil 2.20 -
Gold 1196.08 + 0.66%
Silver 18.35 - 0.38%
Copper 3.40 + 1.37%


World markets:


Shanghai 2,638.52
Nikkei 225 9,672.04 +182.70 (1.93%)
Hang Seng Index 21,549.88 +92.22 (0.43%)
TSEC 7,972.66 0.00 (0.00%)
FTSE 100 5,386.16 -10.32 (-0.19%)
CAC 40 3,760.72 +13.21 (0.35%)
S&P TSX 11,845.05 +62.45 (0.53%)
S&P/ASX 200 4,571.70 +29.60 (0.65%)
BSE Sensex 18,217.44 +102.61 (0.57%)


Market Summary:

Gold for August delivery on the Comex division of the New York Mercantile Exchange was up 1.34% at $1,201.10 per troy ounce.

US July Private-Sector Jobs Rise Weak labor markets remain an obstacle to a recovery. Private payroll gains increased by only 42,000 in July, as large businesses added no new workers, according to data released Wednesday.

July's private-sector job gain was the sixth consecutive increase, according to a national employment report published by payroll giant Automatic Data Processing Inc. (ADP) and consultancy Macroeconomic Advisers. But the pace of hiring has averaged only 37,000 during those six months.

"Firings have stopped but strong hiring is not yet happening," said Joel Prakken, chairman of Macroeconomic Advisers, which compiles the survey for ADP. "There is no sign of acceleration [in hiring]."

Economists had expected ADP to report a job gain of 39,000 in July. The estimated change in employment for June was revised to a gain of 19,000 from an increase of only 13,000 first reported.

The data offered relief ahead of Friday's release of the Bureau of Labor Statistics' nonfarm-payroll data, which includes government workers. Forecasters expect a drop of 60,000 due mostly to Census-worker layoffs, with unemployment edging upward in July.

"That number Friday will be very important for the market," said Colleen Supran, portfolio manager at San Francisco-based Bingham, Osborn & Scarborough, which manages $2.1 billion in investments. "Corporate America seems to be doing well, but can they take the next step and do some hiring? Corporations have to be very concerned about any expansion plans when they don't have a sense of the final consumers."

A separate monthly jobs survey showed planned layoffs increasing for the third straight month in July, though the increase was slight. Employment is being closely scrutinized by investors, given its importance for consumption.


US July Services Sector Expands

The U.S. non-manufacturing sector expanded at a better-than-expected pace in July, according to data released Wednesday by the Institute for Supply Management. the Institute for Supply Management's non-manufacturing purchasing managers' index bucked forecasts to rise to 54.3 in July, from 53.8 in June, indicating expanding activity.

"I wouldn't get too enthused; it's one data point that's positive," said Christian Hviid, chief market strategist at Genworth Financial Asset Management. "At the end of the day, the headwinds are still out there. It's a pretty weak employment landscape, and there's this concept of austerity out there, and potentially slower growth going forward."

The ISM's non-manufacturing purchasing managers' index rose to 54.3 in July, from 53.8 in June. Forecasters surveyed by Dow Jones Newswires had expected the July PMI to slow to 53.1. Readings above 50 indicate expanding activity.

The ISM said the July business activity/production index fell to 57.4 from 58.1 in June, but the high level showed production is expanding. The new-orders index rose to 56.7 last month from 54.4. The ISM's non-manufacturing employment index edged up to 50.9 in July from 49.7 in June.


Thursday's US Calendar

12:01 p.m.
July U.S. Monster Employment Index

8:30 a.m.
July 31 Unemployment Insurance Weekly Claims Report - Initial Claims Weekly
Jobless Claims (expected 455K), Net Change (expected -2K), (prior week)
(previous 4565000), Net Chg (prior week) (previous +81K)

10:00 a.m.
July 24 DJ-BTMU Business Barometer (previous -0.6%), (52 Wk) (previous +5.9%)

10:30 a.m.
July 30 EIA Weekly Natural Gas Storage Report Total Working Gas in Storage (previous 2919B), Total Working Gas in Storage (Net Change) (previous +28B)

12:00 p.m.
Tsy Secy Geithner, HHS Secy Sebelius and Labor Secy Solis hold press briefing on Social Security and Medicare Trustees report in Washington.

4:30 p.m.
Money Stock Measures

4:30 p.m.
Aug 4 Foreign Central Bank Holdings Foreign US Debt Holdings (previous 3.15T), US Foreign Agency Holdings (previous 831.6B), Foreign Treasury Holdings (previous 2.32T)

4:30 p.m.
Aug 4 Federal Discount Window Borrowings Primary Credit Borrowings (previous 26M), Primary Credit Borrowings W/E Daily Avg (previous 11M), Discount Window Borrowings (previous 64.17B), W/E Daily Avg (previous 64.84B)



World Markets Summary:

American depositary shares of European banks fared well on positive earnings, with Lloyds Banking Group gaining 4.1% and French banking group Societe Generale rising 1.4%.

In Japan, the Nikkei Stock Average fell 2.1%, as export firms felt the weight of the rising yen, near its recent highs against the U.S. dollar. On Wednesday, the U.S. dollar regained 0.5% on the yen.

The euro fell back against the dollar as the latest euro-zone data disappointed growth prospects and lowered inflation expectations, trading recently at $1.3167, down from $1.3231 late Tuesday in New York.

Gold futures broke above $1,200 an ounce before slipping slightly, buoyed by strong investment demand and news that China has liberalized its domestic gold market. Copper was also strong, adding 1.3%.

Crude-oil futures fell to $82.51 a barrel.

Crude Slips As Fuel Supply Swells; Oil Stocks Decline. US Crude Oil Stocks -2.784M Bbl In Wk; Seen -1.6M Bbl. US Refineries Ran At 91.2% Vs 90.6% Week Ago. Distillate Stocks +2.173M Bbl In Wk; Seen +1.1M Bbl

Huge builds in gas and distillates even as refiners are cutting production. The American Petroleum Institute on Tuesday reported a decline in oil inventories of about half the decrease expected, which didn't bode well for oil futures Wednesday.

The Washington-based trade group reported a draw of 776,000 barrels on the week ended July 30. Analysts polled by Platts expected a decline of 1.2 million barrels for the week.

The API also reported an increase of 2.3 million barrels of gasoline, compared to analyst expectations of a decrease of 870,000 barrels. Stocks of distillates, which include heating oil and diesel, rose 1.1 miillion barrels, the API said. Analysts surveyed by Platts had forecast an increase of 1.2 million.

The refineries were expected to be running at 90% of their capacity, down 0.6%. The API report comes ahead of more closely watched government report due Wednesday at 10:30 a.m. Eastern"

Saudi Aramco Cuts Sep Crude OSPs To NW Europe and the Mediterranean

Saudi Aramco Cuts Sep Crude OSPs To NW Europe and the Mediterranean by between $1.35 and 50 cents, crude traders in Europe who have seen the OSPs said Wednesday.

Saudi Aramco's crude oil official selling prices, in U.S. dollars a barrel, are as follows:


To Northwest Europe, as a differential to the Brent Weighted Average or BWave:

Crude Sep Aug Change
Extra Light -1.70 -0.35 -1.35
Light -2.40 -1.40 -1.00
Medium -3.90 -3.05 -0.85
Heavy -4.60 -3.90 -0.70

To the Mediterranean, as a differential to the Brent Weighted Average or BWave:

Crude Sep Aug Change
Extra Light -1.70 -0.60 -1.10
Light -2.95 -2.25 -0.70
Medium -4.65 -4.00 -0.65
Heavy -5.40 -4.90 -0.50



European Stocks

European stock markets finished a little higher Wednesday. Regional markets started Wednesday on a downbeat note, as investors reacted to Tuesday's disappointing U.S. economic data, which saw consumer spending and income flat, while home sales and factory orders weakened.

There were hints from the U.S. of an improving labor situation, and a better-than-expected non-manufacturing report. They helped to alleviate investor fears, at least temporarily, about the struggling economic recovery's ability to create jobs.

Stocks recovered from their day's lows, and the Stoxx Europe 600 index ended little changed at 262.17. France's CAC-40 finished up 0.3% at 3760.72, while Germany's DAX ended up 0.4% to 6331.33. The U.K.'s FTSE 100 index, however, finished down 0.2% at 5386.16.

Late in Europe, the euro traded at $1.3162 against the dollar, down from $1.3233 late Tuesday in New York. The yen was at 86.22 against the dollar, up from 85.85.

Earlier, Asian shares were mostly lower Wednesday with the yen's rise to an eight-month high against the dollar hurting Japanese exporters' stocks, while overall confidence in markets was subdued.

On Thursday, the key rate announcements from both the Bank of England and European Central Bank are due. In the U.S., initial jobless claims will garner much attention ahead of Friday's payrolls data.

In major market action, shares of German sportswear retailer Adidas edged up 0.7%. The firm's second-quarter net profit soared to EUR126 million, from EUR9 million in the same period a year ago, and it increased its full-year outlook. Shares of Electricite de France climbed 5.5%. The French government said late Tuesday that it plans to increase regulated electricity tariffs.

Shares of clothing and homewares retailer Next PLC dropped 7.7%. It said that there has been a "noticeable cooling" in retail demand and consumers remain cautious although it expects fiscal-year pre-tax profit to meet guidance.

Shares of banking group Standard Chartered dropped 5.2%, even as its first-half net profit rose 11% to $2.15 billion. On the plus side, shares of Lloyds Banking Group advanced 3.6% after its earnings topped expectations.

Oil and gas firm BP said its Macondo oil well in the Gulf of Mexico appears to have reached a static condition. BP's shares gained 1.4%.

In Milan, shares of UniCredit SpA declined after its second-quarter net profit tumbled 70% to EUR148 million.

Also in the financial sector, shares of Allied Irish Banks dropped 5.1% in London trading after its first-half net loss widened to 1.7 billion euros ($2.25 billion). Swatch shares gained 5% after the Swiss watch maker's first-half net profit surged 55% to 465 million Swiss francs ($445.9 million).


Wheat prices reach 22-month high

Wheat prices have hit a 22-month high after a severe drought and ensuing wildfires in Russia devastated crops.

Concerns are growing that the rise will lead to an increase in prices of flour-related products such as bread and biscuits. Gary Sharkey, head of wheat procurement at Premier Foods, which makes Hovis bread, told the Financial Times that the industry would be "unable to ignore a 50% rise in wheat prices".

'Exposed'

Russia was the world's fourth largest wheat exporter in the 12 months to June behind the US, the EU and Canada, according to the US Department of Agriculture. And along with other former Soviet Republics such as Kazakhstan, it accounted for about 25% of the world's wheat exports last year, said Richard Feltes, senior vice president and director of commodity research at Chicago-based MF global.

He added that while there was uncertainty over the volumes of crops being lost, such drastic change in production would severely cuts into global supply. "This is a big event, the most serious since 1975," he told the BBC News website. "The end user globally is very exposed here."

Martin Deboo from Investec said it would have an effect on both food prices and food company profits. Russia has high levels of grain in reserves and will start using those. But Mr Belyayev said that production levels would be lower than forecast.

"We will manage to produce 70-75 million tonnes, I think," he said. The Ministry of Agriculture had forecast the grain crop to come in below 85 million tonnes, compared with 97 million tonnes in 2009.

Picking up the slack

Kona Haque, commodities strategist at Macquarie Bank, said that Kazakhstan and Ukraine, who have also been affected by the drought along with Russia, would see their export levels go down, but there would not be a global wheat shortage.

"The crop declines we are seeing [in the former Soviet Union] are very real, 20-25% drops in production leading to equivalent decline in exports," she said. "But the fact remains that there are still big exportable surpluses in other parts of the world, particularly the US, that will be able to pick up some of the slack."



South America Stocks


Brazil Real Closes Stronger, But Market Wary To Test BRL1.75

The Brazilian real closed slightly stronger against the U.S. dollar Wednesday in a see-saw session that featured rangebound trading above the psychologically important BRL1.75-to-the-dollar level. The real ended at BRL1.7580 to the dollar on Brazil's BM&FBovespa exchange, slightly stronger from Tuesday's close at BRL1.7587.

The currency opened stronger before sliding into negative territory after better-than-expected economic data from the U.S. gave the greenback a boost.

The real, however, gained some strength after the Brazilian Central Bank released foreign exchange figures, but failed to make a greater assault at the BRL1.75 level. The central bank figures showed net July inflows of $712 million, rising primarily in the last week of the month after a series of overseas bond offerings by Brazilian companies.

The data also showed that exporters continued to stash dollars overseas rather than repatriate the cash with the real at elevated levels, traders said. That could be a strong signal that the recent rally in the local currency could be losing steam, especially as it nears heavy technical resistance at BRL1.75, traders added.

Traders also noted that expectations for heavy inflows from a series of bond and public share offers have already been partially priced into the currency. Inflows are still expected to pick up, largely because of the share offer by Brazilian state-run energy giant Petroleo Brasileiro (PBR, PETR4.BR) planned for September.


Emerging Markets Will Grow 6% In 2010-2011, Led By Latin America

Emerging market economies, led by Latin America, will likely grow an average 6% a year in 2010 and 2011, as they attract greater investment flows, said Chilean investment bank Larrain Vial executive Tomas Langlois on Wednesday.

Latin America will be among emerging market leaders in coming years, as the region's banking, housing and consumer sectors have a lot of room to grow, said Langlois at Larrain Vial's annual financial seminar.

The region, which includes Central and South America, could see investment flows increase by 20% in 2011, led especially by Brazil, Peru and Chile.

"Latin America will have more growth than developed economies and emerging Asian markets in 2011," said Langlois, director of variable income for Larrain Vial.

The region's growth will largely stem from an increase in foreign capital, healthy levels of debt and growing capital markets, he added. Chile will likely be one of the region's leaders in coming years, with the banking and retail sectors pushing its economy forward. Private consumption has attributed to 50% of Chile's growth in 2010, but that could be largely replaced by the investment sector, which will likely contribute to more than half of the country's growth in 2011, the executive said.

In addition, if China continues to buy copper, the country's capital market will see significant growth, as its blue-chip Ipsa index has shown a strong correlation with copper prices in the past two years, according to Langlois. Although there are very few mining companies listed in Chile, local stocks take direction from international copper prices as the South American nation produces about a third of the world's copper.

Other countries to watch in the region include Colombia and Peru, he added. Colombia's energy sector will further boost the economy, especially in light of the planned construction of six hydroelectric plants between 2010 and 2018. The energy market there will benefit from strong levels of demand from Central America and Brazil, he said.

Peru will also see growth, largely driven by private investment, which contributed to 50% of the country's growth this year. In addition, Peru's stock market is an excellent opportunity for growth and investment. In recent years, it has lagged behind other Latin American markets, but the next few years could be an interesting point of entry into its capital markets, Langlois said.

However, looming over Latin America's potential growth is the uncertain future of China's economy. China is one of the largest consumers of Latin America's commodity exports, especially copper and forestry products.

The Asian nation will likely see volatility over the course of the next 10 years, said Andre Esteves, chief executive of Brazilian investment bank BTG Pactual, during the seminar.

China's lack of transparency in its financial markets, along with the rapid nature of its transformation into a market-based economy, will ensure less consistent growth in coming years, he added.

Latin American nations, especially those that focus on exports, must keep China in mind for economic decisions, he said. Positive financial conditions will continue in the region over the next few years, with stable local economies and strong macroeconomic policies, he added.

==END==