Market Happenings for Thursday, August 11, 2011

Pre-market, futures are down a bit, CSCO is up +12% and NYX is down -3.50%. Light crude is down -1.58% at 81.58. Gold hit a new high last night at 1800 but is now lower by about -$40. Also investors are worried that France’s credit rating will get downgraded, even though the rating agencies are saying they don’t foresee having to do that.

U.S. Stock News

September S&Ps this morning are trading up +10.00 points. The US stock market yesterday tumbled right from the opening and settled sharply lower on concern that Europe will fail to contain its sovereign-debt crisis and that the global recovery will continue to weaken: Dow Jones -4.62%, S&P 500 -4.42%, Nasdaq Composite -4.09%. Bearish factors included (1) carry-over weakness from a plunge in European stocks to a 2-year low on concern over contagion of the European debt crisis after credit default swaps to insure the government bonds of France rose to a record, (2) the action by the BOE to cut its 2011 and 2012 UK growth estimates, which adds to evidence that the global economy is in a slowdown, (3) weakness in financial companies and bank stocks, and (4) a slump in companies that are most-dependent on economic growth on speculation the earnings of those companies will fall as the economy slows.

Bullish factors included (1) the +30.4% increase in the refinancing sub-index of the weekly MBA mortgage applications index, the biggest increase in 2-1/3 years which may help sustain consumer spending going forward as homeowners lower their monthly mortgage payments, (2) the statements from Standard & Poor’s, Fitch Ratings and Moody’s Investors Service in which they all affirmed their top AAA credit rating for France, and (3) strength in gold producers and mining companies after gold prices rose to another record high.

Cisco Systems (CSCO) jumped 10% in pre-market trading after the company reported fiscal Q4 profit, excluding some costs, was 40 cents a share, ahead of analysts’ estimates of 38 cents.

The Markets

September 10-year T-notes this morning are trading down -5 ticks. T-note prices yesterday shook off early losses and moved higher on increased safe-haven demand for Treasuries after the equity market tanked and on concern the European debt crisis may spread after credit default swaps to insure the government bonds of France rose to a record: TYU11 +7.5, FVU11 -0.2, EDZ11 -3.0. Bullish factors included (1) strong safe-haven demand after the stock market plunged, (2) increased safe-haven demand on concern the European debt crisis may worsen after credit default swaps to insure the government bonds of France rose to a record, (3) strong overall demand for the Treasury?s $24 billion 10-year T-note auction that had a bid-to-cover ratio of 3.22, stronger than the 12-auction average of 3.11, and (4) the flatter yield curve after the Fed’s post-FOMC statement that they will keep the funds rate “exceptionally low” until 2012 prompted investors to purchase Treasuries farther out on the yield curve which narrowed the yield spread between the Fed funds rate and 10-year T-notes to a 2-1/2 year low of 192 bp. Bearish factors included (1) reduced safe-haven demand for Treasuries after Standard & Poor’s, Fitch Ratings and Moody’s Investors Service affirmed their top AAA credit rating for France, (2) reduced foreign demand for US debt after indirect bidders at the $24 billion 10-year T-note auctioned purchased only 35.4% of the notes, well below the 12-auction average of 50.3%, and (2) supply pressures ahead of the Treasury’s $16 billion auction of 30-year T-bonds on Thu.

The dollar index this morning is weaker with the dollar/yen -0.22 yen and the euro/dollar +0.12 cents. The dollar index yesterday recovered from a 1-week low and settled higher on increased safe-haven demand from the rout in equity markets along with weakness in the euro on concern the European debt crisis may spread to France: Dollar Index +0.031, USDJPY -0.102, EURUSD -0.01979. Bullish factors included (1) increased safe-haven demand for the dollar after the stock market tumbled, (2) concern the European sovereign-debt crisis may spread to France after credit default swaps to insure the government bonds of France rose to a record, and (3) the slump in the British pound to a 2-1/2 week low against the dollar after the BOE said in its quarterly inflation report that the outlook for growth has weakened. Bearish factors included (1) speculation the Fed may boost its stimulus measures to bolster the economy, which would further weaken the dollar’s interest rate differentials and (2) strength in the Chinese yuan which rose to a 17-year high of 6.4120 against the dollar on speculation the PBOC will allow faster appreciation of the yuan to temper inflation after the Jul China trade surplus widened to a 2-year high and Jul China consumer prices climbed at their fastest pace in 3 years.

Sep crude oil prices this morning are down -7 cents a barrel and Sep gasoline is -0.60 of a cent per gallon. Sep crude oil and gasoline prices yesterday moved sharply higher after weekly crude and gasoline inventories unexpectedly declined along with speculation the Fed may boost stimulus measures to bolster the economy: CLU11 +$3.59, RBU11 +11.49. Bullish factors included (1) the unexpected decline in weekly DOE energy inventories (crude oil -5.22 million bbl versus expectations of +1.5 million bbl, gasoline -1.59 million bbl versus expectations of +900,000 and distillates -737,000 bbl versus expectations of +1.0 million bbl), (2) increased demand after total US fuel products supplied in the week ended Aug 5 surged 652,000 barrels a day, or +3.3%, to 20.3 million barrels a day, the highest in 7-1/2 months, and (3) speculation the Fed may implement further stimulus measures to spur the economy, which may boost fuel demand. Bearish factors included (1) a reversal in the dollar after the dollar index recovered from a 1-week low and settled sharply higher, which reduces investment demand in commodities, (2) the slump in stock prices, which undercuts confidence in the economic outlook and energy demand, (3) the action by the IEA to cut its 2011 global oil demand forecast to 89.5 million barrels a day, down -60,000 bbl from a Jul forecast, and warned that it may also need to cut its 2012 demand forecast as “storm clouds” threaten the economic recovery, and (4) customs data from China that showed Jul China crude imports fell -1% to 19.23 MMT, a 9-month low.

Earnings Reports

Earnings reports (confirmed releases, sorted by mkt cap): KSS-Kohl’s (BEST earnings consensus $1.08), SLE-Sara Lee (0.20), JWN-Nordstrom (0.74), NVDA-Nvidia (0.31), KOS-Kosmos Energy Ltd. (0.07), MCP-Molycorp (0.42), DV-Devry (1.04), RGLD-Royal Gold (0.40), RENN-Renren (0.00), BR-Broadridge Financial Solutions (0.91), AMCX-AMC Networks (0.49), AL-Air Lease (0.10), WEN-Wendy’s (0.05), TGP-Teekay LNG Partners LP (0.46), EAT-Brinker International (0.47).

Financial Calendar

0830 ET Weekly initial unemployment claims expected +5,000 to 405,000, previous -1,000 to 400,000. Weekly continuing claims expected -5,000 to 3.725 million, previous +10,000 to 3.730 million.

0830 ET Jun trade balance expected -$48.0 billion, May -$50.2 billion.

1100 ET Treasury announces amount of 5-year TIPS to be auctioned Aug 18 (previous $14 billion).

1300 ET Treasury auctions $16 billion 30-year T-bonds.

1630 ET Weekly money supply report and Fed balance sheet.

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