Market Happenings for Wednesday, August 10, 2011

Markets are down 3.50% at this point. RL is a big winner this morning, up +7% and DIS and AMD are the big losers, each down -8%.

U.S. Stock News

September S&Ps this morning are trading down -9.40 points. The US stock market yesterday erased overnight losses and moved higher on short covering and bargain hunting and then surged in afternoon trade after the Fed promised more stimulus measures if the economy continues to falter: Dow Jones +3.98%, S&P 500 +4.74%, Nasdaq Composite +5.29%. The S&P 500 posted an 11-month low, the Dow fell to a 10-1/2 month low and the Nasdaq dropped to a 10-month low but all the indexes erased their losses and finished higher. Bullish factors included (1) bargain hunting by stock investors after the price-earnings ratio of stocks in the S&P 500 fell to 11.3 times estimated income, the lowest in over 2-years, (2) the post-FOMC statement in which the Fed said it will hold the funds rate “exceptionally low” through at least mid-2013 and it was prepared to use additional policy tools “as appropriate,” (3) strength in commodity and energy producers after crude oil rose and gold prices surged to another record high, and (4) the continued decline in interest rates as the 10-year T-note yield fell to an all-time low of 2.034%.

Bearish factors included (1) the -0.3% decline in Q2 nonfarm productivity along with the downward revision to Q1 nonfarm productivity to -0.6% from the originally reported +1.8%, which shows the first back-to-back decrease in productivity since Q3 and Q4 of 2008 and may keep employers from hiring additional workers or increasing wages, (2) the post-FOMC statement that said “downside risks” to the economic outlook have increased as labor market indicators have “deteriorated” and US household spending has “flattened out,” (3) the larger-than-expected +6.5% gain in Jul China consumer prices, the most in 3 years which may limit stimulus measures the Chinese government can use to prop up its economy, and (4) comments from ECB Council member Nowotny who said there is “fear” that the global economy could enter a downturn again and that the current situation had “parallels” to the period after Lehman Brothers collapsed with banks parking funds at central banks.

The Markets

September 10-year T-notes this morning are trading down -8.5 ticks. T-note prices yesterday retreated from a 2-1/2 year high in overnight trade as the stock market recovered but T-notes erased their losses and surged to an all-time nearest-futures high on strong demand for the Treasury’s $32 billion 3-year T-note auction along with the post-FOMC statement that said “downside risks” to the economic outlook had increased: TYU11 +1-8/32, FVU11 +25, EDZ11 +5.0. The yield on the 10-year T-note fell to an all-time low of 2.034%. Bullish factors included (1) strong safe-haven demand during overnight trade after global stock markets sold off, (2) strong demand for the Treasury’s $32 billion 3-year auction that had a bid-to-cover ratio of 3.29, higher than the 12-auction average of 3.16, while indirect bidders, a class of investors that includes foreign central banks, took 47.9% of the auctioned 3-year T-notes, well above the 12-auction average of 35.1%, and (3) the post-FOMC statement that said the Fed will hold the funds rate “exceptionally low” through at least mid-2013 as “downside risks” to the economic outlook increased. Bearish factors included (1) reduced safe-haven demand for Treasuries after equity prices rallied sharply late in the session, (2) the downward revision to Q1 nonfarm productivity to -0.6% from the originally reported +1.8% and the upward revision to Q1 unit labor costs to +4.8% from the originally reported +0.7%, their biggest gain since Q4 of 2008, (3) the dissention by Minneapolis Fed President Kocherlakota, Dallas Fed President Fisher and Philadelphia Fed President Plosser on Tuesday’s FOMC decision, and (4) supply pressures ahead of the Treasury’s $24 billion auction of 10-year T-notes on Wed.

The dollar index this morning is lower with the dollar/yen -0.44 yen and the euro/dollar -0.15 cents. The dollar index yesterday settled lower as the stock market recovered and on speculation the Fed may boost its stimulus measures to ensure the economy stays afloat: Dollar Index -0.186, USDJPY -0.810, EURUSD +0.01975. Bearish factors included (1) reduced safe-haven demand for the dollar after the stock market erased overnight losses and settled sharply higher and (2) speculation the Fed may boost stimulus measures to ensure an economic recovery, which may further weaken the dollar’s interest rate differentials. Bullish factors included (1) the larger-than-expected decline in Jun German exports, which is euro negative and (2) comments from ECB Council member Nowotny which may boost the safe-haven demand for the dollar when he said there is “fear” that the global economy could enter a downturn again.

Sep crude oil prices this morning are up +$3.16 a barrel and Sep gasoline is +8.85 cents per gallon. Sep crude oil and gasoline prices yesterday recovered from early losses tied to stock market weakness and OPEC’s action to cut its global oil demand forecast but couldn’t hold their gains and closed lower after the Fed refrained from announcing additional stimulus measures: CLU11 -$2.01, RBU11 -2.38. Sep crude posted a 10-1/2 month low and Sep gasoline fell to a 5-1/2 month low. Bearish factors included (1) OPEC’s action to cut its global consumption forecast for this year by -150,000 barrels a day to 88.1 million barrels a day, citing “dark clouds” over the global economy as developing nations “struggle with rising sovereign debt and high unemployment,” (2) the action by the US Energy Department to cut its crude oil price forecast for 2011 to an average $95.71 a barrel from $98.43, (3) the Fed standing pat and not announcing any additional stimulus measures to spur the economy, and (4) the outlook for weekly crude supplies to increase for a third week when the DOE releases its weekly inventory figures on Wed. Bullish factors included (1) a weaker dollar, which encourages investment demand in commodities and (2) the rebound in equity prices which recovered from sharp losses overnight to trade higher, which boosts confidence in the economic outlook and energy demand. Expectations for Wednesday’s weekly DOE inventories are for crude oil supplies to rise +1.5 million bbl, gasoline stockpiles to build by +900,000 bbl, distillate inventories to gain +1.0 million bbl and the refinery capacity rate to fall -0.3 to 89.0%.

Earnings Reports

Earnings reports (confirmed releases, sorted by mkt cap): CSCO-Cisco Systems (BEST earnings consensus $0.38), NWSA-News Corp. (0.30), RL-Polo Raplph Lauren (1.47), M-Macy’s (0.50), BAP-Credicorp Ltd. (2.03), UPL-Ultra Petroleum (0.65), CSC-Computer Sciences (0.69), AAP-Advanced Auto Parts (1.38), AVT-Avnet (1.15), AH-Accretive Health (0.10), CZZ-Cosan Ltd. (0.16), IOC-InterOil (0.13), HAR-Harman International Industries (0.44), HHC-Howard Hughes Corp. (0.00), ABH-AbitibiBowater (0.26), RATE-Bankrate (0.11).

Financial Calendar

0700 ET Weekly MBA mortgage applications, previous +7.1% with purchase mortgage sub-index +5.1% and refinancing mortgage sub-index +7.8%.

1000 ET Jun wholesale inventories expected +1.0%, May +1.8%.

1300 ET Treasury auctions $24 billion 10-year T-notes.

1400 ET Jul monthly budget statement expected -$135.0 billion, Jun -$43.1 billion.

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