Market Outlook
Monday, June 07, 2010

Monday presents several economic reports. The schedule for today is:-

10:00 Employment Trends Index

11:00 SF Fed Conference: Asia and the New Financial Landscape

11:00 Hearing: Local Impact of the Gulf Spill

3:00 PM Consumer Credit

6:15 PM Bernanke: Keynote Address at Woodrow Wilson Center Dinner

Also, once again, there are a couple of companies reporting their quarterly earnings:-

• FuelCell Energy Inc. (FCEL) and

• The Pep Boys (PBY)

Monday sees investors enter the new week tentatively. The absence of any big moves comes after major indexes plummeted more than 3 percent Friday. Investors sold stocks following the Labor Department's monthly employment report that showed a drop in hiring by private employers in May. The weak report calls into question the strength and pace of a domestic economic recovery.

Analysts said the impact of the disappointing data was still being felt at the start of the week amid an atmosphere of overall risk aversion.

"I still think the nonfarm payrolls are having a negative effect. There's a bit of a hangover effect. ... They put any growth concerns back into the forefront of investors' minds," said Joshua Raymond, market strategist at City Index.

However, U.S. stock index futures have edged slightly higher this morning, following heavy losses in the previous session, though plenty of worries remained over the euro and the sustainability of the U.S. economic recovery.

Solid German data eased some concerns about a wobbly European economy.

The German data showed industrial orders jumped far more than expected in April, with indications of a rise in investments adding to signs that Europe's largest economy is on the path to durable growth.

Also the S&P looks ready to bounce off a key technical level.

Traders have pointed to critical support levels for the S&P 500 in the wake of Friday's sell-off in the absence of U.S. economic and earnings news. The index has tumbled 12.5 percent since its April 23 high for the year.

On Friday, the S&P 500 fell below 1,070, which was considered a support level for the index and closed just below the intraday low the market reached during the so-called "flash crash" on May 6.

There are few domestic economic reports due out early this week that could ease the concern brought on by the jobs report, so investors could turn their attention elsewhere for the next few days. That means the health of Europe's economy could again become the focus of traders and the Gulf of Mexico oil spill will also likely garner attention.

The weekly unemployment report due out Thursday is likely to get increased attention because the monthly jobs data was so disappointing. Economists expect initial jobless claims inched lower last week.

Retail sales and consumer sentiment reports are due out Friday.

Those two reports could be vital to investors regaining confidence because there is concern that without new jobs being created consumers will cut back on spending and their confidence will wane. Retailers' stocks were among the hardest hit after the employment report Friday.

Hungary's government backed off statements it made last week that it was facing a similar debt crisis to Greece, but that wasn't enough to calm ongoing concerns. European markets fell modestly Monday.

The euro fell to a new four-year low early in the day, but rebounded and is now trading higher. As it recovered from early morning losses, European markets have pared some of their losses.

The euro dropped as low as $1.1878 before bouncing back to $1.1954.

The Energy Sector

Shares of BP (BP) rose 2.8% in London on Monday and were expected to remain in the spotlight. The company said that the cap installed last week over a portion of the oil leak in the Gulf of Mexico continues to capture oil and that the amount collected is expected to increase over coming days.

The latest effort, called a lower marine riser package, collected 10,500 barrels of oil on June 5, compared with an estimated 12,000 to 19,000 barrels leaking from the well each day. BP stock futures rebounded nearly 4% on the news early Monday.

The rebound in futures comes after stocks posted sharp losses late last week.

The oil giant's shares have fallen about 24% over the last month, as the company has struggled to contain and clean up the Gulf oil spill.

There are a few further points to the mornings trading which need to be considered:-

• Gold is slipping as well this morning, losing $$2.10 to sit at $1,215.60 an ounce in London.

• The U.S. dollar is trading slightly lower this morning against strength in the euro. As a result, the U.S. Dollar Index is down 0.05% in pre-market trading.

• Benchmark crude for July delivery remains weak on concerns of over a weak economy and slackening demand in the U.S. In electronic trading, the most active contract was down 3 cents at $71.48 per barrel.

• Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,203,231 call contracts traded on Friday, compared to 719,353 put contracts.

• Treasury prices were slightly higher, pushing the benchmark 10-year note's yield down to 3.2% from 3.22% late Friday. Bond prices and yields move in opposite directions.

Overseas Markets

Asian shares fell sharply to start the trading week as markets played catch-up to Wall Street's Friday decline, analysts said. European shares were lower as investors pondered growth concerns and worries about the euro.

European Concerns

Hungarian Parliament

Hungary on Friday became the latest country to apply added pressure to the euro, sending the single currency to new four-year lows. The single currency pared losses Monday to trade at $1.1976, little changed from Friday.

Hungarian officials had roiled the markets with warnings that the nation was on the verge of a Greece-style default. Over the weekend, officials attempted to soothe worries, saying the country would meet its deficit target.

The situation has served to highlight concerns about the exposure of European banks to Hungary and to add to tensions surrounding sovereign-debt problems in the single-currency region, economists said.

European shares European markets lost ground in early trading.

Overseas, Britain's FTSE 100 dropped 0.3 percent, Germany's DAX index fell 0.2 percent, and France's CAC-40 fell 0.6 percent.

In Europe, at midday, London -0.4%. Paris -0.6%. Frankfurt -0.1%.

Earlier in Asia, markets tumbled, as Japan's Nikkei index closed nearly 4% down and Hong Kong's Hang Seng index lost more than 2%.

In Asia, Japan -3.8% to 9520.8. Hong Kong -2.0% to 19378. China -1.6% to 2512. India -2.0% to 16781.

Futures Trading

Ahead of the opening bell, Dow Jones Industrial Average (DJIA) futures rose 1, or less than 0.1 percent, to 9,947. S&P 500 Index (SPX) futures rose 1.70, or 0.2 percent, to 1,067.80, while Nasdaq 100 index futures rose 4.75, or 0.3 percent, to 1,839.00.

Futures: Dow +0.1%. S&P +0.2%. Nasdaq +0.2%. Crude -0.2% to $71.37. Gold -0.25% to $1214.60.

US futures-june07,2010

Company News

Late Friday, Oracle Corp.(ORCL) announced that it now expects up to $825 million in additional restructuring costs related to its acquisition of Sun Microsystems Inc., due to additional severance payments and other items in Europe and Asia. Oracle had previously disclosed an estimated $325 million in restructuring costs related to its $5.6 billion purchase of Sun, which closed earlier this year. The additional restructuring costs will be incurred "through calendar 2011," Oracle said.

Wal-Mart Stores Inc. (WMT), which grew its overseas sales to over $100 billion for the first time last year, is looking for acquisitions around the world, said Doug McMillon, head of the overseas division, which represents about 25% of the world's largest retailer's total. McMillon said he's also looking at ways including possible acquisitions to enter Russia. He said the company looked at its recent purchase of the British operations of the deep discounter Netto "as a real estate transaction." He also said Wal-Mart won't rule out expanding in China through opening its own shopping center, a strategy that its rival Tesco has already taken.

Some Interesting News-

• On Monday evening, Federal Reserve chairman Ben Bernanke will answer questions about the economy at an event in Washington.

• Apple Inc (AAPL) shares gained 1 percent to $258.63 in premarket trading ahead of what is widely expected to be the unveiling of its newest iPhone on Monday.

• U.S. listed shares of BP Plc (BP) gained 4.4 percent to $38.78 premarket after the company said it was capturing most of the oil gushing from its gushing Gulf of Mexico well, and that an additional capture system would be ready in mid-June.

• In merger news, Spain's Grifols SA (GRLS) agreed to buy Talecris Biotherapeutics Holdings Corp (TLCR), which produces plasma-based protein therapies, for $3.4 billion in a move to expand its business in blood products. Talecris jumped 45.3 percent to $24.01 in light premarket trade.

• Reliance Communications Ltd (RLCM ) and AT&T Inc (T) have talked about the U.S. telecommunications giant taking a significant minority stake in the Indian company, the Wall Street Journal reported, citing sources.

• Spanish healthcare company Grifols agreed to buy Talecris (TLCR) for $4B including debt. Both companies produce treatments based on blood plasma, and Grifols expects the deal to create around $230M in annual synergies. The acquisition is good news for Cerberus Capital Management, which holds a significant stake in Talecris and previously tried to sell the company.

• Prudential (PUK) doesn't plan to revise its bid for AIG's (AIG) Asian unit, the company said in an emailed statement, denying earlier reports that Prudential CEO Tidjane Thiam was considering a "daring attempt" to resurrect his failed AIA bid. The company remains committed to the region through its existing "very successful business," and AIA rumors are "misguided and inaccurate." At the annual general meeting today, Thiam will have to convince investors calling for his resignation that he has an alternate plan for Asian expansion.

• AT&T (T) has reportedly held informal talks with Reliance Communications about potentially taking a large minority stake in the Indian cellphone company. Talks are still in early stages, but a deal would give AT&T an international lift as the domestic market heads towards saturation. Reliance said yesterday that its board had approved the sale of up to a 26% equity stake to raise money for debt reduction and network upgrades; the stake could be worth nearly $2B at current market levels.

• After tense weekend negotiations, G-20 finance ministers agreed to drop the idea of a global bank tax, bowing to pressure from Canada and other critics of the levy. Officials reported progress on tightening global banking standards, but the requirement for banks to increase their capital cushions could take years to implement because it conflicts with the current goal of increasing lending. Conflicts also abounded over prescriptions for growth, with European nations pushing for lower budget deficits and the U.S. warning against relying on exports instead of domestic demand.

• BP (BP) was finally able to report some success in its efforts to stem the Gulf of Mexico spill, as its containment cap collected more than 10,000 barrels of oil on Saturday. The company hopes to increase the amount captured over the next few days. Despite the progress, the Coast Guard warned "there will be oil out there for months to come" and clean-up efforts could extend into the fall. Lawmakers will hold another hearing on the spill's impact this morning, this time heading down to Louisiana for a field hearing.

• The airline industry will post a $2.5B profit this year thanks to a rebounding economy, according to the IATA, reversing a recent prediction of a $2.8B deficit. A profit would be the industry's first since 2007, and only its third profitable year in a decade as airlines struggled with the fallout from terrorist attacks and the financial crisis, among other problems. The IATA expects it will now take two years, not three, for sales to rebound to peak levels.

• "It is blatant that Hungary is not Greece," Hungarian Economy Minister Gyorgy Matolcsy said today, and "there is no need for new austerity plans." His comments followed recent remarks from other government officials suggesting that Hungary could face a possible default. The conflicting comments have sent Hungary's currency, the forint, down against the euro, while bond yields have risen.

• Three more banks were closed on Friday, bringing this year's failures to 81 so far. The failures in Nebraska, Mississippi and Illinois are expected to cost the FDIC's insurance fund at least $312M.


Traders remain wary this morning after Friday's drop, with the DJIA and the SPX trading slightly above fair value. Finally, the CBOE Market Volatility Index (VIX) skyrocketed 20% on Friday to close back above its 10-day and 20-day moving averages.

"It has been a headline-driven market so we are going to have to wait for some headlines for either a move for stability or a continuation of the weakness," said Andre Bakhos, director of market analytics at Lek Securities in New York.

"We got whaled on Friday so we are looking for a little stability. There are very few headlines to do it. We are sitting at support so people may be picking away at things."

"We had a tremendously crazy week last week. Everybody's looking for some type of bounce off that bottom," said Anthony Conroy, head trader at BNY ConvergEx Group.

As I have mentioned on numerous occasions this is the time to be making the most of trading options.

Success is simple. Do what's right, the right way, at the right time.

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