Tuesday has quite a few economic reports scheduled. They are:-
7:45 … ICSC Retail Store Sales
8:30 … Productivity and Costs
8:55 … Redbook Chain Store Sales
10:00 … IBD/TIPP Economic Optimism
10:00 … Wholesale Trade
12:00 PM… Treasury's Barr: 'The Path Forward for Financial Reform'
1:00 PM … Results of $34B, 3-Year Note Auction
2:15 PM… FOMC Announcement
5:00 PM … ABC Consumer Confidence Index
Also the following companies are reporting their quarterly earnings:-
• Convergys Corp. (CVG),
• Fossil Inc. (FOSL),
• JA Solar Holdings Co., Ltd. (JASO),
• Cree Inc. (CREE),
• LDK Solar Co. Ltd. (LDK),
• SunPower Corp. (SPWRA), and
• The Walt Disney Company (DIS).
Tuesday sees U.S. stocks poised to fall, as investors eyed a drop in overseas markets and awaited the latest statement from the Federal Reserve.
U.S. stock futures fell as nervousness dominated sentiment ahead of the Federal Reserve's monetary-policy announcement later in the session and following weaker-than-expected import data from China.
Investors may be jittery ahead of the results of the central bank's latest policy meeting, due out at 2:15 p.m. ET.
The Fed is widely expected to keep interest rates at historic lows near zero, but investors will be more focused on what policymakers say about the recovery and their plan for propping up the economy.
Investors will also analyze a report on business productivity in the second quarter, which is expected to slow to 0.1% from the 2.8% in the first quarter, according to a consensus estimate from Briefing.com. The slowdown in productivity could be a good sign because it means employers have halted layoffs and are running near peak efficiency. To grow further, companies would have to hire additional staff. High unemployment is a major obstacle to a stronger recovery.
June Wholesale Trades
The Commerce Department will release a reading on June wholesale trades, which economists expect wholesale inventories and sales both likely rose in June, though inventories grew at a slower pace than May. Inventories likely increased 0.4 percent in June after rising 0.5 percent in May. Sales are predicted to have risen 0.5 percent in June after falling 0.3 percent in May.
Notes of Importance
There are a few further points to the mornings trading which need to be considered:-
• The Dow Jones Industrial Average (DJIA) threatened to break out above 10,700 on Monday, however, the blue-chip barometer remains trapped between this resistance level and support near 10,600. The DJIA has not strayed far from this trading range for the past six sessions.
• The S&P 500 Index (SPX) remains trapped in a similar range between support at its 200-day moving average and resistance near 1,130.
• Gold futures are off $4.30 at $1,198.30 an ounce, as the malleable metal once again swings below the $1,200 mark.
• The U.S. Dollar Index is in rally mode this morning, gaining 0.52% to trade at 81.13 ahead of this afternoon's Fed statement on monetary policy. The index set a three-month low on Friday last week, and is now challenging resistance at its 10-day moving average, which it has not closed a session above since July 21.
• Benchmark crude futures are threatening the $80 region, with the front-month contract off $1.10 to $80.30 per barrel in electronic trading.
• Bonds: Prices for U.S. Treasurys were a little higher. The yield on the 10-year note was 2.82%. The government is scheduled to auction $74 billion worth of debt this week, beginning with $34 billion worth of 3-year notes on Tuesday.
• Equity option activity on the Chicago Board Options Exchange (CBOE) saw 843,785 call contracts traded on Monday, compared to 483,274 put contracts.
Overseas markets fell after Chinese trade figures showed a steep slowdown in the growth rate of imports, which has added new concerns to the pace of a global recovery. China has been looked at as a country that could help offset slowing demand for goods in the U.S.
The declines came after data showed that China's July trade surplus surged to $28.7 billion, as exports soared 38.1%. However, imports rose 22.7%, showing a bigger-than-expected deceleration in import growth, partly a result of slowing domestic demand amid policy tightening.
"We have export growth in China easing but still relatively strong, a big Chinese trade surplus, an even bigger U.S. trade deficit, a weaker yuan relative to the euro and yen, but hardly any change against the dollar in recent weeks," said Brian Jackson from RBC Capital Markets in a note to clients. "These all suggest that pressure for further gains in the yuan against the dollar is likely to build."
The Bank of Japan on Tuesday held off on new policy steps to combat a stronger yen, saving its limited firepower in case the currency's rise accelerates and threatens the country's fragile recovery.
European share markets: fell back in the early going. Britain's FTSE 100 was down 0.7% in morning trading. France's CAC 40 and Germany's DAX posted declines of about 1%.
• In Europe at midday, London -0.5%. Paris +1.0%. Frankfurt +0.6%.
The dollar gained against the euro and U.K. pound, but weakened versus the Japanese yen.
Earlier in Asia, Chinese shares led declines. The Shanghai Composite finished the session down 2.9%. The Hang Seng in Hong Kong lost 1.5% and Japan's Nikkei slipped 0.2%.
• In Asia, Japan -0.2% to 9551. Hong Kong -1.5% to 21474. China -2.9% to 2595. India -0.4% to 18220.
As of 6:15 a.m. in New York, the Dow Jones Industrial Average futures were down 61 points, or 0.58%, to 10605, the S&P 500 futures were lower by 6.3 points to 1119.30 and the Nasdaq 100 futures were down 11 points to 1902.75.
• Futures: Dow -0.5%. S&P -0.6%. Nasdaq -0.4%. Crude -1.3% to $80.44. Gold -0.4% to $1197.40.
Ambac Financial Group Inc. (ABK) posted a second-quarter net loss of $57.6 million, or 20 cents per share, up from last year's net loss of $2.37 billion, or $8.24 per share, in the same period. Because of the poor quarter, the company said that it is preparing a bankruptcy filing. "Ambac is currently pursuing raising additional capital and is also pursuing a restructuring of its outstanding debt through a prepackaged bankruptcy proceeding," Ambac said.
ABK competitor MBIA Inc. (MBI) posted a second-quarter profit of $1.3 billion, or $6.32 per share, up from net income of $895 million, or $4.30 per share, last year. Adjusted pre-tax income, which excludes a $1.5 billion derivatives gain and several other items, was $14 million in the latest period.
United Airlines parent UAL Inc. (UAUA) said that traffic rose 2.1% to 11.39 billion revenue passenger miles in July from 11.15 billion a year ago. A revenue passenger mile equals one passenger flown one mile. July capacity at United rose 1.8% to 13.06 billion available seat miles from a year ago. Load factor increased to 87.2% from 86.9% in the year-ago period.
BP (BP) said late Monday that it had made a $3 billion deposit into the $20 billion escrow account, from which the oil giant will pay for claims to those who suffered from the effects of the Gulf Coast oil spill. Shares of BP were down 1.3% in pre-market trading.
Walt Disney (DIS) will report after today's closing bell. Analysts expected Disney to report a profit on average of 58 cents per share, according to data by Thomson Reuters.
Some Interesting News
• Google, Verizon propose net neutrality rules. Google (GOOG) and Verizon (VZ) issued a joint legislative proposal on an open internet, laying out seven principles that include a net neutrality enforceable on wireline networks but not on wireless. The agreement does ask for transparency in network management on both wireline and wireless networks. Despite the buzz around the joint announcement, the practical impact is limited; the agreement basically sticks to the status quo on net neutrality, has no teeth unless the FCC makes it part of its official rules, and allows Verizon to block content or services on its wireless network as long as it informs consumers.
• S.Korea raids Google office. South Korean police raided Google's (GOOG) office in Seoul this morning on suspicions the company had illegally collected data on users. Google has been preparing since late last year to launch its 'Street View' in South Korea, a service now notorious for various privacy breaches.
• GDF Suez, International Power form energy powerhouse. As expected, GDF Suez (GDFZY.PK) and International Power (IPRPY.PK) agreed to a tie-up that will see GDF take control of 70% of the combined company, while International Power shareholders will own the remaining 30%. As part of the deal, GDF will transfer some of its power plants to International Power and pay shareholders a special dividend of 92 pence a share ($1.45). Both companies also released their H1 results this morning: International Power's net profit fell 49% to £199M ($316M), revenue -16% to £1.6B. GDF net profit rose 9.3% to €3.6B ($4.7B), revenue +0.3% to €42.3B.
• Elan postpones spinoff. Elan (ELN) announced it would delay the planned spinoff of EDT, its drug delivery business, as "market conditions at this time are not conducive to an appropriate valuation." The company reaffirmed its 2010 financial outlook of adjusted earnings of more than $150M, and expects to retire up to approximately $500M in outstanding debt due to mature in November 2011 and November 2013.
• KKR shelves common offering. KKR (KKR) canceled its plans for a $500M common stock offering, a setback for the firm that was listed on the NYSE less than a month ago. The company, which had planned to use the proceeds to expand its business and for general corporate purposes, didn't provide an explanation for the cancellation. KKR also reported economic net income of $433.1M in Q2, down from a pro forma figure of $613.5M a year ago.
• SanFran Fed: Economy to deteriorate. The economy “is likely to deteriorate progressively starting sometime next summer," according to researchers at the San Francisco Fed. Over the next 18-24 months, the odds of another recession are higher than that of expansion, as measures of consumer spending and confidence have dropped and private hiring has fallen short of expectations.
• Lehman, HSBC face minibond suit. A New York judge ruled yesterday that investors may sue Lehman Brothers (LEHMQ.PK) and HSBC (HBC) over $1.6B in now-worthless securities sold to retail investors in Hong Kong. The plaintiffs, who bought structured financial notes called minibonds, are seeking class action status; Hong Kong doesn't have a mechanism for filing class action suits. Premarket: HBC -0.9% (7:00 ET).
• Dozens of funds nearly broke the buck. Sixty-two money market funds in the U.S. and Europe nearly broke the buck during the financial crisis, coming dangerously close to falling beneath a constant $1 per share price, according to Moody's. At least 20 firms that manage "prime" money funds injected at least $12.1B into their funds to preserve principal and prevent investors from credit losses. Moody's didn't identify the funds.
• Skype calls for IPO. Luxembourg-based internet telephony provider Skype filed for an IPO of American depository shares. Net income for the first half was only $13M, and much of it was from interest income, but its gross margins are 51% and have been expanding steadily. As of the end of June, Skype averaged 124M users per month, with 8.1M paying users; the company plans to continue expanding its overall user base while working to convert more users into paying customers. The company, which is looking to trade on Nasdaq, didn't specify the number of shares in its IPO or the price range.
• BP, U.S. near deal on escrow fund. BP (BP) made an initial $3B deposit into the $20B escrow account established to pay for Gulf spill claims, and is said to be close to an agreement with government officials as to how to guarantee the remaining $17B obligation. BP is likely to use future revenues to guarantee its fund, a move that gives both sides an incentive for production to continue in the Gulf. There had also been discussion of securing the fund with BP's oil fields in the Gulf, but sources said the government didn't want to end up owning wells. These options provide the government with collateral in case BP's efforts to generate the funds through ongoing operations and asset sales fall short. Premarket: BP -1.6% (7:00 ET).
• Faulty ignition prompts Honda recalls. Honda (HMC) recalled 384K vehicles due to a faulty ignition system that could allow the car to be switched off without being placed in park, increasing the chance the vehicle could roll. The recall affects Accord and Civic 2003 models and Element 2003-2004 models. The company received several complaints, reports of a small number of accidents and one injury from the problem.
• News Corp. cuts Chinese TV stake. News Corp. (NWS) will sell control of its three Chinese TV channels to a fund backed by China Media Capital, China's second largest media company. It marks a defeat for the company, which had struggled in the Chinese market for years, and a shift in strategy as profitable growth in China now seems less likely in the face of various restrictions on trade. Financial terms of the deal weren't disclosed.
• U.S., U.K. probe Goldman disclosure timing. Regulators in the U.S. and Britain are investigating the timing of Goldman Sachs' (GS) disclosure that it was the subject of a federal civil probe. The timing of the disclosure is part of larger, ongoing investigations into the bank's marketing of CDOs tied to subprime mortgages.
• BofA could get capital boost from China bank stake. Bank of America (BAC) may add $13B to its book value because of its 11% stake in China Construction Bank. The stake had been valued at the original cost of $9.2B because it couldn't be sold until August 2011, but with the lockup period expiring in less than a year, accounting rules require the stake to be carried at its current market value of $22.9B. The $13B boost, which is expected to be included in October's Q3 report, will help lessen the blow from the bank's potential $10B charge tied to new regulations. Premarket: BAC -0.8% (7:00 ET).
• BoJ holds steady.The Bank of Japan held its key policy rate steady at 0.1%, as expected, and maintained its credit programs for lenders by a unanimous vote. In their statement, policymakers made no direct mention of the yen, which is approaching a 15-year high and threatening a weakening economic recovery, but the language indicated concern about how overseas events are affecting the currency.
U.S. stocks kicked off the week on a positive note Monday, with the Dow gaining 0.4%, the S&P 500 adding 0.6% and the Nasdaq rising 0.8%.
But investors may be jittery ahead of the results of the central bank's latest policy meeting, due out at 2:15 p.m. ET.
Chairman Ben Bernanke said a few weeks ago that the recovery's pace is "unusually uncertain," which spooked investors. Earnings and economic reports over the past couple of months have painted a mixed picture of the economy's health. Earnings have been very strong and companies have become more upbeat, but economic data continues to point toward slowing growth.
Since the economic picture began to sour in early June, there has been a growing debate among traders on whether the Fed would have both the ability and the political will to further stimulate the economy if necessary to avoid a "double-dip" recession.
But now following the July jobs report which showed the nation lost 131,000 jobs in the month and private sector job creation remains minimal, a growing majority of investors and economists believe the Fed now has no choice.
"As usual it will not be the actual rate decision that takes center stage but the potential second round of QE that has been rumored for the last couple of days," said James Hughes with CMC Markets. "Many now expect the Fed to loosen monetary policy and add further stimulus in a reaction to the weaker economic data that we have seen over the last couple of months."
Interest rates are expected to remain unchanged at their 0-0.25% range they have been for months now. But economists expect the Fed may add language to its policy statement that indicates the bank will begin to buy, or least consider buying, Treasuries and other bonds to help lower borrowing costs.
Still, many observers think the Fed will likely resist pressure to buy bonds for the time being, but it may adjust the language of its statement to show growing awareness of economic uncertainty.
"Based on the Fed's own words, this current level of uncertainty is actually common at this stage of the economic cycle," said Jeffrey Kleintop, chief market strategist at LPL Financial.
"We believe the Fed will remain on hold this week, but could undertake additional stimulus if the uncertainty lingers later this year," he said in a note.
"We're seeing some squaring up of short positions ahead of the Fed, and there is some risk-off sentiment as well as Asian stocks closed lower, prompting a sell-off in high yielders such as the Australian dollar," said Christian Lawrence, currency strategist at RBC Capital Markets.
Societe Generale said it was bullish on U.S. Treasuries on the possibly of more quantitative easing.
"Scaring the market with an early move is a clear drawback, but acting late to fight the deflation risk would be even more costly," it said in a note.
"All in all, Treasuries might pull back a touch if the Fed fails to deliver today, but this will prove to be a buying opportunity: the QE debate will come back soon anyway unless the economy or the inflation data quickly turn around."
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