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U.S Market Update

Wed, Jun 17 2009, 16:10 GMT

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- US equity markets are having trouble finding any real momentum one way or another this morning. European bourses remain heavy while stock prices both here and abroad have been held back by cautious comments from FedEx, a broad slate of bank ratings downgrades from S&P and a CPI reading suggesting an economic recovery is minimal at best. The May Consumer Price Index was barely positive on a m/m basis, while the y/y figure showed the biggest annual drop in the series since 1950. The data provides evidence that the recession is keeping inflation in check or that deflation is around the corner, depending on one's point of view. Front-month NYMEX crude is down again this morning, with the contract under $70 led by a decline in gasoline prices and on the back of increasing supplies.

- The CPI data has enabled bond bulls to remain in charge. Another coupon purchase from the Fed and no new supply coming to market this week has kept yields retreating. The 10-year is backed off some 40 basis points from last week's run towards 4% while the long bond is moving away from the 4.5% level. Fed fund futures continue to rebound from the selling experienced post the jobs report and now price in roughly a 40% the Fed hikes rates by the end of the year.

- The White House is expected to officially present its plan for a total overhaul of the US financial regulatory structure later today, although the broad contours of the plan have been discussed by various officials over recent days. Last night a senior Obama Administration official confirmed earlier reports that the plan would require firms that create various asset-backed securities to retain a 5% stake in their securitizations and would address money market mutual funds. This morning, White House Advisor Goolsbee told CNBC that the Fed would be tapped as a "day-to-day" supervisor of financial institutions. Note also that yesterday afternoon Senator Reed introduced a bill to regulate hedge funds, with legislation that would require hedge funds, private equity funds and venture capital funds to register with SEC.

- Financial names have been loosing ground since the open after S&P downgraded ratings and outlook on 22 US banks. S&P said that it believes operating conditions for the banking industry will become less favorable than they have been in the past, characterized by greater volatility in financial markets during credit cycles and tighter regulatory supervision. It also warned that the loss content of loan portfolios should increase, but recent capital rebuilding will likely help banks defray these losses. Most of the downgrades were for regional banks, although Wells Fargo was a notable national bank that was downgraded as well. Shares of WFC are down 5%. Regionals are getting hit across the board, with ZION and FITB leading the charge, both down around 8%. USB is a an exception, with its repayment of $6.6N in TARP funding buoying its shares. Shares of all the leading banks are in the red, with Citi and BoA down more than 5% in early trading.

- In earnings, FedEx's earnings soundly beat expectations, although revenue was well below par. The firm's guidance for next quarter was notably below analysts' forecasts; FedEx's CFO noted that the recent run-up in fuel prices would have a significant negative impact on its results next quarter. A lack of visibility on fuel prices kept FedEx from offering full-year guidance. On the conference call, the CEO said that if oil stays where it is, FedEx should recoup fiscal Q1 losses related to fuel charges in fiscal Q3 & Q4. Adobe reported in line with expectations, and offered very broad guidance ranges for next quarter. Executives said the firm's North American market has continued to stabilize, while Europe has remained weak. Scotts Miracle Gro fertilized its outlook for the full year, strengthening its earnings forecast on double-digit y/y sales increases year to date. Silicon Labs has joined other semiconductor names in raising guidance thanks to stronger consumer demand.

- Potash names are getting slammed this morning after German fertilizer manufacturer K+S slashed its 2009 sales forecast to 4-4.5M tons from 6M prior due to weak demand. The company said there were no signs of recovery in European demand, and that declining demand was putting pressure on prices. Shares of MOS, POT and AGU are down around 8% on the news mid morning, while the Frankfurt-listed shares of K+S [SDF.GE] are down a whopping 16%. Solar names are weak after Canadian Solar said it would ramp up module production to 800MW this year from its prior forecast of 620MW. CSIQ is down 8%, while solar sector ETF TAN is down 4%. Also note that Star Scientific lost a major case in its ongoing attempts to enforce patents against Reynolds American, sending shares of STSI down 80%. Star has vowed to keep fighting in this case.

- In currencies, the greenback maintained a softer tone against the euro during the New York session but continued to consolidate within a 1.3800-1.3930 range, with price action capped by sovereign names. Overall the dollar's tone weighed down by the largest annual CPI drop since 1950, cautious quarterly guidance by FedEx and the banking jitters from S&P's big move. The soft US CPI number fuelled expectations that the Fed would keep interest rates low. Risk aversion is helping the JPY firm up against most of its major pairs, with USD/JPY probing below the 96 area and GBP/JPY dipping below the 156 handle. China's Premier Wen Jiabao commented earlier that the potential economic recovery was at a critical juncture and this weiged upon equity prices and commodities. The CAD and AUD saw the bulk of their European gains erode on the back of softer oil and metal prices. NYMEX crude back below the $70/barrel while spot gold hugging the lower end of the $930/oz level. USD/CAD tested the 1.14 level for fresh 3-week highs. AUD/USD unable to retake the 0.80 level.

Published on  Wed, Jun 17 2009, 16:10 GMT