MarketView for December 29

 

 

Summary

 

The S&P 500 is on track to chalk up its best December in nearly two decades as share prices advanced in thin trading on Wednesday, lifted by economic optimism in 2011. The S&P has gained 6.8 percent so far this month and rose in 17 of the last 20 sessions. However, volume is about the lowest of the year because of the holidays and scarce economic news. The S&P, which has already passed the level on September 12, 2008 just before Lehman Brothers collapsed, is on course for its biggest December gain since 1991 when it rose 11.2 percent.

 

A number of major consumer-linked shares posted solid gains on Wednesday, with McDonald's up 1.1 percent to $77.27 and Walt Disney up 0.9 percent to $37.69. Both companies are Dow components.

 

BJ's Wholesale Club rose 7.1 percent to $47.63 after the New York Post reported buyout firm Leonard Green & Partners remained interested in buying the warehouse club operator and that it may launch a hostile bid.

 

Sears Holdings was up 6.4 percent to $74.49 after it said it launched an on-demand video service to compete with companies like Netflix. Netflix saw its share price fall 1.9 percent to $180.27 but is up more than 200 percent this year.

 

Molycorp, which owns a rare-earth mine in California, rose 6.8 percent to $49.34 after China reduced quotas for exporting the minerals, thus threatening to reduce already tight global supplies.

 

Brazilian oil firm Petrobras rose 4.9 percent to $25.89 after it said its reserves could rise significantly due to two deep-water oil fields.

 

Noble Energy and its Israeli exploration partners confirmed earlier estimates that the offshore Leviathan prospect was Israel's largest natural gas find. Noble rose 2.6 percent to $87.16.

 

Bond Market Firmer

 

Treasuries debt prices should stay firm into year-end, following a strong seven-year note auction on Wednesday. Government debt prices rose on Wednesday as investors took advantage of the third-last trading day of the year to extend duration, offset short exposures and position for new Fed purchases.

 

Many on Wall Street used the $29 billion auction of seven-year notes to purchase Treasuries, helping the market add to gains. Wednesday's sale had the highest participation of indirect bidders since June 2009.

 

The Fed will buy up to $27 billion in Treasuries and as much as $2.5 billion in TIPS, coming to market every day, after making purchases on only two days this week. Monday's purchase will comprise between $7 billion and $9 billion of debt maturing 2018 to 2020.

 

Investors wanting to square short Treasury positions into year-end also may have boosted demand in Wednesday's auction. Month-end extension, wherein investors buy longer-dated government debt to match the duration of their portfolio benchmarks, likely also boosted demand, he said.

 

Wednesday's auction came in sharp contrast with a $35 billion sale of two-year notes on Monday and a $35 billion auction of five-year notes on Tuesday, which both saw dealers take around 58 percent of the debt.

 

Dealers bought only 31.2 percent of the seven-year notes.

 

The most liquid seven-year notes were last up a point in price to yield 2.71 percent, down from 2.88 percent late Tuesday. The benchmark 10-year Treasury notes rose 1-6/32 in price to yield 3.34 percent, down from 3.49 percent late Tuesday. Thirty-year bonds rose 2-3/32 in price to yield 4.41 percent from 4.54 percent.

 

China’s Rare Earth Policy Of Concern

 

China's move to slash export quotas on rare earth minerals has raised fresh international trade concerns, and Japan's Sony Corp vowed on Wednesday to reduce its reliance on the minerals.

 

China, which produces about 97 percent of the global supply of rare earth minerals, cut its export quotas by 35 percent for the first half of 2011 versus a year ago, saying it wanted to preserve ample reserves. It also cautioned that it has not decided on the quotas for the second half of the year.

 

The little-known class of 17 related elements is used in numerous electronic devices and clean energy technology.

 

A European Commission spokesman said the European Union "notes the latest quota figures and expects China to respect its recent assurance of a guarantee of rare earth supplies to Europe." The United States, which earlier this month threatened possible World Trade Organization action over Chinese rare earth export restraints, voiced concern on Tuesday as well.

 

While Japanese giant Sony said China's move represented a hindrance to free trade, for other companies the Chinese action provided a boost.

 

Shares of Lynas Corp, which owns the world's richest known non-Chinese deposit of rare earth minerals, rose more than 10 percent even though it will be at least a year before it is capable of mining any material from a new lode in Australia.

 

Other rare earth companies, including China Rare Earth Holding Ltd, Arafura Resources, Alkane Resources and Greenland Minerals and Energy Ltd, also gained between 8 percent and 10 percent.

 

Shares in Colorado-based Molycorp closed Wednesday's session on the New York Stock Exchange up 6.76 percent at $49.30. That was its second-highest close ever and represented a nearly 400 percent jump from the company's initial public offering price of $14 in July.

 

Molycorp owns a rare earth mine in Mountain Pass, California, which is scheduled to resume production next year after a 10-year hiatus.

 

"Any reductions China makes in its 2011 exports versus 2010 levels will only exacerbate the global supply shortfall of rare earths we can expect in 2011," Molycorp CEO Mark Smith said in a statement.

 

U.S. makers of high-tech products such as Apple Inc's iPads and various Japanese companies have been scrambling to secure reliable supplies of the minerals outside of China as Beijing steadily reduces export allocations.

 

While Sony does not import or buy rare earth elements directly, the minerals are crucial for the production of components used in its finished products. These include magnets, condensers, and abrasives for polishing LCD glass, company spokeswoman Ayano Iguchi said.

 

Sony, maker of Bravia brand flat TVs, Vaio PCs and the PlayStation 3 videogame console, will look for ways to cut its use of rare earth elements, including developing alternative materials, Iguchi said.

 

"We cannot welcome rare earth export controls or any restrictions that hinder the system of free trade," Sony said in an e-mail statement in response to questions by Reuters.

 

point in time there is no direct impact on our company. But further restrictions could lead to a shortage of supply or rise in costs for related parts and materials," Sony said. "We will watch the situation carefully."

 

Wind turbines and hybrid cars are among the biggest users of rare earth minerals, which analysts say are facing a global supply crunch as demand swells. The minerals also are used in some weapons systems.

 

World demand for rare earth minerals at present is about 110,000 tons a year, with China accounting for about 75 percent of total demand with the remainder split between Japan, the United States and Europe, in descending order.

 

Demand is set to more than double to 250,000 tons by 2015. China's export quota cut for rare earth minerals for the first half of 2011 was initially reported on Tuesday as about 11 percent of quotas for the first half of 2010. But clarifications from China's government on Wednesday showed it was a 35 percent cut from the year-earlier period.

 

"Concerned parties should not estimate full-year quotas for rare earth minerals just by looking at the first set of quotas," China's Ministry of Commerce said.

 

Final quotas will take into account domestic production and demand both at home and abroad, according to the ministry.

 

Prices have surged for these minerals since authorities in Beijing slashed their rare earth exports by 40 percent this summer, saying China needed them for its economic development.