MarketView for July 1

 

 

Summary

 

Stocks rose on Wednesday, the start of the third quarter, as reassuring manufacturing data from China, Europe and the United States reinforced hopes that the world's economy is on the road to recovery. A day after the benchmark S&P 500 wrapped up its best quarter in a decade; Wall Street sent funds flowing into stocks in growth-sensitive sectors such as energy, industrials, technology, and materials.

 

However, the release of the all-important June non-farm payrolls data just a day away, some caution prevailed that resulted in the key equity indexes ending the day sharply off their highs. Other data on Wednesday indicated that the manufacturing sector contracted in June but at a slower pace than in May. The Institute for Supply Management said its index of national factory activity edged up to 44.8 to in June from 42.8 in May.

 

A weaker dollar underpinned stocks of multinational companies such as Coca-Cola, up 2.5 percent at $49.18, as investors bet the currency's decline might increase overseas earnings. Coca-Cola is one of the best-known defensive stocks whose shares are thought to be better able to withstand an uncertain economy.

 

General Mills also raised optimism with regard to the economy after the company forecast a stronger-than-expected annual profit, sending its stock up 3.9 percent to $58.18. Kraft Foods, another major player in the food industry, rose 5 percent to $26.61, following the outlook of General Mills. Kraft topped the Dow's list of major advancers. Chip makers ranked among the Nasdaq's best performers, with Intel up 3 percent at close at $17.04.

 

In the latest readings on the global economy, surveys from Europe showed manufacturing was shrinking less than initially thought and in China's case, growing modestly. Additionally, global outplacement consultancy Challenger, Gray & Christmas data showed planned layoffs at U.S. firms fell to a 15-month low in June. That news eclipsed the ADP Employer Services payroll survey showing that private employers cut 473,000 jobs in June.

 

Prospects for a better world economy lifted commodity prices, boosting stocks in natural resource companies, including miners, with Newmont Mining up 3.2 percent, to close at $42.18.

 

Shares of Chevron rose 0.4 percent to $66.52, while Exxon Mobil added almost 1 percent to end the day at $70.56. Both stocks were off their best levels, however, after crude oil futures reversed an initial climb that sent them above $71 a barrel earlier on Wednesday. Domestic crude futures for August delivery settled down 58 cents per barrel at $69.31,

 

Nonetheless, overall trading volume in the financial markets was light due to the absence of most market players in a holiday-shortened week. The financial markets will be closed on Friday for the U.S. Independence Day holiday. 

 

Job Losses Outweigh Other Data

 

Domestic manufacturing reached its highest level of activity in nearly a year in June but surprising weakness in private sector employment continues to indicate a weak economic recovery. Some parts of the economy are showing signs that the 18-month-old recession, the most protracted in decades, may soon end, but job losses are seen accumulating long after economic growth resumes.

 

Private industry reduced employment by a larger than expected 473,000 jobs in June, slowing from the 485,000 lost jobs in May, according to a report from ADP Employer Services, released a day before the closely watched government nonfarm payrolls report.

 

Manufacturing was lower in June but at a slower pace than in May. The Institute for Supply Management said its index of national factory activity edged up to 44.8, the highest reading since last August and above economists' median forecast of 44.5. A reading below 50 indicates contraction.

 

It will probably take another three months for manufacturing to get back into growth territory, said Norbert Ore, chairman of the Institute for Supply Management's manufacturing business survey committee.

 

And an index of ending sales of previously owned homes, which measures homes which are under contract to be sold, edged up 0.1 percent in May, for the fourth straight monthly gain, the national Association of Realtors reported.

 

Investors' belief that an economic recovery was on the way was supported by a report from global outplacement consultancy Challenger, Gray & Christmas, Inc indicating that planned layoffs fell to a 15-month low in June, a fifth straight month of declines and the lowest since March 2008.In addition, Chicago Federal Reserve President Charles Evans said on Wednesday he expects the U.S. economy to grow in the second half of this year and was looking for growth of 2.5 to 3 percent in 2010.

 

U.S. construction spending fell 0.9 percent in May, however, to the lowest rate in more than five years, showing an economic stimulus plan passed in February has given little relief to public construction. In further news from the battered housing market, mortgage applications fell to a seven-month low, a weekly report showed. The Mortgage Bankers Association said its U.S. mortgage applications index fell 18.9 percent in the week to June 26 to its lowest reading since November, despite slightly lower borrowing costs.

 

Automakers posted better sales for June than in recent months on Wednesday, led by Ford Motor Co. The results pointed to signs of some stabilization in the industry, which has been especially hard hit by bankruptcies and layoffs as consumers have retrenched. Ford reported a 10.9 percent drop in U.S. sales in June, compared to its expectations for a decline of between 10 to 20 percent. GM's June vehicle sales fell by an adjusted 36.0 percent from the same month last year.

 

Crude Prices Fall

 

Oil prices fell on Wednesday after government data showed an increase in gasoline inventories ahead of the July 4 Independence Day holiday, traditionally the peak of the summer driving season. Gasoline stockpiles rose by 2.3 million barrels last week, according to an  Energy Information Administration report. Distillate inventories, including diesel, increased by 2.9 million barrels, while crude stockpiles fell by 3.7 million barrels.

 

Sweet domestic crude for August delivery settled down 58 cents per barrel at $69.31, after rising as high as $71.85. London Brent crude settled down 51 cents per barrel at $68.79.

 

The economic crisis has battered fuel demand, sending crude off record highs above $147 a barrel hit last July. But optimism that a potential economic recovery could push demand higher has helped lift crude off lows below $33 a barrel touched in December. Total domestic product demand fell 5.8 percent over the four weeks to June 26, compared with year-ago levels, according to the EIA report.

 

The Organization of the Petroleum Exporting Countries agreed last year to a series of output cuts aimed at taking 4.2 million barrels per day of crude off the market to help stem the slide in crude prices.

 

Kuwait's oil minister said OPEC was unlikely to raise output when it meets again in September, if markets remain oversupplied.

 

Output from OPEC member Nigeria has dropped over the past month due to an escalation of civil unrest in its oil-rich Niger Delta region. On Tuesday, Royal Dutch Shell (RDSa.L) said attacks by Nigerian militants had cut its onshore output to around half of what it was producing earlier this year.

 

1-for-20 Split No Help for AIG

 

AIG saw its share price fall nearly 20 percent on Wednesday, following a 1-for-20 reverse stock split by the troubled insurer. The reverse split was approved at the AIG annual meeting on Tuesday. The shares closed at a pre-split $1.16 on Tuesday.

 

Investors who had adjusted to the stock trading for "a dollar and change" might be thrown by the seemingly higher valuation and push it down, he added. Before the split, the shares had traded below $2 for much of the year, weighed down by the company's nearly $100 billion in losses last year and a taxpayer bailout that left the U.S. government owning a nearly 80 percent stake in the company.

 

The shares also fell sharply on Tuesday after Chief Executive Ed Liddy said at the annual meeting that he could not give any assurance that the shares would ever recover or that the U.S. government would ever relinquish its majority ownership of the company.

 

AIG disclosed its plans for the reverse stock split in a regulatory filing on May 21, but the news was overshadowed by an announcement that same day that Liddy planned to step down as CEO and chairman once successors were found.

 

Data Indicates Lower Auto Sales for June

 

Domestic automobile sales were lower for the month of June as the economy remained a deep concern for consumers, although Ford Motor Co posted far better results than most, leaving its Detroit rivals in the dust. Ford, reported a 10.9 percent drop in U.S. sales in June. The auto industry indicated that the results pointed to more stability for the economy, but fell short of marking a turnaround for the battered U.S. auto market after a punishing four-year decline.

 

The sales results came as General Motors pleaded its case to the U.S. Bankruptcy Court to permit a swift sale of its best assets to a new company funded by the Obama administration and avoid liquidation. GM posted a 33.6 percent decline in U.S. sales in June and sounded a more cautious tone about the economy than rivals in a conference call with analysts and reporters.

 

"Our results are tenuous," said GM sales chief Mark LaNeve. "Our customers are expecting a very quick exit from bankruptcy similar to what they saw for Chrysler."

 

Toyota Motor Corp posted a 31.9 percent sales decline in June. The automaker trailed Ford for second place in the U.S. market through the first half of 2009. Chrysler Group LLC, in its first sales report following its sale to a group led by Italy's Fiat SpA in June, said U.S. June sales fell 42 percent.

 

Honda Motor, which had posted strong U.S. sales a year earlier as a rise in gasoline prices drove demand for small cars, posted a 29.5 percent sales decline, while Nissan posted a 23.1 percent drop and said there were some optimistic signs that demand had stabilized after a downward spiral after the financial market collapse in September.

 

Edmunds called the month the most expensive June on record, with the average incentive at $2,930 per vehicle sold, up 20 percent from a year earlier. Edmunds expects incentives to fall as production cuts in recent months pare inventories.

 

"June incentives have never been higher, but we anticipate that the tide is about to turn," Edmunds executive director of industry analysis, Jesse Toprak, said in a statement.

 

Chrysler, which had the highest U.S. June incentive at $4,873 per vehicle according to Edmunds, halted production during its bankruptcy and GM has cut back substantially.

 

Looking ahead, automakers and industry analysts expect a modest bump in U.S. auto sales from the "cash for clunkers" program signed into law last month, which begins to gear up later in July.

 

Everyone is looking to the new government "cash for clunkers" incentives to trade low-mileage vehicles for new cars to provide a moderate sales bounce in the latter half of the year.

 

Results were not adjusted for an extra selling day in June from a year earlier.