News Column

MARKET ANALYSIS: Nervousness Palpable As Fed Decision Draws Near

June 18, 2014



WASHINGTON (Alliance News) - The major US index futures are pointing to a mixed opening on Wednesday, with sentiment suggesting nervousness characteristic of a FOMC decision day. If the Fed decision plays in line with market expectations, the markets could go about a consolidation move, although some degree of pullback cannot be ruled out. However, if the statement and the Fed Chair's press conference relay an extremely dovish message, traders may be encouraged to pick stocks. Alternatively, any reference towards interest rate normalization could generate weakness. Corporate news of the day has largely been mixed and is therefore unlikely to provide direction to markets.

US stocks advanced on Tuesday despite the release of a disappointing housing starts report. The major averages opened lower and showed some volatility in morning trading before moving decisively higher in the early afternoon. The averages advanced until late afternoon trading and moved sideways thereafter, ending the session modestly higher.

The Dow Industrials added 27.48 points or 0.16% before closing at 16,809, the S&P 500 Index ended up 4.21 points or 0.22% at 1,942 and the Nasdaq Composite closed at 4,336, up 16.13 points or 0.37%.

The breadth among the Dow components was even, with 15 of the 30 stocks advancing, while the remaining 15 declined. Goldman Sachs (GS), Home Depot (HD) and JP Morgan Chase (JPM) were among the best performers of the session.

Financial and airline stocks advanced notably, while most of the other major sectors ended the day showing more modest moves.

On the economic front, the Commerce Department reported that housing starts fell to a seasonally adjusted annual rate of 1.001 million units in May, down from 1.071 million in April. Single-family starts declined by 39,000 to a 3-month low and multi-family starts were down 31,000. Building permits, considered an indicator of future housing activity, fell to 991,000 units despite single-family permits rising by 22,000.

Meanwhile, monthly consumer price inflation quickened to 0.4% in May, with the core rate at 0.3%. Both headline and core inflation rates were expected to come in at 0.2%. The annual rates of consumer price and core consumer price inflation were at 2.1% and 2%, respectively. Energy prices rose 0.9% month-over-month, while food prices were up 0.4%. Service price inflation, accounting for about 60% of the total, was at 0.4%.

The Dow Industrial climbed to a resistance around 16,843 yesterday but settled shy of that level. If the FOMC announcement supports the momentum, the index could attempt to break above that resistance. Further upward, the index has resistance around 16,946. On the downside, the index has support around its 21-day MA currently at 16,719 and the 16,627 level.

Commodity, Currency Markets

Crude oil futures are climbing USD0.30 to USD106.66 a barrel after sliding USD0.54 to USD106.36 a barrel on Tuesday. An ounce of gold is currently fetching USD1,272.40, up USD0.40 from the previous session's close of USD1,272. On Tuesday, gold fell USD3.30.

Among currencies, the US dollar is trading at 102.14 yen compared to the 102.15 yen it fetched at the close of New York trading on Tuesday. Against the euro, the dollar is valued at USD1.3569 compared to yesterday's USD1.3547.

Asia

The major Asian markets closed mostly lower, with the exception of the Japanese and Taiwanese markets. Notwithstanding the positive lead from Wall Street overnight, traders chose to remain cautious ahead of the FOMC announcement.

Australia's All Ordinaries, which showed some volatility in the morning session, declined steadily in the afternoon before closing down 16.80 points or 0.31% at 5,364.

Energy stocks declined sharply, as oil's rally stalled. Financial stocks also saw moderate weakness, while material, consumer discretionary and healthcare stocks gained ground.

China's Shanghai Composite Index ended at 2,056, down 11.18 points or 0.54%, and Hong Kong'sHang Seng Index edged 21.87 points or 0.09% lower to 23,182.

Meanwhile, the Japanese market benefited from the weak yen, which pushed up export stocks and in turn the broader market. The Nikkei 225 average opened slightly higher and advanced steadily throughout the remainder of the session. The index ended up 139.83 points or 0.93% at 15,116.

Financial stocks also found buying interest, while construction, real estate, oil, food and telecom stocks moved to the downside.

On the economic front, a report released by Japan'sMinistry of Finance showed that the nation's trade deficit widened to 908.96 billion yen in May from a deficit of 811.8 billion yen in April, although the deficit was narrower than the USD1.189 trillion deficit expected by economists. Exports fell 2.7% year-over-year and imports declined 3.6%.

The Chinese National Bureau of Statistics reported that house prices in China rose 5.6% year-over-year in May, slower than the 6.7% increase in April.

Two separate indexes measuring economic conditions ahead in Australia showed softness. The Conference Board's leading economic indicators index eased 0.1% month-over-month in April following a 0.2% increase in March.

Meanwhile, the gauge compiled by Westpac and the Melbourne Institute showed that their leading economic indicators index for Australia rose 0.75% to 98.08, although remaining below trend for the fourth consecutive month.

Europe

European stocks opened higher but some markets witnessed volatility in early trading. Nevertheless, the major averages in the region are holding mostly above the unchanged line, as traders look ahead to the Fed decision due later in the day.

In corporate news, Swedish retailer H&M reported second quarter earnings that came in line with estimates by most analysts. The company also noted that June sales have got off to a good start.

On the economic front, the minutes of the Bank of England's June monetary policy meeting showed that policymakers were unanimous in their decision to maintain interest rate and the size of the asset purchase program unchanged.

US Economic Reports

The Commerce Department released its current account data for the first quarter, showing a current account deficit of USD111.2 billion compared to the upwardly revised deficit of USD87.3 billion in the fourth quarter. Economists expect a deficit of USD99.8 billion for the quarter, wider than the originally estimated deficit of USD81.1 billion in the fourth quarter.

The Energy Information is scheduled to release its weekly petroleum status report for the week ended June 13th at 10:30 am ET.

Crude oil stockpiles decreased by 2.6 million barrels to 386.9 million barrels in the week ended June 6th. However, inventories were in the upper limit of the average range for this time of the year.

Meanwhile, distillate stockpiles rose by 0.9 million barrels yet were below the lower limit of the average range. Additionally, gasoline inventories increased by 1.7 million barrels and were in the middle of the average range.

Refinery capacity utilization averaged 89.3% over the four weeks ended June 6th compared to 89.5% over the four weeks ended May 30th.

Following the conclusion of the 2-day FOMC meeting, the Fed is scheduled to announce its monetary policy decision at 2 pm ET. The central bank is widely expected to hold interest rates unchanged, while it is expected to continue trimming the size of its asset purchase program by another USD10 billion.

Also at 2 pm ET, the Fed will release updated forecasts for the economy, and half an hour later, Fed Chair Janet Yellen will host the customary post-meeting press briefing.

Stocks in Focus

Adobe Systems (ADBE) reported second quarter non-GAAP earnings of 37 cents per share on revenues of USD1.07 billion. The results exceeded estimates. The company also said it expects third quarter adjusted earnings of 22-28 cents per share on revenues of USD975 million to USD1.025 billion, surrounding the consensus estimates.

FedEx (FDX) reported better than expected fourth quarter results and issued in line guidance for 2015.

Actuant (ATU) reported better than expected third quarter results but lowered its full year guidance below consensus estimates.

ConAgra (CAG) lowered its fourth quarter guidance, citing weak volume at its consumer food business.

La-Z-Boy (LZB) reported fourth quarter adjusted earnings from continuing operations of 33 cents per share compared to 30 cents per share last year. Sales rose 2.1% to USD353 million. The earnings exceeded estimates, while the revenues missed expectations.

Actavis (ACT) and Forest Labs (FRX) announced that both companies' shareholders have approved all proposals related to Actavis' planned acquisition of Forest Labs. The companies also noted that the closing of the deal, now subject to regulatory approvals and other customary closing conditions, is expected to occur at mid-year.

Williams (WMB) announced that it has priced its public offering of 53 million shares of its common stock at USD57 per share.



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Source: Alliance News


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