Barchart Morning Call
Overnight Developments
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- Global stocks are mostly higher with the European Euro Stoxx 50 up +0.63% and June S&Ps up +1.40 points. The dollar is higher, Treasuries are weaker and commodities are mixed. The British pound rose against the dollar after the BOE said that inflation remains "uncomfortably high." In its quarterly inflation report, the BOE said "there is a good chance that inflation will reach 5% this year and it is more likely than not to remain above the 2% target throughout 2012." The euro weakened against the dollar on speculation European leaders are slowing the drive to grant Greece additional aid after German Chancellor Merkel said Greece needs to stay the course on its budget-cutting program to deserve an extension of the 110 billion-euro ($158 billion) bailout granted last year. German inflation accelerated more than estimated last month after the Apr German CPI was revised up to +2.7% y/y, higher than the +2.6% y/y originally reported and a 2-1/2 year high.
- The Asian stock markets today closed mixed with Japan up +0.46%, Hong Kong -0.19%, China -0.26%, Taiwan -0.03%, Australia +1.15%, Singapore +0.66%, South Korea +1.31%, India +0.39%. Japanese stocks closed higher, led by gains in exporters, after the yen weakened against the dollar, while Chinese stocks closed lower after inflation rose more than expected and China's factory output rose less than expected. Apr China consumer prices climbed +5.3% y/y, stronger than expectations of +5.2% y/y, while Apr China industrial production rose +13.4% y/y, weaker than expectations of +14.6% y/y. The PBOC may be prompted to tighten monetary policy further after new lending in China also exceeded expectations with Apr China new loans at 739.6 billion yuan ($114 billion), higher than estimates of 700 billion yuan. South Korea's Kospi Stock Index closed higher after South Korea's unemployment rate fell to a 3-month low of 3.6% in Apr.
- June S&Ps this morning are trading up +1.60 points. The US stock market yesterday finished with moderate gains on strong company earnings results and increased M&A activity: Dow Jones +0.60%, S&P 500 +0.81%, Nasdaq Composite +1.01%. The Nasdaq posted a 1-week high. Bullish factors for stocks included (1) carry-over support from a rally in European stocks on reduced European debt concerns after the Greek newspaper Kathimerini reported that the IMF is arranging a package of as much as 100 billion euros ($144 billion) to replace Greece's existing bailout, (2) carry-over support from a rally in Chinese stocks after Apr China exports climbed +29.9% to a record $156 billion, stronger than expectations and a sign that the global economic recovery may be sustained, (3) strong company earnings results as 72% of the 423 S&P 500 companies that have reported earnings results since Apr 11 have beaten analysts' estimates, and (4) increased M&A activity as there has been 8,744 deals announced globally this year totaling $883.63 billion, up +26% from the $699.13 billion in the same period in 2010.
- Bearish factors included (1) inflation concerns after the stronger-than-expected Apr import prices (+2.2% m/m and +11.1% y/y versus expectations of +1.8% m/m and +10.4% y/y), and (2) comments from Richmond Fed President Lacker who said US "home prices are likely to remain under pressure" and that many sectors of the economy remain in the "doldrums."
- Johnson & Johnson (JNJ) rose 1.0% in European trading after Goldman Sachs raised its recommendation for the shares to "buy" from "neutral," predicting the company's earnings will grow 9 to 10% over the next 3 years from growth of 2 to 3% over the previous two.
- Walt Disney (DIS) fell 2.6% in European trading after the company reported Q2 profit of 49 cents a share, below analysts' estimates of 58 cents.
- June 10-year T-notes this morning are down -8.5 ticks. T-note prices yesterday traded sideways to lower throughout the day as stock market strength along with strong import prices weakened T-note prices: TYM11 -12, FVM11 -8.5, EDU11 +1.0. Bearish factors included (1) the stronger-than-expected Apr import prices (+2.2% m/m and +11.1% y/y versus expectations of +1.8% m/m and +10.4% y/y), (2) a rally in stocks which reduced the safe-haven demand for Treasuries, and (3) supply pressures ahead of the Treasury's $24 billion auction of 10-year T-notes on Wednesday. Bullish factors included (1) comments from Richmond Fed President Lacker who said US "home prices are likely to remain under pressure" and that many sectors of the economy remain in the "doldrums," and (2) strong demand for the Treasury's $32 billion auction of 3-year T-notes that had a bid-to-cover ratio of 3.29, stronger than the 3.16 average of the last 12 auctions.
- The dollar index this morning is slightly higher with the dollar/yen +0.13 yen and the euro/dollar -0.45 cents. The dollar index yesterday fluctuated between small gains and losses throughout the day and finished slightly lower as strong equity prices reduced the safe-haven demand for the dollar while concerns over the solvency of Greece underpinned the dollar: Dollar Index -0.126, USDJPY +0.524, EURUSD +0.00441. Bearish factors included (1) reduced safe-haven demand for the dollar as stock prices firmed, and (2) the report from the Greek newspaper Kathimerini that the IMF is arranging a package of as much as 100 billion euros ($144 billion) to replace Greece's existing bailout, which reduced European sovereign-debt concerns. Bullish factors included (1) the unexpected declines in Mar French industrial and manufacturing production, which is euro negative, and (2) the view from the chief economist at Citigroup that any further lending to Greece would be futile and amount to "Ponzi finance" as it only buys more time until Greece must restructure its debt.
- June crude oil prices this morning are trading down -72 cents a barrel and June gasoline is -5.39 cents per gallon. Crude oil and gasoline prices yesterday finished higher on strong China exports and from a rally in gasoline after Jun gasoline climbed to a 1-week high amid concern that flooding of the Mississippi River will disrupt fuel production and distribution: CLM11 +$1.33, RBM11 +10.13. Bullish factors included (1) the strength in Apr China exports which rose to a record and indicates economic strength that is positive for energy consumption and demand, (2) strength in gasoline on concern that the worst flooding of the Mississippi River in 75 years may shut 11 refiners between New Orleans and Baton Rouge with a combined capacity of 2.5 million barrels a day, or 13% of US output, and (3) the rally in equities, which bolsters optimism in the economic outlook and energy demand. Bearish factors included (1) the action by CME Group to raise trading margins on crude oil and energy futures traded on NYMEX, which may lead to liquidation of positions by investors to raise funds, and (2) the outlook for US crude supplies to increase to near a 2-year high when the DOE releases weekly inventory figures on Wed. Expectations for the weekly DOE inventories are crude oil supplies to increase +1.5 million bbl, gasoline stockpiles to fall -500,000 bbl, distillate inventories to remain unchanged and the refinery utilization rate to rise +0.4 to 83.2%.
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