Morning Call

0 CommentsWednesday • January 27, 2010 • by alwaters

Morning Call
January 27, 2010

Gold Update

The Dollar retreated early in the morning, but is leveling off slightly. As a result, gold has struggled to gain traction. As expected, we have remained in a relatively tight range with gold actually holding well above its resistance level.
India has imported 35-40 tons of gold so far this month which is more than three times the amount at this time last year. Slightly softer prices and, perhaps, anticipating another sharp increase, India has chosen to stock up. China’s gold purchases have also grown 10% from 2008’s record in volume terms, rising 26% by value to equal $13.5 Billion or more.

What to Buy

Big trouble for Toyota, the world’s biggest automaker. Faulty gas pedals have prompted Toyota (TM) to suspend U.S. sales of eight of its most popular models, including the Camry, America’s best-selling car. Last week, Toyota issued a recall for the same eight models involving 2.3 million vehicles. Shares are down by more than 6% in pre-market activity and are likely to slide for several days. Put options are an attractive opportunity.

Interest Rate Outlook

An increase in the use of derivatives to insure against defaults or speculate on government bond prices is spilling over into the corporate debt market, as well. Elsewhere in the credit markets, the extra yield investors demand to own corporate bonds instead of Treasuries held at 164 basis points, yesterday.
The U.S. Federal Open Market Committee is expected to keep its target interest rate for lending between banks unchanged in a statement this afternoon, following its two day meeting. Investors will be paying close attention to any indication that the Fed is considering monetary tightening.

Public Finance Update

Facing all too common fiscal shortfalls, Illinois is about to go to market tomorrow with $1 Billion of taxable Build America Bonds. Ahead of the sale, all three major rating agencies affirmed Illinois’ credit rating. The state’s credit has suffered several rounds of downgrades leaving it among the lowest of states, just above California.

Locally, Moody’s said it has downgraded the rating on the city of Boston Industrial Development Financing Authority’s $33.8 Million senior revenue bonds (Boston Crosstown Center Project) Caa3 from Caa1. The outlook is negative.

In a report released yesterday, the Congressional Budget Office said that Build America Bonds will cost $26 Billion more over the next 10 years than was previously estimated. It is still unclear whether the program will be extended beyond the current year.

Market Outlook

Once again, the Dow finished flat yesterday, giving back its mid-day gains to end the day down by less than 3 points. Futures this morning point to a slightly higher opening, but have proved to be a bit unreliable lately. Generally speaking, sentiment is somewhat negative in the marketplace. Swap trading is rising as concern grows that high deficits in the developed economies will mean trouble ahead. Traders are buying protection against defaults on sovereign debt at more than five times the rate of company bonds. Greece sold 8 billion Euros ($11.3 Billion) of bonds this week at a premium to yields on its outstanding securities in the first issue since the Greece was downgraded last month by Standard & Poor’s, Moody’s and Fitch. Portugal also faces a budget shortfall that’s more than twice the European Union’s limit. Swap activity has also increased on the debt of Italy and Spain.

Stocks have slipped globally as investors are concerned that economic growth will weaken as the Federal Reserve and the European Central Bank curb stimulus measures. Many economists believe that central banks in China, India, Brazil and Australia will begin to push up borrowing costs. Asian stocks fell for the eighth straight day, the longest losing streak since May of 2005. The major indexes in Asia averaged a downside of about 1%. The financial sector was a little more mixed after several days of losing ground. In Europe this morning, stocks are lower by an average of 0.5%. With few exceptions, European banks are underperforming the market with losses of 1-4% at mid-day. It is worth noting that the indexes have come up off of their earlier lows. In the pre-market this morning, US banks are prepared to move slightly higher at the opening bell.

The Dollar has fallen off against all of the major currencies this morning, which has added some support to commodities. Economic pessimism, however, has restrained any real commodity rally. Oil is up marginally at just under the $75 mark. Gold is hovering along, down a few cents at $1096. Natural Gas is the lone energy commodity that is lower; falling by a few cents at $5.43.

On the economic calendar today, we have Mortgage Applications, New Housing Sales, and the EIA Petroleum Status Report. The Federal Reserve also ends its two day meeting on interest rates and the President will give his State of the Union address tonight. Both the Fed and President will be watched carefully for tone more than substance as investors seek clues to what to expect in the near future. For earnings, we will hear from Abbott, Allegheny Technologies, Caterpillar, Citrix Systems, ConocoPhillips, General Dynamics, Hess, Murphy Oil Corporation, Norfolk Southern, Qualcomm, Rockwell, Boeing, Valero, and several others. With some exceptions, corporate earnings have been a little disappointing and today’s list will certainly be a driving force in the markets today.

The President’s State of the Union address will be watched closely by a public looking for hope and a financial sector looking for warning signs. Two expected topics in tonight’s speech will be jobs and a spending freeze to address the burgeoning deficit. According to the Congressional Budget Office, the deficit will come in at $1.35 Trillion in 2010, a slight drop from the $1.4 Trillion deficit in 2009, but still high enough to make the budget outlook ‘bleak.’ Economic growth will remain ‘muted’ for several years and unemployment won’t return to 5% until the middle of the decade. The aggregate deficit projection for the next decade is $6 Trillion.

Posted in: Morning Call: Daily Analysis of the Global Markets and Economy

Tagged with: bonds, economy, gold, oil, stocks