Morning Call

0 CommentsFriday • February 19, 2010 • by alwaters

“One must not tie a ship to a single anchor” to say something”
Epictetus Plato

Morning Call
February 19, 2010

Gold Update

The Federal Reserve’s formal announcement of a quarter point hike in the discount rate has the Dollar rising and gold losing its luster. With the IMF also selling bullion in the open market, gold prices could be a bit unstable in the coming weeks. About $9 lower this morning at $1109, we are cautious that further downside risk remains.

Hot Stocks

Traders are taking downside positions on J.C. Penney (JCP) ahead of its fourth-quarter earnings release today. Retail figures continue to be somewhat disappointing and shares in JC Penney could take a hit today if, as expected, earnings are disappointing.

Public Finance Update

Word is that Senate Republicans are drafting an alternative financial regulatory plan. Senator Richard Shelby of Alabama is leading a group of Republican senators in drafting financial-regulation legislation as an alternative to that proposed by Connecticut Senator Chris Dodd after bipartisan talks broke down earlier this month. Shelby’s proposal is expected to forgo the stand-alone Consumer Financial Protection Agency proposed by the White House in favor of establishing a consumer-protection division within a new regulator.

Despite a slight decrease in outflows, tax-exempt money market funds saw losses grow to $3.88 Billion for the week ending February 15th as they finished at $381.56 Billion.

In the BABs market, word is that at least one Build America Bond issuer had its subsidy payment reduced because it owed money to the federal government, and this “offset” system is entirely automated. The issuer, not identified in the report, received a 5% reduction on the expected payment.

Market Outlook

The Dow managed a respectable gain yesterday of 83 points, led again by consumer and energy shares. Futures this morning are a drop at the opening bell, but are up off of earlier lows. The market reaction was partly due to word that the Federal Reserve has raised its rate charged to banks for direct loans by a quarter-point to 0.75%, effective today. The Fed had signaled that this move was imminent and investors will likely react moderately to the official announcement. The targeted rate hike is the first move toward an exit strategy from the aggressive monetary policy undertaken at the height of the financial crisis. U.S. central bankers have closed four emergency lending facilities this month and are preparing to reverse or neutralize the more than $1 Trillion in excess bank reserves they have pumped into the banking system. The discount-rate increase will encourage banks to borrow in private markets rather than from the Federal Reserve.

Last night, the Asian equity markets reversed their upward trend and fell by an average of about 2%. Most of the high volume trading was to the downside; including most bank shares. In Europe this morning, investors have reacted negatively to news from the Fed; with an average downside of nearly 1%. Here, too, banks are lower across the board. Adding to the negative sentiment in Europe was news that U.K. retail sales dropped more than twice as much as economists forecast in January as the nation’s winter freeze affected sales.

Commodities have plummeted as the Dollar has risen sharply following the Fed announcement. The Dollar is higher against all of the major currencies this morning; particularly on the Pound as the UK budget deficit has led the Pound to a 9 month low against the Dollar. Oil has lost about a Dollar to $78 and is likely to give up more ground before stabilizing. Gold has fallen by almost $9 to $1109 and may have further downside as well.

Today’s economic data will include the Consumer Price Index and some Real Earnings figures. For earnings news, we will hear from JC Penney, PG&E, Pinnacle West Capital, and a few others.

In yesterday’s report, Initial Jobless Claims l rose to a seasonally adjusted 473,000 for the week ending February 13th, according to the Labor Department, marking an increase of 31,000 since the week prior. The Wall Street consensus projected that initial claims would fall to 438,000 from the previous week’s pre-revised 440,000. The numbers illustrate the fact that the employment problem so key to sustainable recovery is not, yet, out of the woods.

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

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