Barchart.com U.S. Morning Call for Monday, November 6, 2006 Overnight Global News
- US Q3 earnings – Q3 earnings season is starting to wind down. Of the S&P 500 companies, 31 will report Q3 earnings this week and only 20 next week. Q3 earnings have been much stronger than expected, allowing the stock market to move higher through late October. More recently, however, US stocks have moved lower on generally weak US economic data and more stable oil prices. Q3 earnings growth for the S&P 500 companies is now expected at +18.6%, up from expectations of +14.0 on Oct 1, according to Thomson First Call. However, earnings expectations for Q4 have eased to +10.0% from +12.8% on Oct 1. Moreover, the market is expecting earnings growth to dip back to single-digit levels of +8.8% in Q1 and +6.8% in Q2.
- The European Commission raised its forecast for Eurozone GDP growth in 2007 to +2.1% from May's forecast of +1.8% and reduced the CPI forecast to +2.1% from +2.2%. The improved forecasts are mainly the result of lower oil prices. The Comission said, "The economies of the EU have taken significant momentum into the second half of 2006, leading to a sizeable carry-over for 2007." The Commission projected a further improvement for 2008 with GDP of +2.2% and inflation of +1.9%. The Commission also had a complaint about undervalued Asian currencies and said that the yen's 7% decline against the euro this year "contrasts with what real exchange rate indicators would suggest." The strong euro versus the weak Asian currencies has hurt European exports to Asia.
- The Eurozone Oct services purchasing managers index fell -0.2 points to 56.5, which was weaker than the market consensus for a +0.5 increase to 57.0. In other negative news for Europe, Germany's Sep factory orders report showed a -2.5% decline, which was the first decline in 4 months. Lower factory orders were mainly the result of slower orders from the US and other foreign sources.
Overnight U.S. Stock News - Dec S&Ps this morning are trading +4.90 points on lower crude oil prices (-37 cents) and on continued relief that last Friday's Oct unemployment suggested that the US economy should continue to grow near 2%. The US stock market last Friday closed mildly lower, supported by the stronger than expected US unemployment report but undercut by the sharp rise in T-note yields and crude oil prices (Dow -0.27%, S&P 500 -0.22%, Nasdaq Composite -0.14%).
- AIG is up +0.9% in European trading this morning after the insurer said it will open four more branch offices in China next year to sell life insurance.
- Home Depot is down -0.9% in European trading this morning after UBS cut its stock rating for both Home Depot and Lowe's to "reduce" from "neutral." Lowe's has not traded in Europe this morning.
- Berkshire Hathaway (BRK/A) is likely to show strength today after reporting earnings last Friday of $1,797 per share, which was substantially higher than the analyst consensus of $1244 per share. Berkshire's profits were mainly boosted by its sale of expensive property insurance to businesses in the Gulf of Mexico when there were no major hurricanes this year.
- Comcast (CMCSA) rallied +1.2% in after-hours trading last Friday while Charter Communications fell -2.7% after Jim Cramer on his "Mad Money" show said he favors Comcast over Charter Communications because Comcase produces higher monthly subscription fees, has more subscribers, and has a lower debt-to-equity ratio.
- HP rallied 1% in after-hours trading last Friday and Gateway fell -3.7% after Jim Cramer said HP should be bought while Gateway should be sold since Gateway's 2008 P/E is almost double HP's while HP is growing faster than Gateway
Today's U.S. Market Focus - This week’s key US economic news includes tomorrow’s US Election Day, Thursday’s US Sep trade deficit report (expected narrower at $66.0 bln vs Aug’s 69.9 bln), and Thursday’s early-Nov US consumer confidence report (expected 0.2 to 93.4). The Treasury will sell $19 bln in 3-year T-notes on Wednesday and $13 bln in 10-year T-notes on Thursday. Friday is Veterans’ Day. US government offices are closed but all US financial markets are open during regular hours.
- Fed policy – Expectations for Fed policy tightened up after last Friday’s Oct unemployment rate fell -0.2 points to a new 5-1/2 year low of 4.4%. The Oct payroll report of +92,000 was weaker than market expectations of +123,000, but Sep and Aug payrolls were revised significantly higher to 148,000 and +230,000, respectively. The Oct unemployment report was strong enough to drown out talk for the time being about a US recession. The market is still discounting no chance of a Fed rate change through Jan 2007. The market is now discounting only a 25 bp rate cut to 5.00% by September 2007 versus expectations before the Oct unemployment report for a 50 bp rate cut by September 2007.
- Dec T-note prices this morning are trading -1 tick on continued bearish sentiment from last Friday. Dec T-note prices last Friday plunged on the US Oct unemployment report and closed -27 ticks. The Oct unemployment report dashed talk of a recession and caused a big rise in the 10-year T-note yield to 4.72% from last Wednesday's low of 4.55% and the 8-month low of 4.53% posted in September. The unemployment report may prompt T-note prices to trade within the established 2-month trading range for the rest of the month.
- The dollar this morning is trading mildly higher with the dollar/yen up +0.36 yen and the euro/dollar down -0.18 cents. The dollar index last Friday rallied sharply on the US Oct unemployment report and the reduced expectations for Fed easing. The FX market this week will be focused on tomorrow's US Election Day, Thursday's US Sep trade deficit (expected at a narrower -$66.0 bln vs Aug's -$69.9 bln), and the outcome of the Bank of England's meeting on Thursday which is likely to produce a 25 bp rate hike to 5.00%.
- Dec crude oil prices this morning are trading -37 cents on some long liquidation pressure after last Friday's sharp rally. There was a Reuters report of a small attack by militants on an oil facility in the Niger delta, but no sign so far of the big coordinated attack that the US warned about last Friday. Dec crude oil prices last Friday closed sharply higher by $1.26 per barrel on a warning from the US government that Nigerian militants may be planning a large scale, coordinated attack on oil facilities in the Niger delta. The crude oil market continues to focus on the extent of OPEC's implementation of its production cut agreement, US and global crude oil and product inventories, and the extent of cold weather in the US (which determines heating oil demand).
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