Week Ahead: China’s Yuan Statement Rallies Risk Assets

Global equity markets surge on news that China will let its currency float gradually over time. The dollar slips as investor appetite for risk rises.

Market Preview

The risk trade is back in favor after China’s announcement that it plans to gradually let the yuan float against the U.S. dollar. Global risk assets (stocks and commodities) jumped higher on Monday after the central bank news out of China.

In overseas equity markets this morning, Hong Kong’s Hang Seng index rose 3.1 percent. Japan’s Nikkei 225 jumped 2.4 percent and China’s Shanghai Shenzen surged 3.1 percent.

The German DAX is higher by 1.4 percent mid-day. Britain’s Footsie 100 is also up by 1 percent.

U.S. S&P 500 index futures were trading higher by 1.5 percent in Monday’s pre-market action.

Crude oil prices rose to the highest level in six weeks after China announced it will increase flexibility in its currency. Oil is up over 1.5 percent this morning and hovering around $78.50 a barrel.

Spot gold is trading higher by 0.4 percent, near its all-time high just above $1,262 an ounce.

The euro is trading at 1.239 after rebounding against the dollar earlier this morning. The single currency had traded as low as 1.237 today. This price action is all on the heels of the euro’s best weekly advance in nine months against the greenback last week.

China Loosens Currency Peg

On Saturday, China’s central bank announced plans to enhance the flexibility of its exchange rate. China ruled out a one-time revaluation and indicated any strengthening of the yuan would be gradual. The U.S. government has pressured China to let its currency move more freely against the dollar.

An appreciation of the yuan is expected to translate into lower inflation risk and greater purchasing power for Chinese consumers while increasing inflation risk and lowering purchasing power for U.S. consumers. Lower inflation in China would take the pressure off the People Bank of China (China’s central bank) to raise interest rates in an attempt to cool off the its high growth economy.

Mining stocks are expected to benefit from this move as it reduces the pressure for continued monetary and fiscal policy tightness in China.

Mining stocks surged in London this morning with Xstrata higher by 4.8 percent and BHP Billiton (BHP) jumping 4.3 percent.

Economic Preview

On the economy, existing home sales for May will come out on Tuesday with observers expecting an annualized rate of just over 6 million in sales forecast for the month, a five percent rise from the 5.77 million sales rate reported for April.

New home sales will be released on Wednesday with an annual rate of 400,000 forecast for May, a 20 percent decline from the 504,000 rate for the previous month.

Also on Wednesday, the two-day meeting of the Federal Open Market Committee (FOMC) ends and releases a statement. The Fed will again likely leave short-term interest rates unchanged at nearly zero percent. Language in the statement is once again expected to say that rates will stay “exceptionally low” for an “extended period.” The FOMC will also likely maintain that expansion in the economy continues with few signs of inflationary pressure. is However, the statement could mention potential risks to the U.S. economy, particularly from a European sovereign debt and banking crisis.

On Thursday, initial jobless claims will be released with expectations for 465,000 new unemployment claims for the week of June 19th. Economists will be watching this week’s number carefully after the Labor Department reported higher than expected jobless claims last week.

Also on Thursday, all eyes will be on the durable goods orders announcement. Orders for durable goods are forecast to be weak, with economists forecasting a 0.5 percent decline for May after rising 2.9 percent in April.

Earnings Preview

On the earnings front, Adobe Systems (ADBE) will report on Tuesday. Analysts are expecting first quarter profits of 42 cents per share.

Oracle (ORCL) will post profits on Thursday, with Wall Street expecting 55 cents per share.

Also on Thursday, the Blackberry company, Research in Motion (RIMM) is expected to report $1.33 per share in earnings.

KB Homes (KBH) will post earnings on Friday with analysts expecting a loss of 30 cents per share.

Markets Meet Week With Optimism

Traders remain optimistic after two weeks of stock market gains. U.S. major markets are brushing aside the Greek debt crisis, tighter credit rules in China and a surprise change in the discount rate at the Federal Reserve.

This will be a busy week for news with plenty of news on the  economy, a flurry of retail company earnings reports, and a controversial health care summit.

U.S. stocks are up in the pre-market in anticipation of a positive week, particularly for retail company earnings.

Market Review

In overseas equity markets this morning, major Asian markets were generally higher. Japan’s Nikkei 225 index rose 2.7 percent today on improved export news riding on the shoulders of a weaker yen.

China’s Shanghai Shenzen index dropped 0.6 percent on concerns that the Chinese government would tighten policy significantly in coming months following the People’s Bank of China raising reserve requirements by 50 basis points on February 12. Today was the first day investors in China have been able to react to the news after a week-long Chinese New Year holiday.

Hong Kong’s Hang Seng was higher by 2.4 percent.

South Korea’s Kospi Composite gained 2.1 percent.

The Australian ASX 200 market was up 1.7 percent.

European equity markets advanced on Monday. The German DAX index is higher by 0.3 percent. Britain’s Footsie 100 index gained 0.4 percent.

U.S. stock futures are higher by 0.4 percent in Monday’s pre-market action.

Oil futures are flat this morning, with the March contract trading just under $80 a barrel this morning.

Spot gold is also flat, trading at just over $1,120 an ounce this morning.

Despite the continued debt crisis in the eurozone, the euro was slightly higher versus the U.S. dollar at $1.3619, versus $1.3603 late Friday. The dollar index, a basket of market weighted currencies, is at 80.49 just before U.S. markets open this morning.

Euro Still At Risk

Financier George Soros writes in the Financial Times “A makeshift assistance should be enough for Greece, but that leaves Spain, Italy, Portugal, and Ireland. Together they constitute too large of a portion of euroland to be helped in this way.”

Currency traders are also signaling that the euro is likely to continue to drift downward regardless of European Union actions. Aggressive deficit reduction in debt challenged European nations would reduce economic growth. A bailout by Europe would set a precedent for larger countries that could lead to a monetary “printing press” spiral increasing inflation. Either way, the euro is expected to continue moving lower over the long-run against the U.S. dollar.

Obama Proposes Price Controls on Health Insurance

Health insurers are likely to take a hit this week as President Obama is expected to introduce price controls on health insurance premiums as part of a White House revision to the Senate health care reform bill.

The proposal comes on the heels of political criticism of Anthem Blue Cross of California raising health premiums an average of 25 percent. Anthem is a subsidiary of the nation’s second largest health insurance WellPoint Inc. ($WLP). UnitedHealth Group ($UNH) is the largest health insurer by revenue.

This proposal comes in advance of an election-year summit convened by the White House for Thursday, February 25. The summit is controversial because the President wants to start the debate based on the Senate bill while Republicans want to start over on a health care bill.

Economists are skeptical about price controls in general, with a reduction in access to health services and reduced quality of care as likely outcomes of setting prices in markets.

GlaxoSmithKline Drug Safety Concern

GlaxoSmithKline’s ($GSK) shares could take a hit today as the New York Times is reporting that the company’s diabetes medicine Avandia weakens the heart, increasing chances of heart failure. The Times reported, “If every diabetic now taking Avandia were instead given a similar pill named Actos, about 500 heart attacks and 300 cases of heart failure would be averted every month because Avandia can hurt the heart.”

More on the Fed Exit Strategy

Federal Reserve Chairman Ben Bernanke heads to Capitol Hill on Wednesday and Thursday to testify in his semi-annual report on the state of the economy and monetary policy. Given the move in the discount rate last Thursday, everyone will be looking for more clues on the Fed’s exit strategy.

Economic Preview

On the economic front, the U.S. government will auction off $126 billion in notes and bonds today. Observers are curious to see what price and yield the bonds will receive given the recent hike in the Fed’s discount rate from 50 basis points to 75 basis points.
Durable goods orders for January will be released on Thursday. The consensus expectation is for a 1.5 percent jump in durable goods, up sharply from the 0.3 percent increase in December.

The fourth quarter GDP number will be revised on Friday. No change is expected from the preliminary number with a consensus annualized growth rate of 5.7 percent.

Also on Friday, existing home sales for January will be released. Economists are estimating the annualized sales rate was 5.5 million last month.

Earnings Review

This week has several major retail earnings reports on the heels of disappointing first quarter guidance from the world’s largest retailer Wal-Mart ($WMT) last week. The company reported adjusted earnings of $1.17 per diluted share, beating analyst estimates of $1.12 last week. JC Penney also beat the street with $1.02 in profits per share on expectations of 82 cents per share.

Home improvement giant, Lowe’s Companies ($LOW) reported 14 cents per share profits this morning before the market opened with analyst estimates of 12 cents per share. The company indicated costs cutting and modest sales improvement boosted fourth-quarter profits. The company also forecast first-quarter earnings guidance short of analyst expectations, with first-quarter earnings of 27 to 29 cents per share. Analysts were forecasting 33 cents per share.

Constellation Energy ($CEG) reported fourth-quarter earnings of 30 cents a share, missing street estimates of 31 cents per share. The company reaffirmed its guidance of $3.05 to $3.45 a share for 2010 and provided 2011 guidance of $3.45 to $3.85 a share profits.

Earnings Preview

Nordstrom ($JWN) is scheduled to report later today after the market closes with analysts expecting earnings per share of 79 cents per share.

Forest Oil Corp. ($FST) is forecast to report earnings of 61 cents a share in the fourth quarter.

Home Depot ($HD) will report on Tuesday before the market opens with expectations of 17 cents per share. Also reporting earnings early on Tuesday is Macy’s ($M) with a per share target of $1.32 and Target ($TGT) with expectations of $1.16 profits per share.

TJX Companies ($TJX) will release earnings on Wednesday before the market opens. Current consensus earnings estimates are for 91 cents per share.

Kohl’s ($KSS) will report on Thursday before the market opens with earnings expectations of $1.37 per share.

Human Genome ($HGSI) is expected to report after the close on Thursday with consensus estimates of minus 11 cents per share.

Dryships ($DRYS) is expected to report after the close on Thursday with consensus estimates of minus 23 cents per share.

On Friday before the market opens, Ship Finance ($SFL) is expected to report earnings per share of 48 cents per share.

Frontline Limited ($FRO) will also report on Friday with expectations of 11 cents per share.

Other companies reporting earnings this week include the Gap ($GPS), Chico’s ($CHS), Barnes & Noble ($BKS), Safeway ($SWY), Blockbuster ($BBI), Office Depot ($ODP), and Saks ($SKS).

Markets Start 2010 on a Positive Note

The majority of major global equity markets kicked off 2010 on a positive note amid rising hopes for a global economic recovery. U.S. stock futures suggest a strong start for 2010 as the Federal Reserve’s top two officials send a signal that the Fed Funds rate will likely stay at historically low levels for an extended period.

In overseas equity markets this morning, Asian markets finished mixed. Japan’s Nikkei 225 index jumped 1.0 percent or 108 points to 10,655. China’s Shanghai Shenzen index is down 1 percent and Hong Kong’s Hang Seng fell 0.2 percent on inflation concerns.

India’s Sensex index rallied 0.5 percent, Australia’s ASX 200 index edged higher by 0.1 percent, and South Korea’s Kospi index advanced 0.8 percent. The Tel Aviv Stock Exchange (TA-25) gained 0.4 percent on Monday.

European equity markets were higher this morning. The German DAX index is up 0.8 percent. Britain’s Footsie 100 index rose by 0.9 percent.

U.S. stock futures are higher this morning by just over half a percent as the Federal Reserve’s top two officials suggest that interest rates will be kept low for months.

While at the American Economic Association in Atlanta, Georgia, Federal Reserve Chairman Ben Bernanke said in a speech on Sunday that lax regulatory and supervisory policies, rather than monetary policy, were to blame for the housing bubble.  Citing comparisons with other large industrialized economies, he showed that countries with relatively higher interest rates had housing bubbles even larger than in the U.S.  He said the largest cause of the bubble was exotic mortgages and the decline in underwriting standards. Greater global capital flows explained about 30 percent of the rise in housing prices and low interest rates about 5 percent according to the Fed Chief. Bernanke concluded, “The magnitude of house-price gains seems too large to be readily explainable by the stance of monetary policy alone.”

Looking forward, Fed Vice Chairman Donald Kohn said that a tighter Fed Funds policy to head off perceived threats from asset price increases “could be expensive.”  Kohn said the economy is likely to grow more slowly than its potential for an extended period. He also indicated inflation is likely to be lower than the Fed’s target of 2 percent.

Traders see the comments by these Fed officials as strong hints that short-term interest rates will remain low for some time.

Crude oil prices moved higher this morning by $1.60 a barrel or 1.9 percent with the front month contract trading just under $81 a barrel.

The price of gold jumped overnight by $18 an ounce or 1.6 percent. Spot gold was selling for $1,115 an ounce this morning.

Treasury bonds continue their sell-off into the new year, with the 10-year note yield rising 2 basis points to 3.86 percent – the highest level since June 2009.

In foreign exchange markets, the dollar is under pressure as investors gain a stronger risk appetite. The DXY index is 77.54, off 0.4 percent or 0.33 from the previous close of 77.87.

On the economic front for the week, the Institute for Supply Management’s manufacturing index will be released this morning at 10 AM. The index is projected to rise from 53.6 to 54.8 percent. A rising index value is a positive sign. Any value above 50 signals growth in manufacturing activity. The November report dropped 2.1 points. Most economists believe that the slowdown in November was temporary.

On Wednesday, the Federal Open Market Committee will issue minutes of its meeting from three weeks ago. Traders will be looking for clues about Fed sentiment going into the new year.

The most anticipated economic report for the week will come on Friday morning with the Labor Department’s estimate of December’s employment situation report. Economists expect the nonfarm payrolls forecast to be flat in comparison to the previous month. They also are forecasting the unemployment rate, which was 10 percent in November, will remain the same.

In company news, the second-largest U.S. energy producer, Chevron Corporation ($CVX) may rise as much as 20 percent over the next 12 months according to a Barron’s report. Analysts expect crude oil prices to climb in 2010 and the company has several global exploration projects in the pipeline.

Wealth management firm Baird boosted Intel ($INTC) to outperform from a neutral rating based on higher computer procurement forecasts for companies during the first half of 2010.  The company is expected to outperform peers in the semiconductor industry for 2010.

Wal-Mart Stores ($WMT) said it plans to cut costs by combining purchasing for several countries, according to a Financial Times report. The company estimates that shifting to direct purchasing could reduce costs from 5 percent to 15 percent across the supply chain over the next five years. Potential savings are targeted in the range of $4 billion to $12 billion.

On the earnings front, fast food company Sonic Corp. ($SONC) will report earnings per share on Tuesday with analysts expecting 14 cents per share.

Also on Tuesday, fertilizer manufacturer The Mosaic Company ($MOS) will release earnings.  The consensus estimate is a 35 cent profit per share.

Agriculture operator Monsanto ($MON) will report earnings on Wednesday with expectations of breaking even for the most recent quarter.

Other companies expected to report earnings this week include:  AngioDynamics ($ANGO), Synnex Corp. ($SNX), Bed Bath & Beyond ($BBBY), Family Dollar ($FDO), Ruby Tuesday ($RT), Shaw Group ($SHAW), Apollo Group ($APOL), Constellation Brands ($STZ), HIS ($IHS), AZZ Corp. ($AZZ), Penford ($PENX), and the Greenbriar Companies ($GBX).

Disclosure: None

BIS Gets Tough with Bankers

On Monday, the Basel, Switzerland based Bank for International Settlements announced that central bankers and financial regulators agreed to implement a set of measures for strengthening regulation, supervision and risk management of member banks. The measures are  designed to reduce the risk of future global financial crises.

Coming into the meeting, there  were two ways of thinking about how to manage potential global financial crisis. The majority would like what are called “macroprudential tools” incorporated into the system through new capital rules. The problem with current rules is they tend to encourage banks to become overextended during booms. On the other side, Bank of England governor Mervyn King, prefers “discretionary tools,” encouraging banking regulators to tighten monetary and regulatory policies when they identify a bubble. The majority view held sway in the agreement.

Risk management measures adopted include increasing banks’ capital requirements, a new leverage ratio as an additional indicator to the Basel II risk-based framework, and a minimum global standard for funding liquidity. The bankers agreed to build a framework for counter cyclical capital buffers above the minimum standard including constraints on teh distribution of capital. The Basel Committee on Banking Supervision is also considering capital surcharges or fees to reduce the risk of future systemic bank crises.

The BIS statement read, these actions should “substantially reduce the probability and severity of economic and financial stress.”

The BIS meeting follows on the heels of a  two-day Group of 20 (G-20) London summit with finance ministers and central bank leaders. The G-20 financial heads agreed that fiscal and monetary policy will continue to be “expansionary” in the near future to reduce the risk of a double-dip recession.

“The agreements reached today among 27 major countries of the world are essential as they set the new standards for banking regulation and supervision at the global level.” said European Central Bank (ECB) President Jean Claude-Trichet.

At the insistence of Germany and France, the group also laid the groundwork for linking banking compensation to the long-term performance of the bank.  This issue could be contentious and is unlikely to be resolved before a G-20 heads of state summit scheduled for September 24-25 in  Pittsburgh, Pennsylvania.

Related: Banking Times,  Bloomberg, Reuters