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Monday, June 21, 2010

Evening Market Update


China Currency Announcement Can’t Keep Stocks Afloat

After notching solid gains in early trading on China’s announcement that it would allow more flexibility in the exchange rate of the Chinese yuan, stocks slid throughout the day and finished in the red. In equity news, Dow member Walt Disney Co. benefited from a record opening weekend of Toy Story 3, while shares of BP Plc continued to fall after the company said late Friday that Anadarko Petroleum Corp is refusing to pay its share of the Gulf oil-spill cleanup costs. M&A news also dominated the headlines, as Corn Products International announced that it will acquire a starch unit from AkzoNobel for $1.3 billion, while Ralcorp Holdings said it will purchase American Italian Pasta Co. for $1.2 billion, and Biovail Corp and Valeant Pharmaceuticals International also agreed to merge. Treasuries finished the day mostly lower.

The Dow Jones Industrial Average lost 8 points (0.1%) to close at 10,442, the S&P 500 Index fell 4 points (0.4%) to finish at 1,113, and the Nasdaq Composite decreased 21 points (0.9%) to 2,289. In moderately light volume, 1.1 billion shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil rose $0.39 to $77.57 per barrel, wholesale gasoline dipped $0.01 to $2.14 per gallon, and the Bloomberg gold spot price fell $24.50 to $1,232.30 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—increased 0.4% to 85.98.

Shares of Dow member Walt Disney Co. (DIS $35) traded lower, even after Toy Story 3 posted the biggest opening weekend in Pixar Animation Studios’ history—which is owned by DIS—grossing $109 million domestically. The Wall Street Journal is reporting that outside the US, Toy Story 3 made an estimated $44.8 million and it has not opened in about 75% of overseas markets.

In M&A news, Corn Products International Inc. (CPO $32) announced that it has reached an agreement to acquire National Starch, a specialty starch maker, from AkzoNobel (AKZOY $57) for about $1.3 billion in cash. AKZOY said it will use the proceeds for both acquisitions and organic growth. CPO finished lower, while AKZOY was higher.

Private label and branded food products firm Ralcorp Holdings Inc. (RAH $57) announced that it will acquire American Italian Pasta Co. (AIPC $53) for $53.00 per share in cash, for a total purchase price of approximately $1.2 billion. Separately, RAH issued 3Q EPS guidance that missed the Street’s profit forecasts. RAH was down solidly, while AIPC was up sharply.

Biovail Corp. (BVF $17) announced that it has agreed to merge with Valeant Pharmaceuticals International(VRX $47), forming a new company that will be named Valeant Pharmaceuticals International, Inc. Under the terms of the deal, VRX shareholders will immediately receive a one-time special cash dividend of $16.77 per share owned prior to the closing of the deal and 1.7809 shares of BVF common stock upon closing of the merger. Shares of both firms were solidly higher.

BP Plc (BP $30) remained in the news and shares continued to decline after the company said late Friday that Anadarko Petroleum Corp. (APC $43)—a partner of BP’s in regard to the leaking oil well in the Gulf of Mexico—plans to refuse to pay its share of the clean-up costs. According to the Dow Jones Newswires, APC’s CEO said, “BP’s behavior and actions likely represent gross negligence or willful misconduct.” BP said it strongly disagrees with APC’s claims and expects its partners to pay their full share. Moreover, BP said the costs for the spill had reached $2 billion. APC traded higher.

No US reports today, focus instead on news abroad

Treasuries were mostly lower as there were no major US economic reports released today. The yield on the 2-year note was flat at 0.71%, the yield on the 10-year note gained 3 bps to 3.25%, and the 30-year bond yield increased 2 bps to 4.16%.

The Chinese government said over the weekend that it will allow more flexibility in the exchange rate of the Chinese yuan. China’s currency has been pegged against the US dollar since 2008 and the move is being met with optimism regarding the Chinese economy and the outlook for the continued global economic recovery. The yuan hit the highest level since July 2005 compared to the dollar but the Chinese government said there is no basis for a large-scale appreciation, per the Associated Press. Moreover, the move is expected to aid in controlling inflation and help domestic demand, with Bloomberg reporting that the Chinese government said an appreciation of the yuan will benefit exporters and Chinese employment more than it hurts and a more flexible currency would also help curb consumer-price gains, asset bubbles and dependence on exports for growth.

China currency move dominates headlines

Besides the announcement out of China, international economic news was relatively light today, with the lone major release in the Asia/Pacific region being Japanese department store sales, which fell 2.1% year-over-year (y/y) in May.

Euro-area economic news was also minimal, with a gauge of UK home prices rising 0.3% month-over-month (m/m) in June and a narrowing of the Italian current account deficit, being the lone major reports on today’s docket.

Existing home sales on tap for tomorrow, FOMC begins two-day meeting

Tomorrow, the economic calendar will yield a key reading on the housing market, with the release of existing home sales, which are forecasted to increase by 6.0% month-over-month (m/m) in May to an annual rate of 6.12 million units. This would mark the third-straight solid monthly advances, joining 7.0% and 7.6% gains in March and April, respectively. However, any optimism regarding the health of the housing recovery is likely to be discounted somewhat as the May figures benefited from the rush to the end of the homebuyer tax credit as they reflect closings from contracts entered one to two months earlier, and reality has begun to set in regarding if the housing market can continue to stabilize and recover without the assistance of the government stimulus. Also, last year, December existing home sales fell sharply by over 16% as the homebuyer tax credit, before its extension to April 2010, was initially set to expire in November, suggesting we may see a drop off in sales as the employment picture and the flare up in the euro-area debt crisis exacerbate sentiment and further dampen willingness to purchase homes.

The two-day Federal Open Market Committee (FOMC) meeting begins tomorrow and will conclude mid-day Wednesday with the release of the statement. While no interest rate changes are expected, the status of the extra measures the Fed has taken to address liquidity and the cost of capital will continue to be monitored. Minutes from the April meeting showed that there was debate about the pace and timing of asset sales on the Fed’s balance sheet, while the crisis in Europe prompted the Fed on May 10th to re-open its currency swap lines to central banks to ensure financial institutions had access to dollars in conjunction with the larger European rescue package that was unveiled that day. The Fed’s balance sheet expanded very modestly after the action, but has since leveled off, remaining fairly flat over the past two months. Since the last meeting, economic growth forecasts globally have been revised lower due to the European crisis and the likelihood of a slowdown in China, and traders have pushed out the timing of the first US rate hike from December 2010 to March of 2011.

The only other report on the domestic front will be the Richmond Fed Manufacturing Index for June, which is expected to decrease to 20 from a prior reading of 26, although any figure above zero denotes expansion.

Economic releases internationally include the German IFO survey of business confidence, and both Canadian and Brazilian CPI.

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