The Dow and S&P 500 opened in negative territory today, after speculation of an equity market correction following a five-month rally
‘We can expect a lot of volatility’ in stocks, warned Mark Mobius of Templeton Asset Management today. ‘When you have these rapid increases, almost without correction, you will definitely have a correction at some point.’ [1]
US house builders, which had rallied sharply on Friday, were at the centre of a strong bout of profit-taking this afternoon. DR Horton fell 3.7% to $13.02, Lennar Corp lost 3.1% to $13.01 and Pulte Homes edged 1.9% lower to $12.40.
Mining companies were also under pressure, after Goldman Sachs JBWere Pty (an affiliate of Goldman Sachs Group) warned that increasing aluminium, zinc and nickel stockpiles and declines in global demand outside China are threatening the rally in metals.
Goldman is recommending that investors cut stakes in metals producers. [2] Shares in Alcoa fell 0.4% to $12.95, Freeport-McMoRan Copper & Gold declined 1.7% to $62.32 and Newmont Mining shed 1.2% to $41.03 following this report.
Drugmaker Eli Lilly was also among the causalities today, down 3.1% to $33.81 after Goldman Sachs added the company to its ‘conviction sell’ list, saying its ‘patent cliff’ is the largest in the industry. Goldman also downgraded electronics retailer Best Buy from ‘buy’ to ‘neutral’ today. Its share price slid 4.5% to $37.96. [3]
In contrast, US banks continued to gain some traction, with the likes of Wells Fargo, Bank of America and Citigroup up between 0.3% and 4% at $28.85, $16.64 and $4.01 respectively. Elsewhere in the financial sector, mortgage provider Freddie Mac soared 70.3% to $1.26 a share after reporting its first profit in two years and saying that it will not seek additional government aid in the foreseeable future.
McDonalds, the world’s largest fast food restaurant company, also managed to buck the overall bearish trend and advance 1.9% to $56.25 after reporting a 4.3% rise in global sales for July. The rise in international sales was attributable to the success of McCafe coffees, low priced menus across the UK and France, and longer store hours in Australia.
It is worth noting that sugar has remained in vogue, as dire weather conditions in India and Brazil, two of the largest producers, hurt supplies. ‘There is still little sign of higher prices discouraging demand,’ said Toby Cohen, a director at sugar brokerage firm Czarnikow.
‘With the (global) production balance forecast to be in deficit in 2009/10, the sugar market is now facing the risk of supply being insufficient to meet current consumption levels.’ [4]. ICE October raw sugar contracts were up by 3.12% to 21.46 cents a pound this afternoon.
It has also emerged that the cash-for-clunkers programme, where car owners can receive up to $4500 to trade in their old gas-hungry car for a newer energy efficient model, received another $2 billion from the US government to keep the popular programme running.
Although the programme is doing a good job at helping to revive the auto sector, we have to remember that the sector is currently being artificially stimulated by the government. The question is: what will happen to auto sales once the stimulus comes to an end? In my opinion, there is the likelihood for a sharp drop in car sales.
The US government may have to wait until the US economy is in a stronger position before withdrawing the programme and US auto makers may have to offer their own incentives in order to keep demand flourishing. It has also transpired that a cash-for-appliances programme is also being discussed.
By around 3.35pm (London time), the Dow Jones Industrial Average was down by 9.9 points (-0.11%) to 9360.17, while the broader S&P 500 was 1.8 points (-0.18%) lower at 1008.68.
[1] Source: Bloomberg News (10 August 2009)
[2] Source: Bloomberg News (10 August 2009)
[3] Source: Bloomberg News (10 August 2009)
[4] Source: FT (10 August 2009)
By Anthony Grech, Research Analyst, IG Index.
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