Profits Taken on US Equity Markets as Traders Fear Reforms

Posted on | September 14, 2009 |

The US equity markets retreated for the first time in eight days today, as tensions surrounding a trade dispute between China and the United States encouraged investors to take profits.

A full blown trade row was ignited between the United States and China today, after President Barack Obama’s administration announced that it will impose duties on Chinese tire imports for a period of three years. This didn’t bode well with China, unsurprisingly, which accused the US of ‘rampant protectionism’ and said it will refer the case to the World Trade Organisation.

It is feared that this development may lead to further protectionist acts between the two countries and weigh on global economic growth. Investors are expecting President Obama to make a speech later today, which may address this trade issue with China as well as new financial sector reforms.

‘You don’t want to be messing with your biggest trading partner who holds most of your debt,’ said Joe Saluzzi of Themis Trading. ‘(The economy) is still teetering on all sorts of edges here. Something like this could be the spark that sends us lower.’ [1]

Not surprisingly, shares of US tire makers rallied today, with Goodyear Tire & Rubber and Cooper Tire & Rubber Co up 5.6% to $18.23 and 10.7% to $16.13 respectively.

US banks fell into the red this afternoon, as investors feared that regulatory changes may weaken profitability across the sector. Downbeat comments from a Nobel Prize-winning economist Joseph Stiglitz, who said underlying problems in the US banking system were not fixed, also damaged sentiment toward financial stocks this afternoon.

Shares of Citigroup sank 3.7% to $4.44, Bank of America declined 1.9% to $16.64 and Morgan Stanley fell 1.8% to $28.31.

Miners were also under pressure after Alcoa, the biggest aluminium producer in the US, was given a new ‘underweight’ rating at HSBC; the broker believes that Alcoa’s shares appear expensive relative to its estimates for aluminium prices. Alcoa’s shares declined 2.3% to 1$2.69 and Freeport-McMoRan Copper & Gold dropped 1% to $69.7. Newmont Mining fell 1.2% to $45.98.

In contrast, US energy majors Chevron and Exxon Mobil were seen marginally higher this afternoon after Morgan Stanley upped its forecast for US crude oil prices. The broker forecasts crude oil to rise to $105 a barrel in 2012, up from a prior estimate of $95 a barrel, on the back of tighter spare capacity. [2]

Chevron’ shares rose 0.14% to $70.85 while Exxon Mobil gained 0.4% to $70.25. In the meantime, October Brent crude and WTI crude oil contracts were trading 0.25% lower to $67.52 a barrel and down 0.52% to $68.93 a barrel respectively.

Elsewhere, Sprint Nextel also bucked the negative trend today, jumping nearly 11% to $4.18 after the Sunday Times reported that Germany’s Deutsche Telekom is mulling over its acquisition. Japan Airlines was also in M&A talk; its shares climbed 6% to $9.70 on speculation that American Airlines and Delta will acquire the company.

Separately, Barron’s provided some trading tips; the financial news company was bullish on Cablevision System and Nalco, saying shares in both companies could gain. Barron’s also believes that utility stocks are attractively priced.

[1] Source: Reuters News (14 September 2009)
[2] Source: Reuters News (14 September 2009)

By Anthony Grech, Research Analyst, IG Index.

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