US Equity Markets Move Higher After Positive News: Financial Spread Trading Report

Posted on | December 14, 2009 |

US equity markets kicked off in positive territory today, after deal news spurred risk appetite and Abu Dhabi quashed default fears after providing Dubai World with a substantial sum of cash.

The market heaved a sigh of relief today after Dubai’s cash-rich neighbour handed over $10 billion to Dubai World. This came in order to ensure that its real estate subsidiary Nakheel had sufficient cash to make a $4.1 billion payment on Islamic bonds maturing today and remain operational through the first quarter of next year.

This move confirms that Abu Dhabi is willing to step in when the going gets tough and suggests that the banks that have exposure to Nakheel’s debts are safe – at least for the time being. The development also reduces the risk of a possible widespread contagion.

Sentiment was also lifted by Exxon Mobil, the world’s biggest oil company, which announced that it is to buy XTO Energy in an all-stock deal valued at $41 billion (when including XTO’s debt and factoring in Friday’s closing prices).

XTO Energy is a firm that has developed unique expertise in extracting gas from unconventional sources. Under the terms of the transaction, XTO shareholders will receive a 0.7098 share of Exxon for every share of XTO.

Rex Tillerson, the chairman and chief executive officer of Exxon, said that XTO’s outstanding resource base, which is equivalent to 45 trillion cubic feet of gas, and its strong technical expertise is attractive for Exxon.

‘XTO’s strengths, together with ExxonMobil’s advanced R&D and operational capabilities, global scale and financial capacity, should enable development of additional supplies of unconventional oil and gas resources, benefiting consumers both here in the United States and around the world.’

Mr Tillerson believes the agreement is good news for the United States economy and energy security, as it would enhance opportunities for job creation and investment in the production of America’s own clean-burning natural gas resources. [1] Mr Tillerson also said the deal would not affect Exxon’s plan to invest in Ghana.

Exxon Mobil’s shares plunged 4% to $69.90, while XTO Energy surged 15.7% to $48 a share. In the meantime, Chesapeake Energy jumped 6.25% to $24.47, Devon Energy climbed 4.45% to $66.73, while Apache advanced 3.2% to $97.63.

By around 3:30pm (London time), the Dow Jones Industrial Average was trading 5.52 points (+0.05%) higher at 10477.02, while the broader S&P 500 was 3.09 points (+0.28%) above its previous close at 1109.50. The technology based Nasdaq Index, rose 4.06 points (+0.23%) to 1796.12.

Citigroup was in the spotlight this afternoon. It unveiled plans to issue $17 billion worth of new shares in order to help it repay the $20 billion it owes to the US government, or TARP (Troubled Asset Relief Program) funding, a move that should theoretically free the bank from restrictions on executive pay.

Citigroup’s share price slid 4% to $3.79 on the back of dilution fears. Meanwhile, Bank of America’s share price edged 0.7% lower to $15.52 and Wells Fargo retreated 0.75% to $25.22.

Investors should also note that President Obama is scheduled to meet with top banking executives, including those from Citigroup, later today. He is expected to ask them to support his efforts to tighten up regulation in the US financial services industry.

It is also important to note that the Greek Prime Minister George Papandreou will outline policies on how to cut the country’s burgeoning budget deficit and try to regain the trust of investors this evening.

Separately, Citigroup equity strategists today upgraded the Russian and Hungarian stock markets and downgraded South Africa and Egypt’s shares for 2010. Citigroup also said that Russia and Turkey were its ‘preferred markets’.

Russia’s economic growth is said to be accelerating and its stocks look cheap.

According to Citigroup, ‘although vulnerable if oil prices fall sharply, Russian equities are likely to do well in an environment of oil price stability as energy stocks play catch up with global peers.’ The international financial conglomerate also commented that ‘domestic consumer stories still look attractive even after their strong run in 2009.’

Citigroup also said it remains overweight on Turkey: ‘valuations as still quite compelling, and recent data suggest to us that economic momentum may be starting to build.’[2]

Source: [1] TimesOnline (14 December 2009)
Source: [2] Wall Street Journal (14 December 2009)

By Anthony Grech, Research Analyst, IG Index.

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