Daily Fundamental

Stock market analysis – Morning call

Global stock markets remain positive on Friday although investors seem inclined to scale back some of their buying as the week ends. Trading patterns are indicating more interest in sector plays than broader index positions. European stock markets are tipped to open a bit higher, with government bonds mixed. The euro and spot gold are slightly higher, with oil lower.

European stock markets are likely to start slightly higher on Friday, as investors continue to probe the limits of the current bear-market rally.

U.S. stock futures are slightly lower on Friday, signalling a cautious start for the Wall Street markets later. Yet the marginal decline in futures also indicates that markets are looking to consolidate the week’s gains as a possible platform for a further advance next week.

U.S. stocks surged on Thursday and the Nasdaq Composite burst into positive territory for 2009 as traders ignored signs of rising unemployment and positioned for a recovery, buying economically sensitive stocks such as Research In Motion.

General Motors was the strongest stock on the Dow Jones Industrial Average as the U.S. government looked likely to give the auto giant another shot at a turnaround. GM surged 14%.

Strength in technology, and especially in semiconductor stocks, bodes well for the broader market, said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research.

Asian shares are off their early peaks Friday though still on course to notch up some solid advances for the week, with automotive stocks rising in Tokyo and Seoul after gains in their U.S. peers.

Chipmakers gained across the region after prices for mainstream memory jumped Thursday, further evidence the beleaguered industry may have reached a bottom.

“There’s definitely been a change in sentiment across the client base in recent days,” said City Index strategist Alex Douglas. “It kicked off with the U.S. stimulus plans and it’s helping anything that has been really beaten down. People are trying to get set for the next big move.”

Still, Stanley Chou, a manager at Mega International Investment Services, said the sector’s rally was probably liquidity driven. “We need to observe chip prices for a few more days to decide whether a solid bottom is there,” he said.

Commodity stocks were higher in Australia, even as some money came off financials.

The Japanese yen was slightly higher against the U.S. dollar and the euro, even as stock markets rose.

Several traders spoke about a disconnect between stocks and currencies – with risk aversion still more prevalent in foreign exchange trade. Others talked about the yen being supported by repatriation of funds before the end of the Japanese fiscal year.

Still, the euro remained inside its recent tight range against the dollar.

Analysts say that considering the U.S. Federal Reserve’s quantitative easing, the euro is unlikely to stay down for long, as the ECB is unlikely to be as aggressive as the U.S. central bank.

“In an environment of economic deterioration, zero percent interest rates, quantitative easing, fiscal stimulus, large trade and current account deficits, ballooning budget deficits and a need to make U.S. assets cheaper and create some inflation…a weaker dollar is a logical conclusion,” said technical strategists at Citigroup. They say the euro’s next move is toward $1.39.

European government bonds may start mixed on Friday in a pause from recent gains.

“Long-end futures may well recover further Friday but short-end futures remain capped for now,” according to Axel Rudolph, Dow Jones Newswires technician.

Bunds garnered support from a relief rally in U.K. gilts after a 2012 index-linked auction attracted strong demand.

Treasury prices are little changed on Friday after markets extended gains late Thursday. The U.S. government received decent demand for a record large sale of seven-year notes, temporarily putting to rest fears that the government may have trouble finding buyers for its massive debt plans this year.

“The stable auction process should put worries to rest over ‘failed auctions’,” said George Goncalves, chief Treasury and agency-debt strategist at Morgan Stanley. “The U.S. Treasury continues to fund the budget deficit this year unscathed, a testament to the Treasury market being the largest deepest last line of defense in finance.”

Investors stepped up with buying ahead of the auction as investors bought short-term debt in advance of the Federal Reserve purchases scheduled for Friday.

The central bank said it intends to buy notes maturing in two to three years. It will also conduct several buybacks of various maturities next week.

“That’s putting a strong bid in the front end of the market,” said Andrew Brenner, co-head of structured products and emerging markets at MF Global. “The street is betting on significantly higher prices for Treasurys.”

US Treasury Secretary Timothy Geithner called on lawmakers Thursday to enact the most comprehensive changes to financial-market regulation since the New Deal, prompting hedge funds and others in the cross hairs to start hunting for ways to preserve as much of their autonomy as possible.

In Japan on Friday, government bond futures were off their lows as the Nikkei pulled back from its highs. But a trader said, “declines will be limited as investors will likely start to shy away from active trading ahead of the end of the fiscal year, which should make JGB moves subdued.”

Japan’s core consumer price index was flat on year in February, but analysts say that weakening private demand means it’s just a matter of time before deflation revisits the world’s second largest economy.

Japan’s retail sales plunged 5.8% in February from a year earlier, the sharpest decline since February 2002, when they fell 5.9%, the government said Friday.

Oil is weaker Friday after an overnight rally driven by the surge in U.S. equity markets, analysts said.

New York’s main contract, light sweet crude for May delivery dropped 60 cents to $53.74 a barrel.

Brent North Sea crude for May delivery was off 51 cents to $52.95.

Crude prices likely ran out of steam amid worries the worst is not over for the US economy, analysts said.

“While the bounce in financials could run on, the broader economy is still in the doldrums and unlikely to turn the corner until next year at the earliest,” research house Capital Economics said in a report.

“As such we think the prospects for non-financials remain far from rosy.”

Spot gold is down $3.70 at $930.50 a troy ounce from New York levels. With the U.S. economy showing tentative signs of recovery, gold needed “more bad news” to regain momentum for the short-term, and to drive the risk aversion that generally benefited bullion, said Ronald Leung, director at Lee Cheong gold dealers.

London Metal Exchange three-month copper gained 2% to $4,168 a metric ton, setting a five-month high, likely on Chinese arbitrage buying, said ANZ commodity strategist Mark Pervan. Later gains were pared to $4,125/ton, still up $41 from the London afternoon kerb.

By One Financial

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