Forget Friday – Now It’s All About…

Daily State of the Markets 
Monday Morning – June 21, 2010  

The discussion after Friday’s quadruple-witch expiration event was whether or not there could be anything gleaned from the day’s rather lackluster action. The bulls pointed to the fact that the market showed some resiliency after a nice run as a sign that our heroes in horns aren’t done with the current rally. However, the bears shrugged off the action by saying the move lacked commitment and pointed to the low volume during the week and the ongoing negative environment as their primary supporting arguments.

However, given what transpired over the weekend and the dose of economic data expected this week, we can probably leave the debate over Friday’s modest gain and look ahead. For this morning, it isn’t about the technical action seen at the end of last week, but about the potential benefits of the Chinese ending their nearly two-year old peg of the yuan/renminbi to the U.S. dollar.

In case you had more important things to do over the weekend than follow the business news from half a world away, on Saturday, China announced that it was ready to break the peg of “the people’s money” to the dollar and allow some additional flexibility in its exchange rate regime. The move has been a long time coming and signals that (a) China is interested in averting a trade war with the U.S. and (b) China sees their economy as being strong enough to handle some appreciation in their currency at this time.

Although the People’s Bank of China came out on Sunday with a statement saying that a substantial appreciation of the renminbi (also known as the Yuan) “was not in China’s interests” and that the exchange rate would remain “basically stable” in the near term, the move is seen as a first step by China in allowing their currency to appreciate over time.

Why should we care, you ask? The bears will argue that any appreciation in China’s currency will make their goods more expensive here in the U.S. However, those looking at the issue from the glass-is-half-full perspective will argue that the move will allow domestic companies more opportunity to do business in China as it makes their goods less expensive to the Chinese.

A few quick examples of companies that can benefit are Caterpillar (CAT), Coca-Cola (KO), McDonald’s (MCD), and YUM! Brands (YUM). According to Reuters, China has become the number one export market for the heavy equipment maker while YUM Brands garners more than one-third of its annual profits from China.

The bottom line is that while the Chinese are known for under delivering on their promises, the move gives the bulls something to lean on going into today’s trading. And in looking ahead to the rest of the week, we’ve got the Fed on tap Wednesday afternoon and a relatively heavy calendar for economic data.

Turning to this morning… We don’t have any economic data to review this morning, but as we mentioned, things heat up significantly later in the week. However, the word that the Chinese will allow some flexibility with their currency over time has put a bid under stock markets around the globe, as just about every country exporting goods to China stands to benefit.

Finally, remember to take time to enjoy your day…

Pre-Game Indicators

Here are the important indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: +1.28%
  • Shanghai: +2.90%
  • Hong Kong: +3.08%
  • Japan: +2.43%
  • France: +1.40%
  • Germany: +1.39%
  • London: +0.99%

   

• Crude Oil Futures: + $1.22 to $78.40
• Gold: + $3.70 to $1262.00
• Dollar: Lower against Yen, higher vs Euro and Pound
• 10-Year Bond Yield: Currently trading higher at 3.31%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +12.84
  • Dow Jones Industrial Average: +87
  • NASDAQ Composite: +17.27  

Wall Street Research Summary

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