Tuesday Lookahead: More Protests In Egypt May Fuel Oil Rally - CNBC

Tuesday's "million" person march in Egypt could keep the heat on oil prices, which have gushed nearly 8 percent in two sessions.

Other financial markets Monday ignored the unrest in Egypt after reacting sharply Friday, as uncertainty increased ahead of the weekend and nervous traders repositioned.

So Goes January?

Stocks ended January on an up note, with the Dow up 2.7 percent for its best January since 1997. For those who believe the old adage, a good January foreshadows a good year for stocks.

The S&P 500 gained 2.3 percent, its best January since 2006 and the Nasdaq gained 1.8 percent, its best since 2007. The Dow Monday rose 68 to 11,891, and the S&P 500 rose 9 to 1286. The day's top sector was energy, up 2.5 percent on rising oil prices and Exxon Mobil's strong earnings report.

The dollar Monday was down 0.6 percent against the euro (1.3692) and was down more than 2.3 percent for the month. However, it gained more than 1 percent against the yen for the month and was barely changed Monday. Treasury prices declined Monday, driving rates higher. The 10-year was yielding 3.38 percent.

"I think it will be a better bid market" Tuesday, said Jefferies Treasury strategist John Spinello. "We have reasons to be better bid. No supply and the Fed buying for five days.

"I think with tomorrow's march (in Egypt), if things get a little unruly we'll be better bid. The street is of the mind set to be long to sell, rather than long for a long ride," he said.

Investors will also be watching ISM manufacturing data and construction spending at 10 a.m. Tuesday. Auto sales for January are released throughout the day, and there are a number of major earnings before the bell. BP [BP 47.47 1.26 (+2.73%) ], Pfizer [PFE 18.22 0.07 (+0.39%) ], UPS [UPS 71.62 0.89 (+1.26%) ], Biogen Idec, Archer Daniels Midland, McGraw-Hill and Cumminsreport. After the bell, Boston Scientific [BSX 6.98 -0.01 (-0.14%) ],Broadcom [BRCM 45.09 0.77 (+1.74%) ], Electronic Arts [ERTS 15.59 0.59 (+3.93%) ], and Aflac report.

Oil Drill

Nymex crude jumped about 3.2 percent Monday to $92.19 per barrel, its first close above $92 since October, 2008.

"Based on the technicals and having touched that number (92), it looks poised to go higher," said John Kilduff of Again Capital.

Paramount Options President Raymond Carbone said U.S. West Texas Intermediate crude, traded at Nymex was following Brent crude higher. Brent hit $100 Monday. "People were short the WTI and long Brent," he said, noting the spread is narrowing between the two as WTI moves higher. "It narrowed today, and it narrowed a couple of dollars Friday. It's the unwinding of a trade that was on anyway," he said.

He said oil could continue to move higher. "It doesn't look like there's going to be any sort of calm coming to the situation any time soon. It depends on the photos you see from that march. If it's nice and peaceful, it'll be one thing. If the tear gas is flying, it'll be another thing," he said.

Kilduff said oil got a boost Monday when the Egyptian military said it would not use force on the protesters. "That seems to bring a new level of uncertainty about what's going going on in terms of transition," he said. "Clearly of all the asset classes, oil is the most sensitive to this uncertainty."

Protesters have been calling for the resignation of long time President Hosni Mubarak in demonstrations that have gotten larger and move violent since they started last Tuesday. Mubarak Friday declared he remained in charge of the government and said he was firing his cabinet. His newly named vice president, Omar Suleiman said on state television Monday that he was asked to begin discussions with the opposition. Mohamed ElBaradei, former UN nuclear chief, has won the support of the Muslim Brotherhood and other opposition to represent their side.

"The reality is a lot of people see him (ElBaradei) as opportunistic. 'The guy didn't live here. He doesn't understand us.' He doesn't really represent that many Egyptians. He's got a seat at the table. He'll be part of any post Mubarak world, but I don't know how sustainable that would be," said Nomura's Ann Wyman, a Middle East and Africa expert who heads Emerging Markets Research, Europe.

Egypt is not a major oil producer, but traders said fear of contagion spreading to other oil producing countries in the region has helped spark the run in oil prices. Prices have also move higher on concerns the protesters could interfere with the Suez Canal or SUMED pipeline, which when combined carried a little more than 3 percent of the world's oil supply in 2009.

"Egypt is putting anxiety back into the oil price, and it will be there at least until there is clarity about a transition out of the current turmoil. The turmoil’s most immediate impact on the world oil market would come from Egypt’s role as a major transit point for Persian Gulf oil, via the Suez Canal and the SUMED pipeline. The larger anxiety is about the impact in the region that provides so much of the world’s oil," CERA chairman Dan Yergin wrote in a quick note.

Will there be a change in the region’s geostrategic balance, of which Egypt is a bulwark? The biggest concern, from the oil market point of view, is in terms of contagion. The entire Arab world is watching the events unfold in Egypt, and the outcome, whatever it will be, will resonate throughout the region—both for populations and for governments. Events will determine how high anxiety drives the price," he wrote.

Egypt's stock market has been closed and will likely remain closed for some time, Wyman said, noting that Tunisia's market has been closed since protesters toppled the government there.

She said a concern for that market is that much of the market's capitalization is from the banking industry, and banks have been closed during the protests. "While they claim to have a lot of liquidity like they did before the crisis started, you have to ask yourself what's going to happen when they reopen, and people start to trying to pull out deposits," she said.

"I think for now there is going to be hesitation to putting more money to work in Middle East markets. Right now, there is just discomfort with the whole region," she said. "Later, some differentiation will be made." Some of the markets that would be more attractive include Dubai, Kuwait, and Abu Dhabi.

"We are just reevaluating political risk across the whole region and how it shakes out. I just think that people want to stand back at a distance right now," she said.

Stock Market and Investing Next Week: Markets Watch Middle East, US Jobs Report - CNBC

Unrest in Egypt has replaced Europe's debt crisis as a flash point for markets, and any unfolding developments there will no doubt affect trading in the week ahead.

Clashes between protesters and authorities intensified Friday, as the government deployed the Army against civilians in the street for the first time in 25 years. The anti-government uprising caught the attention of financial markets in the fourth day of protests Friday, triggering a jump in oil prices and rush to safe-haven assets, like gold, Treasurys and the dollar.

The Dow fell 1.4 percent Friday to 11,823, in the same week it reached 12,000 for the first time in nearly three years.

For the week, the Dow was down 0.4 percent, its first weekly loss in two months, and the S&P 500 was down 0.6 percent to 1276. The S&P fell 1.8 percent Friday, its worse decline since Aug. 11. The Nasdaq, down just 2 points for the week, fell an outsized 2.5 percent, or 68 points Friday, to 2686, as tech stocks took a major hit. Many traders and analysts had been expecting a pull back in stocks, and some said this could be the start of a several percent sell off.

"We don't know what's going to happen, so there's near-term headline risk," said Marc Chandler, chief currency strategist at Brown Brothers Harriman. "Top-tier economic data next week could shift market attention away from the Middle East if things don't escalate too much."

The January employment report, due Friday, is one of those things that will get attention. Economists expect about 135,000 non-farm payrolls were added in January. ISM manufacturing data and auto sales on Tuesday will also be important. European finance ministers meet at the end of the week, and Fed Chairman Ben Bernanke speaks at the National Press Club and takes questions from the media on Thursday.

There are also dozens of major earnings reports in the coming week, includingExxon Mobil [XOM 78.99 -0.89 (-1.11%) ], Archer Daniels [ADM 32.76 -0.67 (-2%) ] and Pfizer [PFE 18.15 -0.33 (-1.79%) ]. "My bias is to think the equity market will find its footing next week," said Barry Knapp, head of U.S. equities portfolio strategy at Barclays Capital.

"Geopolitical events tend to cause sharp reactions, then we forget about it for a few days," unless the situation escalates, he said.

Egyptian President Hosni Mubarak, after the Wall Street close Friday, announced that he was still in charge of the government but that he was dismissing his cabinet. He said the rioting and plundering was unjustified and pledged to take new steps toward democracy and to help the unemployed and poor.

Oil traders had been watching the situation all week for signs of increased instability or spill over into other parts of the Middle East. Demonstrations have also taken place this week in Yemen and Jordan. Nymex crude rose $3.70 per barrel, or 4.3 percent Friday to $89.34 per barrel.

Egypt is not a major oil producer. It produces less than a tenth of the output of Saudi Arabia. But the fact Egypt controls the Suez Canal sent jitters through the markets as traders speculated an uprising could result in closing of the canal, a major shipping artery and a minor thoroughfare for oil.

Knapp did say an unexpected event, like the Egyptian uprising, could conceivably trigger a stock market pull back, but he thinks it would be no more than 5 percent. "I think anything deeper would be unlikely. I don't think it would lead to a 10 percent correction..If there rumblings in Saudi Arabia, it would be a different situation," he said.

Knapp said while fourth quarter GDP, reported Friday at 3.2 percent, had some very strong components, the fact that it did not meet expectations was a disappointment. Economists had forecast 3.5 percent.

"There was a lot to like in the GDP report. The fact of the matter is the headline did miss expectations again. When you think of when that happened in late April or late July, it did coincide with a pretty good equity market correction," he said.

Therefore, the week's economic reports will be very important and will need to support the idea of an improving U.S. economy. Besides the jobs report Friday, ISM manufacturing data and construction spending are released Tuesday. Monthly auto sales also are reported Tuesday.

The ADP private sector employment report is released Wednesday, and weekly jobless claims are Thursday. Productivity and costs, ISM non-manufacturing and factory orders are reported Thursday. Chain stores release their monthly sales Thursday.

Dollar Dilemma

The dollar has been buckling under a rising euro lately, but that pattern reversed Friday. The dollar gained nearly a percent against the euro, but it lost about the same against the yen, as the Middle East fears sent speculators into long yen positions.

"There's a big flow into the safe havens, that would be Japanese yen, Swiss franc and the U.S. dollar," said Chandler. He pointed out that emerging market currencies were particularly hard hit against the dollar Friday. The Turkish lire was down 2 percent and the Israeli shekel was down 1.3 percent. Mexico's peso was also down more than 1 percent.

"This is one of the times that the dollar got stronger and gold got stronger," he said. Gold, which was at its lows of the year this week, bounced 1.7 percent Friday, to $1340.70 per ounce.

Earnings Central

Big oil is front and center this week, with Exxon reporting earnings Monday and BP [BP 46.21 -0.47 (-1.01%) ] on Tuesday. Illinois Toolworks, Gannett, Nustar, Checkpoint Software andRoper Industries report Monday. Anadarko reports after the bell Monday, as does Baidu.com [BIDU 106.54 -2.51 (-2.3%) ].

Tuesday's major reports include Pfizer, UPS [UPS 70.73 -2.18 (-2.99%) ], Archer Daniels, Biogen, Cummins, McGraw-Hill and Paccar. Aflac,Electronic Arts, Broadcom and Electronic Arts report after Tuesday's close.

On Wednesday, Nadaq OMX, Time Warner [TWX 31.72 -0.59 (-1.83%) ],Mattel, Whirlpool, Marathon Oil, Allergen and Hershey report in the morning. News Corp, Visa, Yum Brands [YUM 46.40 -1.19 (-2.5%) ] andTesoro report after Wednesday's bell.

Merck [MRK 33.07 -0.18 (-0.54%) ], Glaxo, Blackstone, MasterCard, CME Group, Moody's, Diamond Offshore, N.Y. Times, Viacom, Cigna, Kelloggand Starwood release results Thursday before the bell. After the bell reports include Coinstar, Las Vegas Sands and Sunoco.

Aetna, Constellation Energy, Aon, Clorox, Tyson Foods, Weyerhaeuser,Pulte Homes, Fortune Brands and Simon Properties report after on Friday.

Inflation Slowing China's Export Engine - CNBC

Inflation is starting to slow China’s mighty export machine, as buyers from Western multinational companies balk at higher prices and have cut back their planned spring shipments across the Pacific.

Markups of 20 to 50 percent on products like leather shoes and polo shirts have sent Western buyers scrambling for alternate suppliers. But from Vietnam to India, few low-wage developing countries can match China’s manufacturing might — and no country offers refuge from high global commodity prices.

Already, the slowdown in American orders has forced some container shipping lines to cancel up to a quarter of their trips to the United States this spring from Hong Kong and other Chinese ports.

The trend, if continued, could ease tensions by beginning to limit America’s huge trade deficit with China. Those tensions were an undercurrent during Chinese President Hu Jintao’s recent Washington talks with President Obama.

Manufacturers and distributors across a range of industries say the likely result of the export slowdown is higher prices for American shoppers in the coming months, and possibly brief shortages of some products if Western retailers delay purchases too long while haggling over prices.

China exports more than $4 of goods to the United States for each $1 it imports from America, creating a trade surplus of about $275 billion. The higher Chinese prices will tend to show up mainly in products like inexpensive clothing and other commodity goods in which labor and raw materials represent a bigger part of the final value — rather than in sophisticated electronics like Apple iPads, in which Chinese assembly is only a small fraction of the cost.

Of course, the slowdown in the volume of imports could also prove temporary, if American consumers accept higher prices and Western corporate buyers end up renewing contracts at much higher cost. In the meantime, if the average price for each imported product rises faster than the volume of shipments falls, China’s surplus with the United States could continue increasing temporarily.

But whatever the eventual impact on trade, Chinese inflation might also reduce Washington’s pressure on Beijing over its currency, the renminbi. For more than a year, the Obama administration has been pushing China to let the renminbi rise in value against the dollar.

China’s intervention in the currency market has kept its currency artificially low. But that flood of money has also driven inflation, giving Beijing an incentive to let the renminbi move higher. Indeed, the renminbi has increased 3.6 percent against the dollar since last June.

The Obama administration is starting to suggest that the currency problem could gradually solve itself if Chinese prices rise so fast that American goods become more competitive.

The first signs of a potential slowdown in Chinese exports have shown up in shipping. As factories closed on Friday across much of China in preparation for weeklong Chinese New Year celebrations, ports in Hong Kong and elsewhere along the coast were working long hours to meet last-minute shipments.

But the annual pre-New Year rush has been nothing like that of recent years, causing shipping lines to reverse rate increases and cancel sailings they introduced last summer as the American economy improved. This winter, the scurrying started only two weeks before the holidays, instead of the usual four weeks, according to shipping executives. That is because many Chinese factories simply cut back production this month as their Western customers began resisting steep price increases.

China’s inflation is running 5 percent at the consumer level, according to official measures. But Chinese and Western economists describe these measures as based on flawed, outdated techniques and say the real figure may be up to twice as high.

In contrast, the annual inflation rate in the United States is low by historical standards — about 1.5 percent currently.

China imposed price controls on food in mid-November to limit inflation. But Chinese state media began warning the public on Wednesday that those controls might be ineffective, as a drought in northern China has damaged the winter wheat crop and frost has spoiled part of the vegetable harvest in the south.

China’s $6 trillion economy used to be heavily dependent on exports for growth. Exports still account for about one-fifth of the economy, after excluding goods that are merely imported to China for final assembly and then re-exported. But China’s economy has grown powerfully for the last two years mainly on the strength of investment-led domestic demand. That demand, partly fed by low-interest lending by state-owned banks, is another factor in China’s inflation.

Cities and provinces across China have tried to cushion inflation’s effect on consumers by sharply raising minimum wages. Guangdong Province, the export heartland of light industry next to Hong Kong, announced two weeks ago that its cities were raising their minimum wages by an average of 18.6 percent, effective March 1.

That follows a similar increase that took effect in Guangdong around eight months ago. Many other provinces and cities have also sharply raised minimum wages recently.

The wage increases are also driven by a growing scarcity of factory workers. The number of Chinese in their 20s and early 30s, the traditional age bracket for factory labor, is slowly shrinking because of the introduction of the “one child system” a generation ago. And a rapidly expanding university system has produced waves of graduates with no interest in factory work.

Some companies have responded by moving factories deeper into China’s interior, said Stanley Lau, the deputy chairman of the Federation of Hong Kong Industries, which represents exporters employing 10 million mainland Chinese workers. But inland wages are starting to catch up with coastal pay rates, Mr. Lau said, while higher transportation costs frequently offset the wage savings from moving to the interior.

Coach, the American company that is one of the largest marketers of luxury handbags and other accessories, announced on Tuesday that it planned to reduce its reliance on China to less than half of its products, from more than 80 percent now. It will shift output to Vietnam and India, particularly for smaller, more labor-intensive leather goods.

But Mike Devine, the company’s executive vice president and chief financial officer, said that it would take four years to carry out the shift.

Trying to move production elsewhere, some retailers are finding many factories are already fully booked: Vietnam and Thailand each have populations smaller than some Chinese provinces, while Cambodia and Laos have smaller populations than some Chinese cities.

Many manufacturers foresee further labor shortages looming in China that will push wages even higher. They are responding with plans to upgrade their factory equipment and product designs, which could turn them into more direct competitors with high-end manufacturers in Europe and the United States.

Spain's Deficit Progress Creates Cushion for Cajas

Spain’s efforts to shrink the euro region’s third-biggest budget deficit may be succeeding, easing investor concern about the cost of bolstering the country’s savings banks.

Spain publishes as soon as today the central government’s deficit for last year, which accounts for the bulk of the nation’s overall shortfall. The deficit fell 46 percent in the first 11 months of 2010, though December is the biggest month for spending. By contrast, Portugal’s central government shortfall widened.

“These figures show the efforts by the government are bearing fruit and generally will continue to do so,” said Luigi Speranza, an economist at BNP Paribas SA in London. “You can see the difference with Portugal, where developments in the fiscal balance in general will be less successful.”

Spain’s public finances face an additional burden as Prime Minister Jose Luis Rodriguez Zapatero puts pressure on struggling savings banks, or cajas, to bolster their capital. He has pledged to make public funds available to help the lenders. Spain’s debt at 64 percent of gross domestic product was lower in 2010 than that of France and Germany, leaving the government with fiscal wiggle room to raise funds for those lenders.

The country’s savings banks have been hobbled by loans to construction and real estate developers since the collapse of theproperty market left the nation with 1 million unsold houses. Concern about potential losses for those institutions, which account for about half of all lending, has contributed to the surge in the Spain’s borrowing costs.

Yield Gap

The gap between the yield on Spanish and German 10-year bonds closed at 203 basis points on Jan. 21. That compares with an average of 15 basis points in the first decade of monetary union. The spread is down from a euro-era high of 298 on Nov. 30, reached after Ireland accepted an EU bailout. The cost of insuring Spain’s debt against default fell to 276 basis points on Jan. 21, the lowest close in two months.

Spain’s overall shortfall, which the government has pledged to bring in line with France’s projected gap of 6 percent of GDP this year, includes the balances of regional administrations and the social security system. The government targeted a total deficit of 9.3 percent last year, down from 11 percent in 2009. Portugal’s deficit fell to less than the 7.3 percent target last year, the government said.

‘Comfortable Buffer’

Spain can afford to pump as much as 75 billion euros ($102 billion) into the savings banks, which would be a “very comfortable buffer,” without straining public finances, said Gilles Moec, an economist at Deutsche Bank AG in London. He estimates that in 2015 the debt-to-GDP ratio will be 80 percent without a recapitalization and that would rise to 86 percent in the case of a 75 billion-euro injection.

“It doesn’t change massively the trajectory,” he said in a telephone interview. “This is conditional upon the capacity of Spain to fulfill on the fiscal side of things, but that seems to be the case.”

Bank of America Merrill Lynch sees the lenders’ capital shortfall at 43 billion euros, rising to 80 billion euros in an “extreme case,” Sergio Gamez, an analyst, wrote in a research note on Jan. 20.

Spain’s government is working on a plan to bolster savings banks’ capital, Deputy Prime Minister Alfredo Perez Rubalcaba said on Jan. 21, without giving more details. The government and the Bank of Spain have said lenders should first seek funds privately, only using the rescue mechanism known as FROB as a last resort. The FROB has committed loans of 11.6 billion euros, about 1 percent of GDP, to back mergers among the lenders.

Salgado’s Response

While the FROB was created with 9 billion euros of capital and the capacity to take on as much as 90 billion euros of debt, Finance Minister Elena Salgado told reporters in Brussels last week that the capital needs “would be very far” from estimates of 30 billion euros to 80 billion euros.

Spain’s government cut public wages 5 percent in June, and is freezing salaries and pensions this year. In a U-turn for the Socialist administration, it scrapped a benefit for new mothers and a subsidy for the long-term unemployed as part of its battle to lower the deficit. The wage cut also applied to regional governments, which hire about half of all public workers and control health spending, helping them reduce their overall shortfall to 1.24 percent of GDP in the first three quarters, compared with a full-year target of 2.4 percent.

Spain’s public finances may also receive a boost in the medium term from a pension overhaul due this month, which will raise the retirement age to 67 years from 65 and tighten rules on how benefits are calculated. The Cabinet has pledged to pass the bill on Jan. 28 and send it to Parliament for approval.

Euro Zone Debt Crisis - New EU Bank Stress Tests More Like the US: Lagarde - CNBC

The stress tests that European banks will undergo this year will have to be more credible, like the ones in the United States, and may be completed in the first half of the year, France's Economy Minister Christine Lagarde told CNBC Monday.

Last year in July, 91 banks in the European Union went through stress tests but only seven of them failed, prompting many critics to say the tests were not tough enough.

"The next European stress tests have to be more credible. They have to be better communicated and that is also part of the picture because if we have to restore confidence and build our stability, we need to safe and secure with our banking system and with our banks," Lagarde said in an interview.

"So we have to go through testing just like in the United States for instance, as will happen in the course of 2011," she added.

Last year, five Spanish savings banks – or cajas – failed the stress test. Spain has taken measures to prop up the cajas but some analysts say that they are likely to need up to 50 billion euros ($67.5 billion) to boost their capital.

"The Spanish banks, like the French banks, like the German banks, like the Swedish banks will be…put to test," Lagarde said.

"And will be stress tested in due course. And just like for any other bank in the European Union. If capitalization or recapitalization is required, then we will have to see to that," she added.