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Morning Update

This week traders will be focusing on two main events: the FOMC meeting kicking off Tuesday and ending Wednesday with an announcement from Fed Chairman Ben Bernanke, and Thursday’s ECB policy setting meeting. Last week despite earnings misses and poor economic data US equities rose on expectations of further stimulus from the Fed and ECB. Rounding out the week will be the non-farm payrolls report on Friday.

Some have speculated that the Fed will cut the Fed Funds rate, the rate it pays banks that hold deposits with them from 0.25%. As of July 25th the Fed held $1.49 trillion of reserves, up from $991 billion at the end of 2010 and $2.4 billion at the end of 2007 (Bloomberg). The aim in cutting interest rates further would be to give banks an incentive to withdraw excess reserves and lend it, where they can get a higher yield. The Fed has not cut rates since 2008, in part out of fear of destabilizing the money market. However, the results from the ECB’s recent rate cut are encouraging - $321 billion Euros in excess reserves were withdrawn from the ECB. The Fed could also communicate that it will keep rates low past 2014, change its outlook on the discount window rate, or even start another round of bond buying.

Notable earnings after today’s close include Seagate Technologies (STX). The stock popped last week after Western Digital, Seagate’s main competitor, reported strong earnings and surprised investors by raising guidance. Trading at a 6.8 P/E the stock looks cheap here. The company reduced guidance earlier last month and consensus expectations are now for EPS of $2.51. The at-the-money straddle for options expiring this week closed Friday at $2.73, implying that the market is expecting the stock to move about 9% after earnings.

Tomorrow before the market opens BP will report earnings. Earnings are expected to be down Q/Q due to lower crude prices. TNK-BP, Russia’s third-largest oil producer, of which BP owns half, reported Q2 earnings of $808 million, down from $2.2 billion a year ago. BP’s stock yields 5.62% as of Friday’s close, so an earnings miss could set up a good long entry into the stock for investors searching for yield.


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