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Stock Market Preview for 01/27/2011

January 27, 2011

U.S. stock index futures are higher this morning on a moderate basis.

Asian markets rallied across the board overnight. A downgrade of Japan by S&P to AA- from AA has sent the yen sharply lower against other currencies.

European markets initially reacted negatively to this downgrade, with spreads widening on peripheral member debt. Stocks there have since come off their lows heading toward the U.S. session, and most of its indexes are now fractionally positive.

The implications of a credit downgrade of a major developed country are not likely to be a one-day event, but for now traders are limiting the impact to currency. One sector that could be affected this morning is the financials.

In currency markets, the U.S. dollar is higher because of the plunge in the yen and the relatively flat movements in other currency pairs. Energy prices are lower, but the reaction in other commodities is mixed. Industrial metals are still relatively strong, and some soft commodities have increased in price.

CATCommodity inflation, particularly in agricultural prices, was highlighted at the World Economic Forum in Davos. Politicians at Davos, notably France’s president Nicolas Sarkozy, have been vocal in calling for price curbs on commodities.

Government officials are sensitive to the potential for social and political unrest that dramatic food price increases in poorer nations can spur. The current street protests in Egypt, while largely political, were stoked in part by surging food prices.

Mexico’s finance minister has expressed concerns that emerging market economies may be damaged by price spikes comparable to those seen in 2008. Companies are not immune from those inflation effects either.

Starbucks last night reduced its second-quarter and full-year 2011 outlook below consensus. While this may or may not have resulted entirely from “dramatically higher coffee prices,” as its CEO contended, it is likely a contributing factor.

Food producers, clothing companies, and price-sensitive casual dining businesses all face higher input costs. Procter & Gamble noted on its call this morning that higher costs had squeezed its margins. Both Starbucks and Procter & Gamble shares are trading lower by more than 2.5 percent at the time of this writing.

In other stock-specific news, Teradyne is up more than 10 percent after beating fourth-quarter earnings estimates and raising revenue and earnings guidance for its first quarter. Qualcomm was also a big winner in the after-market last night and is up more than 5 percent this morning.

Netflix beat expectations as well and is currently trading higher by more than 12 percent. The company added subscribers at a much faster pace than expected, ending the year at 20 million.

Caterpillar also beat forecasts by a wide margin and raised its full-year earnings outlook to $6 per share versus the $5.85 consensus.

Key companies reporting after the close today include Amazon.com, Chubb, Compuware, Federated Investors, KLA-Tencor, Microsoft, Monster Worldwide, and SanDisk. For tomorrow a few notable names include American Electric Power, Chevron, Dominion Resources, Dover, Honeywell, and Ford.

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