Daily Market Reports | Jul 11 2009
By Andrew Nelson
The Dow dropped 36 points, or 0.45% and the S&P500 eased 0.4%, but the Nasdaq bucked the trend, rising 0.2% following a round of positive comments on the tech sector from analysts.
With corporate earnings starting to flow in earnest next week, investors paused to take stock of the as yet to recover US economy. With no evidence of a sustainable improvement for unemployment, consumer confidence and commodity prices, investors are still mostly on the sidelines ahead of the looming US reporting season.
For the week, the Dow was down 1.6%, while the S&P 500 index lost 1.9% and the Nasdaq, despite a minor gain on the day’s trade, finished the week 2.3% lower.
Yesterday’s better-than-expected results from aluminium maker Alcoa were quickly forgotten, with a warning from Dow peer Chevron late yesterday putting investors straight on to the back foot from the opening bell. The Dow oil major reported that a drop in US refining margins would definitely take a bite of second-quarter profits, meaning the boon of recently higher oil prices was being offset by the weaker dollar.
Other big-name commodity stocks went the same way on Friday. Exxon Mobil, Conoco Phillips, US Steel and Rio Tinto were all down between 1.3% and 2.8%. FYI, it was Rio that booked the 2.8% drop.
But Chevron’s profit warning didn’t just drag on oil and materials stocks, it put pressure on the market in general. Understanding the market over the next few weeks will come down to understanding why Chevron’s disappointment held such sway today. In and of itself it wasn’t world ending news, but it was understandably seen a worrying precursor to what is expected be a very difficult reporting season.
And this reporting season is looking more and more crucial, as investors are becoming increasingly likely to interpret the results, especially from the big Dow stocks, as an economic proxy for auguring where the economy is headed.
The truth is, the market isn’t expecting very much. In fact, S&P 500 companies are expected to see profits decline by 36% from a year ago, according to the latest data from Thomson Reuters. But this is the problem, because every big hiccup to the downside, especially as expectations are already so low, is likely to brew into quite a little storm in a teacup.
Going forward, this should see every piece of good news taken at face vale, but every piece of unexpected bad news will reverberate, lowering expectations for not only this quarter, but the next, and the next. And by following such line of reasoning, investors will soon forget the recently discussed topic of recovery. They will forget all of the greenshoots that have been cropping up. Then pessimism will once again take the reins and any sight of a distant recovery, no matter how real it is, will be lost.
And it wasn’t just the good ship Chevron that put investors on the defensive. News that consumer sentiment dropped more than expected also did little to boost the flagging mood, especially as consumer spending is considered crucial for any US recovery. The University of Michigan/Reuters consumer sentiment index fell to 64.6, its lowest level since March, with analysts excepting a more modest drop to 70.
Also, the May trade balance narrowed to US$26 billion, its lowest reading in a decade. It was certainly a surprise to economists who were looking for it to expand to US$30 billion.
Still, the news helped the US dollar push higher against most major currencies, excluding the Japanese yen, taking back the upper hand as concerns about the global economic outlook nibbled away at investor appetite for riskier assets.
Much of the weakness on the S&P500 came form the financial sector, which fell 1.3%. CIT Group headed up the losses, with shares tumbling 18% after the commercial lender confirmed that the Federal Deposit Insurance Corp. had yet to approve its application to issue government-backed debt.
The news did encourage fixed-income traders bid up government debt, which in turn saw the benchmark 10-year Treasury note gain 31/32 to yield 3.295%.
Spot gold held firm, slipping just US10c to US$912.10 and extending weekly losses, with falling oil prices and a strengthening US dollar both serving to tarnish the metal’s appeal as a hedge against inflation and a weak US currency.
Crude-oil futures sank by US52c to settle at US$59.89 a barrel, making it the first settlement below US$60 for the front-month contract since May.
Base metals were also mostly lower in London, although a late push trimmed most of the day’s losses. All except for tin, which dropped 6.3% to fall to its lowest level since late April. Strong import figures from China and mostly bullish inventory reports from the LME ensured copper only gave up US$30 after steeper earlier losses.
The reaction in Australia wasn’t nearly as downbeat as could have been feared, with the SPI actually ticking up 3 points to 3754.
