Daily Market Reports | May 16 2009
By Andrew Nelson
The Dow was down 63 points, or 0.75%, while the S&P 500 gave up 1.1% and the Nasdaq finished 0.5% lower.
Even in the last few months of buoyant markets, Fridays have been a bit sketchy at best . But when you throw in options expirations and a lack of momentum that has otherwise led us into all but one Friday over the last two and half months, and it was always going to be a tough day.
Stocks got off to a wobbly start, but managed to break higher in the morning session after a pair of better-than-expected manufacturing readings. But dismal economic data out of Europe and weak US retail reports capped gains. Banks were beaten down by profit taking after recent runs, while crude oil and a range of energy stocks gave up much of their recent gains.
Declines were broad based, with 24 of 30 Dow components losing ground. The retreat was led by Chevron, Exxon Mobil, Boeing, Caterpillar, Merck, and Wal-Mart Stores.
The day capped off what was a turbulent week that has at least temporarily ended the sharp rally that has carried the major benchmarks more than 30% higher from the bear-market lows of early March. For more than two months now investors have been debating whether those gains can last and be extended further, or if they will just temporarily forestall the next leg of the bear market.
An important point to note is that the proportion of S&P 500 companies trading above their 50-day moving averages now stands above 90%. David James, a senior vice president at James Investment Research, told the Wall Street Journal that this is about 20 percentage points above the level that usually signals a market pullback is on the way.
On the other hand, there still seems to be a bit of optimism on the street, with traders pointing out there are some emerging signs that credit markets are actually starting to improve. In fact, the London interbank offered rate, or Libor, has fallen to its lowest levels in more than two decades, while indicators of stress in the money markets have eased. At the same time, a number of banks are seeing some success in raising money without the US federal government’s backing. Both JP Morgan Chase and Citigroup sold new deals on Friday, while non-financial corporations like Microsoft have also recently had successful debt offerings.
However, Fitch Ratings has warned that it is considering lowering its credit ratings on nine US financial companies, reflecting the group’s expectation for a higher level of vulnerability to an expected re-tightening in credit. All nine names traded sharply lower, with the financial sector as a whole placing most of the downward pressure on the main gauges over the course of trading.
Economic news Friday was mixed. The CPI read was unchanged in April from March, the US Labor Department reported, however core CPI, which excludes food and energy prices, jumped 0.3% last month. This was the largest increase since June 2008 and well above economists expectations for a 0.1% increase.
Consumer prices fell 0.7% compared to a year ago and this was the largest 12-month decline since June 1955. The level is also well under the 2% annual rate of inflation that most Fed officials think is consistent with their dual mandate of price stability and maximum employment. As well, industrial production fell 0.5% in April compared with the prior month.
But it wasn’t all bad, with other data suggesting at least some moderation in the deterioration of the factory sector, with the Federal Reserve Bank of New York’s Empire State manufacturing index climbing 10 points to -4.55 from -14.65 in April and well above the record low of -38.23 from March. All told, the May read is the best since August 2008.
There was a little good news on the consumer front as well, with the University of Michigan’s consumer sentiment index rising to 67.9 in May from 65.1 in April. Forecasts were for a rise to just 67.
All told, the unchanged consumer prices, a slower pace in the decline in industrial output and stronger-than-expected data on sentiment were definitely not as bad as some of the releases earlier in the week, like the jobless claims report, and will probably help reinforce hopes the recession is easing.
What was probably more telling though were economic data from Europe, which came out before the market opened and fanned fears about the depth of the global recession. The data showed that Europe has sunk to what may be the recession’s low point in the first quarter as gross domestic product fell 2.5% from the last quarter of 2008, both in the euro zone and the broader European Union block. Germany’s economy sank 3.8%, while France’s dipped 1.2% in the first quarter.
Altogether, this group of data was more than enough evidence that while things may be stabilising, the economic outlook for both the US and the rest of the world is far from improving. More bad news from the US auto sector only helped reinforce this view. General Motors said it is notifying 1,100 US dealers that their contracts will be ending, and thinks it will end up eliminating up to 2,600 dealers, or 42% of it total dealer force over the next year. This followed on from yesterday’s news that bankrupt auto-maker Chrysler was pulling the contracts from at least 25% of its dealers.
Belying the up tick in consumer sentiment, the reality is that retailers are still doing it tough. JC Penney reported that first-quarter profit plunged 79% from a year earlier, while also forecasting full-year earnings will be in a range that is short of analyst estimates.
Oil fell more than 3% to below US$57 a barrel as dealers became increasingly pessimistic about the outlook for global energy demand, hard hit by the economic slump, which was brought to a fine point by the GDP data out of Europe. US crude for June delivery fell US$2.28 to settle at US$56.34 a barrel, down from a six-month intra-day high of more than US$60 hit earlier this week. Losses on equities markets and moderate gains in the US dollar against other currencies also encouraged selling.
The US dollar gained against the Aussie and the euro on the continent’s weak GDP data, but lost ground versus the yen. Gold was a beneficiary, up US$4.30/oz, while base metals didn’t do much at all after what had mostly been a downbeat week.
Given the news from Europe and the performance on Wall Street, it should be fairly unsurprising that the SPI was lower, down 42 points to 3737.
