MarketView for April 27

 

 

 

Summary 

 

Stock prices were pasted on Tuesday as downgrades of Greece and Portugal fueled fear about euro-zone economic stability, and a grilling of Goldman Sachs on Capitol Hill heightened the possibility of financial reform, although the latter is well over due. Nonetheless, as a result, stock prices saw their worst day in nearly three months. At the same time, the VIX volatility index, Wall Street's barometer of investor fear, rose about 31 percent, its largest one-day move since October 2008.

 

Senators hammered Goldman Sachs’ executives for taking advantage of the housing bubble and making billions off that market's collapse. The hearings coincided with lawmakers' efforts to pass strict regulations for banks. As the drama unfolded in Washington, the cost of insuring Greek and Portuguese debt against default rose to record highs after rating agency Standard and Poor's slashed the sovereign ratings of both countries.

 

The combined volume on the New York Stock Exchange, the American Stock Exchange and Nasdaq was the second highest this year, with 12.77 billion shares traded.

 

Goldman's shares rose 0.7 percent to $153.04. Although Goldman's stock managed to do remarkably well in the market's sharp downtrend on Tuesday, it's still down nearly 17 percent from its recent closing high on April 15, which was the night before the SEC filed civil fraud charges against the company.

 

The stock sell-off had economically sensitive sectors, such as materials, energy, financials and consumer discretionary, falling about 3 percent. Chevron was among the biggest drags on the Dow Industrials, falling 2.9 percent to $80.23.

 

The major stock indexes posted their worst losses since Feb 4, when the S&P 500 fell more than 3 percent and the Dow briefly fell below 10,000, also on concerns about the fiscal stability of Portugal, Spain and Greece. Shares of the National Bank of Greece sank almost 16 percent to $2.60, just above a session low of $2.56, their lowest since March 2009. The euro fell more than 2 percent against the yen and was trading at a one-year low against the dollar.

 

Reflecting Wall Street fears over the sovereign debt problems, the CBOE Volatility Index .VIX surged almost 33 percent to an intraday peak at 23.20, its highest since February. At the close, the VIX was up 30.57 percent at 22.81.

 

3M was one of only two Dow components in the positive zone, up 0.6 percent at $87.97, after posting better-than-expected quarterly profits and raising its full-year outlook.

 

House Prices Fall

 

Prices of homes prices fell in the month of February, but rose compared to a year ago for the first time in more than three years, making it the latest sign that the housing market is slowly recovering.

 

House prices have benefited recently from a federal homebuyer tax credit that expires on April 30, but a glut of mortgage foreclosure sales continue to weigh on the market, Standard & Poor's said on Tuesday. The S&P/Case-Shiller 20-city composite price index fell 0.9 percent on an unadjusted basis in February, worse than a 0.3 percent decline estimated in a Reuters survey. Seasonally adjusted, prices declined by 0.1 percent, as expected, after a string of eight straight monthly increases.

 

S&P's 10-city and 20-city index increased year-on-year for the first time since December 2006, rising 1.4 percent and 0.6 percent, respectively, compared to February 2009. From the peak in mid-2006 through February 2007, home prices are still down more than 30 percent on average nationwide.

 

While prices slid in February, mortgage rates stayed low near 5.0 percent and the number of home sales rose sharply in March as buyers rushed to take advantage of the soon expiring tax credit of up to $8,000. Sales and prices through the spring months will be closely monitored to see if the momentum continues once the tax incentive ends.

 

Consumer Confidence Rises

 

Consumer confidence rose in April to its highest level since the collapse of Lehman Brothers in September 2008, driven by growing optimism about the labor market the Conference Board reported on Tuesday. The Board's index of consumer attitudes rose for the second straight month in April to 57.9 from a downwardly revised 52.3 in March.

 

The expectations index increased to 77.4 in April, the strongest showing since October 2007, from a revised 70.4 in March. The present situation index advanced to 28.6, the highest since May 2009, from a revised 25.2. Consumers' labor market assessment improved. The "jobs hard to get" index fell to 45.0 percent from 46.3 percent, while the "jobs plentiful" index increased to 4.8 percent from 4.0 percent.

 

Greece and Portugal See Government Debt Ratings Cut

 

Standard and Poor's reduced it rating on Greek debt to junk status on Tuesday and also downgraded Portugal, as investors worried political pressures could block a multi-billion euro bailout of Greece. As a result, the markets in Europe and the United States fell sharply in reaction to signs that the Greek debt crisis was spreading to other highly indebted states on the periphery of the euro zone.

 

S&P cut its rating of Greek government debt by a full three notches to BB-plus, the first level of speculative status. The outlook is negative, meaning the agency could downgrade Greece again. The downgrade put Greece on par with Romania and below Kazakhstan, Hungary and Iceland, the last of which rocked global markets when its main banks imploded at the start of the global financial crisis. S&P cited the "political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory."

 

For Portugal, S&P cut its rating by two notches to A-minus, saying Portuguese finances were structurally weak and the economy uncompetitive. Lisbon needs to do more than it currently plans to stabilize its finances, S&P said. 

 

Bailout talks between Greece, European authorities and the International Monetary Fund began in Athens last week, after Greece asked for as much as 45 billion euros in emergency loans from euro zone governments and the IMF this year. Greek and European Commission officials have said the first tranche of aid will be paid before May 19, when Athens will need to refinance a maturing 8.5 billion euro bond.

 

However, the financial markets are not convinced that governments have the political will to reach and sustain an agreement on the aid, especially in Germany, where public opinion is strongly against helping Greece.

 

The backing of Germany, Europe's biggest economy, is vital for any rescue but Chancellor Angela Merkel's Christian Democrats risk defeat in a regional election on May 9 that would end her coalition's majority in the upper house of parliament.

 

To rally support among their taxpayers for a bailout, European governments want Greece to commit to tough austerity steps. But they cannot push too hard since that might hurt Greek public support for austerity, and by deepening Greece's recession, make deficit-cutting targets impossible to hit.

 

In Athens on Tuesday, about 1,500 private and public sector workers, students and anarchists marched to parliament chanting "Out with the IMF and the European Union" in protest against austerity measures that could accompany the bailout. Most Greeks disapprove of their government's decision to ask for financial aid, according to the first opinion poll since the request was made. Of 1,400 people surveyed, 60.9 percent said they were against the decision, said the poll, released on Tuesday by Greek Public Opinion for Mega TV.

 

Greek bank stocks are down more than 9 percent. The Greek bank index has lost nearly 60 percent since the debt crisis began to develop in mid-October, destroying about 28 billion euros in market capitalization. As other banks have cut funding lines to them during the crisis, Greek banks have become heavily dependent on funding which they obtain from the ECB in money market operations.

 

ECB rules mean that after S&P's action, any large downgrade by another agency, Moody's Investors Service, could worsen Greek banks' funding problems. If Moody's, which now rates Greece A3, also cuts Greece to BBB territory, banks will receive 5 percent less cash when they use Greek bonds as collateral in money market operations.

 

Greece's two-year government bond yield soared to nearly 15 percent on Tuesday, meaning any fresh borrowing from the debt market would be ruinously expensive for Greece. Trade in its bonds has almost halted as bid/ask spreads have ballooned to prohibitive levels.

 

The two-year Portuguese government bond yield jumped to 5.23 percent from 4.16 percent, as the cost of insuring its debt against default rose to a record high.

 

Even if Greece obtains international aid this year and over the next few years, many analysts think its uncompetitive economy may continue to struggle in the euro zone's monetary straightjacket, ultimately forcing a debt default.

 

S&P on Tuesday assigned a recovery rating of "4" to Greece's debt, indicating it expected an "average" recovery of between 30 and 50 percent for holders in the event of a Greek restructuring or default.