MarketView for April 13

 

 

Summary 

 

The major equity indexes were mostly flat in a choppy session on Wednesday, with the Street receptive to strong technology earnings even as JPMorgan Chase's numbers weighed on other market sectors. About 6.9 billion shares traded on the major equity exchanges, a number that was well below last year's estimated daily average of 8.47 billion.

 

Network equipment maker Riverbed Technology added to forbearing of tech earnings that in turn helped send the Nasdaq higher. Riverbed ended the day up 12.4 percent to close at $34.74 on four times the average daily volume over the last 50 days.

 

JPMorgan Chase fell 0.8 percent to $46.25 after tacking on a gain of more than 1 percent earlier in the day. The company, a component of the Dow Jones industrial average, exceeded expectations with its earnings, but enthusiasm waned after the bank's chief executive said in a conference call there would not be another dividend hike any time soon.

 

In an outline of his budget proposal, President Barack Obama said he would refuse to renew Bush-era tax breaks for wealthier Americans. A deal to extend those cuts last December propelled the S&P 500 to its highest level in two years.

 

EMC led tech shares higher after a Goldman Sachs analyst said he expects a better-than-consensus quarter for the top maker of corporate data storage equipment. EMC's shares closed 3.3 percent higher at $26.69.

 

From a technical perspective, the S&P 500 weakened as its daily moving average convergence-divergence, a gauge of short-term relative performance, triggered a "sell" signal for the first time since late March. Its momentum was at its lowest point since late March and its relative strength index, near 49, was neutral and far from oversold despite posting losses in four of the last five sessions.

 

The Street is starting to look ahead to the Federal Reserve's policy meeting in two weeks, at which time the Fed is expected to detail its exit strategy as a $600 billion asset-buying program comes to an end.

 

Energy Costs Concern Fed

 

According to the Fed’s Beige Book, the economy continued to improve over the past month on gains in manufacturing but firms are feeling the effects of higher energy and raw material costs.

 

"While many districts described the improvements as only moderate, most districts stated that gains were widespread across sectors, and Kansas City described its economic gains as solid," the Fed said in its Beige Book summary. "Manufacturing continued to lead, with virtually every district citing examples of steady improvement, often with reports of increased hiring," the Fed added.

 

The Fed’s anecdotal summary of economic conditions can be taken to mean that it is unlikely that the Fed will move away from its policy stance of keeping interest rates extraordinarily low and completing its $600 billion Treasury bond purchase program by the end of June.

 

The Beige Book was based on information collected in all 12 regional Fed districts before April 4 and was compiled by the Federal Reserve Bank of Richmond. The Fed said that most districts described wage pressures as "weak or subdued" but higher commodity costs were widely reported to be putting upward pressure on prices.

 

"Energy prices were cited most often, but raw materials in general were an increasing concern of businesses," it said.

 

Firms' ability to pass on price increases varied across districts. Manufacturers were generally finding less resistance to price increases from their customers than retailers or the construction sector, where weak demand was a limiting factor.

 

Retail sales improved slightly in most districts, except Boston, which reported mixed sales, and Richmond, which reported weak sales. Auto sales improved in most districts, the Fed said.

 

Housing remains weak, with most districts reporting flat or weaker markets for single-family dwellings. Market activity was still declining in the St. Louis and Minneapolis districts, while activity in the New York, Cleveland, Kansas City, Dallas and San Francisco markets was reported as weak. But Philadelphia and Atlanta reported that brokers saw signs that conditions are starting to improve.

 

With commodity prices in focus, the Fed report noted mixed assessments of agricultural activity. There were varying degrees of drought in the Atlanta, Kansas City and Dallas districts. Chicago reported that some areas did not have adequate subsoil moisture to endure dry spells, but spring planting should proceed quickly.

 

Most districts said higher fuel and feed prices continued to put downward pressure on farm profit margins but prices for most agricultural commodities remained strong.

 

Wall of Debt Concerns IMF

 

The world's banks face a $3.6 trillion "wall of maturing debt" in the next two years and must compete with debt-laden governments to secure financing, the International Monetary Fund warned on Wednesday. Many European banks need bigger capital cushions to restore market confidence and assure they can borrow, and some weak players will need to be closed, the IMF said in its Global Financial Stability Report.

 

The debt rollover requirements are most acute for Irish and German banks, with as much as half of their outstanding debt coming due over the next two years, the fund said. "These bank funding needs coincide with higher sovereign refinancing requirements, heightening competition for scarce funding resources," the IMF said.

 

Overall, the IMF said global financial stability has improved over the past six months. The most pressing challenges in the coming months will be funding of banks and sovereigns, particularly in vulnerable euro area countries, it said.

 

The IMF and European Union bailed out Greece and Ireland, and are in talks with Portugal on a lending program as sovereign borrowing costs surge. However, the IMF said Spanish authorities were taking the right steps to address the country's debt problems.

 

European banks hold large amounts of euro zone sovereign debt, making them vulnerable to losses if countries are forced to restructure and the lending programs in Greece and Ireland were built on the assumption there would be no such restructuring, and the programs needed time to work.

 

Still, concerns regarding bad debt exposure have heightened concerns regarding bank balance sheets, making it even more important for firms to shore up their capital.

 

U.S. banks built up capital buffers in 2009, when regulators completed a set of stress tests that revealed some large holes. But European banks still need to raise a "significant amount of capital" to regain access to funding markets, the fund said.

 

"It is ... imperative that weak banks raise capital to avoid a pernicious cycle of deleveraging, weak credit growth, and falling asset prices," it warned.

 

The European Central Bank's upcoming stress tests provide a "golden opportunity" to improve bank balance sheet transparency and reduce market uncertainty about the quality of assets on banks' books, the IMF said.

 

European banks won't be able to obtain all the necessary capital from markets, and public money may have to fill some of the gaps, it added. Banks could also cut dividends and retain a larger portion of earnings.

 

"Overall, a comprehensive set of policies -- including capital-raising, restructuring and where necessary resolution of weak banks, and increased transparency about banking risks -- is needed to solve banking system vulnerabilities," it said. "Without these reforms, downside risks will re-emerge."

 

The IMF said banks' exposure to troubled sovereign debt is "uncertain," which adds to the funding strains. It said government debt was generally high and on a worrying upward path in many advanced economies. It repeated its warning that the United States and Japan faced particularly dangerous debt dynamics.

 

Advanced economies were "living dangerously" with high debt burdens, and faced the difficult task of trying to pare deficits without choking off the economic recovery. The fund said government interest bills would likely rise, although the burden should generally remain manageable provided countries proceed with deficit reduction plans.

 

For 2011, Japan and the United States face the largest public debt rollovers of any advanced economy at 56 percent and 29 percent of gross domestic product, respectively. "While the United States and Japan continue to benefit from low current (borrowing) rates, both are very sensitive to a potential rise in funding costs," it said.