MarketView for April 4

Summary

The major equity indexes closed out the day in negative territory for the second consecutive day on Wednesday as Wall Street contemplated a world without monetary stimulus. At the same time, a poorly received bond auction in Spain suggested the effects of Europe's funding operations were waning. The benchmark S&P 500 index has fallen in eight of the past 12 sessions, dropping below its 14-day moving average for the first time in a month. Meanwhile, the Nasdaq posted its worst daily percentage drop since December 14.

Spanish borrowing costs rose sharply at bond auctions, raising concerns that the rally in troubled sovereign debt of euro-zone peripheral nations sparked by the European Central Bank's two Long-Term Refinancing Operations may be coming to an end. The yield on the country's 10-year bond leaped to 5.7 percent, its highest level since January.

Equity markets have rallied steadily since the ECB's stimulus efforts eased funding pressures for euro-zone banks, removing a source of anxiety for U.S. investors. However, Spain's stocks have languished. The shares of Santander, a Spanish bank, have fallen 16 percent since March 19. The markets also continued to feel the effects of the minutes from the Federal Reserve's latest meeting, published on Tuesday. They showed the Fed's policy-setting Federal Open Market Committee was moving away from introducing more monetary stimulus.

Signs that the economy was on the mend in the first quarter have helped markets rally this year. But there is now a growing feeling among investors that a least some of that improvement may have been due to the mild winter. As a result investors are turning cautious ahead of second-quarter economic data.

Commodities, a hedge against the inflationary and dollar-weakening effects of monetary stimulus, fell sharply. Copper fell more than 3 percent; its largest decline in nearly two months, while gold fell to its lowest in nearly three months. However, you should not read too much into the weakness.  The market needs a reason to consolidate after its big run and that the fundamental picture, while not inspiring, is at least solid.

That was shown in the CBOE Volatility Index, Wall Street's fear gauge, which could not sustain its gains after it moved above resistance at its 50-day moving average. The index hit a high of 17.74, its highest in nearly a month, before retreating.

ADP’s private-sector jobs data indicated that employers added 209,000 jobs in March, suggesting the labor market was continuing to strengthen. However, it was not enough to increase investor sentiment.

Moody's downgraded General Electric and its finance unit, GE Capital, each by a notch, saying there were "material risks" associated with GE Capital's funding model. The stock, a Dow component, fell 1.1 percent to $19.74.

McDonald's was down 1.9 percent to close at $97.48 after Goldman Sachs removed it from Goldman's "conviction buy" list and cut its price target on shares of the world's largest fast-food restaurant chain to $110.

Semiconductors weighed on the Nasdaq as SanDisk Corp closed down 11.1 percent to $44.51 after the flash-memory maker warned that its revenue and margins are hurting from weak demand from mobile phone manufacturers as well as from a glut in supply that has led to lower prices.

Volume was light, with about 6.82 billion shares changed hands on the three major exchanges, a number that was below last year's daily average of 7.84 billion shares.

Once Again the Economic Data is Mixed

According to the ADP National Employment Report more than 200,000 jobs were added to the economy in March, additional proof that the labor market is undergoing a recovery. The report indicated that the private sector added 209,000 positions last month. Although there has been some question as to the accuracy of the ADP figures, the average discrepancy between ADP's figures and the government-reported private jobs numbers over the last 12 months was about 1,000 jobs.

ADP also revised upward the job gains seen in January and February to 182,000 and 230,000, respectively. The report is jointly developed with Macroeconomic Advisers LLC. The non-farm payrolls report from the Labor Department on Friday is expected to show a net gain of 203,000 jobs last month, including a rise in private payrolls of 218,000. The unemployment rate is seen holding steady at a three-year low of 8.3 percent. The Labor Department report has shown the economy added more than 200,000 jobs in each of the last three months, helping to keep the economic recovery on track.

Additional data showed a measure of employment in the services sector also rose last month, even though the pace of overall growth slowed. Nonetheless, the economic reports were overshadowed on Wall Street as investors were disappointed by the Federal Reserve's toned-down talk on further stimulus to encourage the recovery.

Federal Reserve policymakers backed away from the idea of launching a third round of monetary action as the recovery gradually improves, minutes from Fed's last meeting showed on Tuesday.  Still, the Fed's assessment of the economy remained cautious.

The Institute for Supply Management said its services index fell to 56.0 last month from 57.3 in February, shy of economists' forecasts for 57.0. The forward-looking new orders component slipped to 58.8 from 61.2. The services sector accounts for about two-thirds of all domestic economic activity. The employment index improved to 56.7 from 55.7, while a measure of prices paid fell back to 63.9 from 68.4.

Other reports on Wednesday provided hints of optimism for the struggling housing market as applications for mortgages gained last week, while home prices excluding distressed sales managed to rise in February. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, rose 4.8 percent in the week ended March 30.

Data from CoreLogic showed overall home prices declined 0.8 percent in February, but excluding cheaper distressed sales, prices rose 0.7 percent.