MarketView for August 11

Summary  

Here we go again. Another up day and that is always a good thing. What is not a good thing is the terrible volatility that we have had to endure over the past several days. The equity indexes chalked up approximately a 4 percent gain on Thursday with bargain-hungry investors taking advantage of the recent wave of fear that drove selling over the last two weeks. In fact, Thursday's rally marked the second bounce in a yo-yo week. After a sell-off that pushed the S&P 500 down as much as 17 percent since July 22, the market is showing some signs of regaining its footing.

Investors used results from Cisco and a dip in weekly jobless claims to below 400,000 claims to a four year low as the catalyst to snap up beaten-down stocks. Cisco rose 16 percent to $15.92 a day after it reported quarterly revenue and profits that topped scaled-back expectations.

Worries about the spread of the European debt crisis were also somewhat alleviated after news of a meeting between France's Nicolas Sarkozy and Germany's Angela Merkel set for Tuesday.

Financials outpaced other S&P 500 sectors after leading losses in the previous session. But bank borrowing costs were under some pressure overseas. However, you also need to keep in mind that while there were strong gains on Thursday, the S&P 500 has ended the day in negative territory for 11 of the past 14 trading sessions on Wall Street.

The CBOE Volatility Index, known as the VIX, fell 9.3 percent, though it remained near levels not seen in over a year. The day's trading volume on the major equity exchanges was 12.99 billion shares, a number that was well above the year's estimated daily average of 7.8 billion shares.

After the close, Nvidia saw its share price jump up 15.6 percent to $15.50 after the graphics chipmaker offered up quarterly revenue guidance that exceeded Street expectations. Meanwhile, the day’s best sectors included the financial sector with the the S&P financial index up 6.3 percent, while the semiconductor index gained 5.2 percent. Another top advancer was the Dow Jones Transportation Average, up 4.3 percent.

Retailers provided support during the day’s buying activity after Kohl's rose 7.3 percent to $47.50 after chain's quarterly earnings exceeded Street estimates and it raised its full-year earnings guidance.

Labor Department data showed new U.S. claims for unemployment benefits dropped to a four-month low last week, a dose of better news after a spate of soft economic data.

Unemployment Claims Fall

Yes, the number of Americans claiming new jobless benefits fell to a four-month low last week, a sliver of hope for an economy battered for days by a credit rating downgrade and falling share prices. According to a report by the Labor Department released Thursday morning, initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 395,000, the lowest level since early April.

However, the optimism generated by the claims report was dampened somewhat by a jump in the trade deficit to $53.1 billion in June, the largest since October 2008, from $50.8 billion in May. As a result of the wider trade shortfall, economists estimated the second-quarter's already weak annual growth pace of 1.3 percent could be revised to 0.9 percent. The government will release its second estimate for second-quarter gross domestic product on August 26.

Hiring accelerated in July after abruptly slowing in the previous two months. However, a one week data point does not a trend make and at the same time there currently are about 13.9 million Americans are unemployed.

Furthermore, an increase in the volume of oil imports pushed the monthly oil import bill in June to its highest point since August 2008. That and the second straight month of declines in exports contributed to the month's wider trade deficit. Imports from China rose nearly 5 percent to $34.4 billion, lifting the trade gap with that country to $26.7 billion as it reached a 10 month peak. U.S. exports fell for a second consecutive month, to $170.9 billion, as shipments to Canada, Mexico, Brazil, Central America, France, China and Japan all declined.

French Banks Could Become a Problem

The concern about the French banks had sent shock waves through credit markets, pushing interbank borrowing rates higher and triggering a 3-month high of 4 billion euros in emergency overnight borrowing from the European Central Bank., as French banks become the target of severe short selling.

As a result, European regulators will ban short-selling in four countries' financial stocks from Friday in a coordinated effort to restore confidence in a market hit by rumors, higher borrowing costs and a steep rise in emergency financing. In a statement issued close to the end of the day, the European Securities and Markets Authority (EMSA) said Belgium, France, Italy and Spain were set to bring in the ban, which will vary in detail from country to country.

The announcement follows days of speculation about the health of French banks, which are heavily exposed to the European countries at the center of the region's debt crisis. "While short-selling can be a valid trading strategy, when used in combination with spreading false market rumors this is clearly abusive," EMSA said in a statement.

"Today some authorities have decided to impose or extend existing short-selling bans in their respective countries. They have done so either to restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field," the EMSA said.

The statement was soon followed by specific announcements from financial regulators in at least three of the countries. France and Spain will ban short selling on financial stocks for 15 days, and Belgium will ban short selling of four financial stocks for an indefinite period. The details of the Italian ban weren't immediately clear.

The three-month euro-dollar cross-currency basis, which reflects the premium for swapping euro Libor into dollar Libor, widened to as much as 95 basis points, up around 40 bps since the start of August.

The signals from Europe set off alarm bells in Asia. Banking sources told Reuters that one bank in the region had cut credit lines to major French lenders, while five others were reviewing trades and counterparty risk.

Investors saw the latest loss of confidence as a sign that few of the problems that brought bank lending screeching to a halt last time around have really gone away.

At the center of the storm was French bank Societe Generale, whose shares fell 15 percent on Wednesday, only to climb 3.7 percent on Thursday in volume nearly three times the average over the past 90 days.

Bank of France Governor Christian Noyer said French banks were solid and that their solidity would not be affected by recent market turmoil. "Their capital levels, boosted by strong equity capital, are adequate, and their medium- to long-term financing programs are being carried out in perfectly satisfactory conditions," Noyer said in a statement.