MarketView for August 2

Summary

The equity markets were lower for a fourth day on Thursday after European Central Bank President Mario Draghi disappointed investors hoping for immediate action to contain the euro zone debt crisis. Although the market focused primarily on the ECB, the Street was also looking ahead to Friday's closely watched jobs report which could bring a volatile end to an eventful week.

Draghi said the ECB would gear up to buy Italian and Spanish bonds on the open market but would only act after euro zone governments have activated bailout funds to do the same, disappointing traders after his pledge last week to do "whatever it takes" to save the euro left many thinking action was imminent.

Markets rallied late last week in part on hopes for stimulus from the Federal Reserve but mostly as expectations grew the ECB would take action to protect the euro. Friday's jobs report could give a stronger indication whether the Fed, which has a freer hand than the ECB, will act shortly.

One of Wall Street's top market makers, Knight Capital Group, was fighting for its survival after a trading glitch that roiled markets on Wednesday wiped out $440 million of the firm's capital. Knight Capital shares fell after Wednesday's trading error forced the company to seek new funding. The stock closed down 62.8 percent at $2.58, their lowest since early October 1998

According to a report released by the Labor Department on Thursday, the number of new claims for jobless benefits rose last week and manufacturers suffered an unexpected drop in orders in June, suggesting the economy is struggling to break out of a soft patch..

According to Thomson Reuters data, 67 percent of the 385 S&P 500 components that have reported results so far this quarter have beat earnings estimates. In the past four quarters, the average beat rate has been 68 percent.

General Motors posted a smaller-than-expected loss in Europe that helped the No. 1 U.S. automaker post a better-than-expected second-quarter profit. Shares slipped 2.6 percent to $19.14.

Retailers reported stronger-than-expected sales for July but the gains were largely due to discounting and do not necessarily signal vigorous consumer spending for the rest of the year.

Gap rose 12.8 percent to $33.17 after the clothing retailer posted its July and second-quarter sales, but rival Aeropostale was down 32.8 percent to close at $13.08 after cutting its second-quarter forecast.

About 7.1 billion shares changed hands on the three major exchanges, a number that was above the year-to-date daily average of about 6.75 billion shares.

Economic Data Not Encouraging

The number of Americans filing new claims for jobless benefits rose last week and manufacturers suffered an unexpected drop in orders in June, suggesting the economy is struggling. The economy has lost momentum in recent months, hurt by fears of higher taxes and sharp government spending cuts next year and ongoing debt problems in Europe. Factory activity has cooled and job growth has braked sharply.

The Federal Reserve on Wednesday signaled it was willing to ease monetary policy further, noting that economic activity had slowed in the first half of the year and unemployment remains elevated. Many economists expect the Fed to launch a third round of bond buying, also known as quantitative easing, in September.

Initial claims for state unemployment benefits rose 8,000 to a seasonally adjusted 365,000, the Labor Department said on Thursday, less than economists' expectations for an increase to 370,000. The smaller gain likely reflected seasonal distortions from the temporary plant shutdowns by automakers for annual retooling, which cause wide swings in claims data in July.

The model used by the government to smooth the numbers for typical seasonal patterns has trouble anticipating the timing of the temporary closures and in addition, some automakers kept production lines running in July. A Labor Department official said last week was the last where the seasonal expectation was shaped by seasonal layoffs in the auto manufacturing sector. The four-week moving average for new claims, a better measure of labor market trends, fell 2,750 to 365,500, the lowest in four months.

Underscoring the weakness in the economy, factory orders fell 0.5 percent in June after rising by the same margin the prior month as demand for a range of items such as motor vehicles, machinery and computers sagged. The rise was in line with economist forecasts. The Commerce Department report was the latest sign of weakening activity in the factory sector.

Planned fell for a second straight month in July, even as job cuts in the financial sector persisted, analysts warned this could be temporary given that layoffs typically slow during the summer.

Employers announced 36,855 planned job cuts last month, down 1.9 percent from June, consultants Challenger, Gray & Christmas said. So far this year, announced layoffs are up 2.5 percent from the same period in 2011. The financial sector cut 6,156 jobs in July, the largest number since January.

"This may simply be the lull before the storm," said John Challenger, chief executive of the company. "The situation in Europe is far from being resolved and ongoing weakness here could continue to take a toll on the financial sector."