MarketView for August 7

Summary

The major equity indexes went negative for a third consecutive session on Wednesday on growing uncertainty over when the Federal Reserve may start to wind down its stimulus, which has been a driving force behind the rally in equities this year.

Even after the benchmark S&P 500 index suffered its largest decline since June 24 on Tuesday, the market was unable to bounce back following comments from a pair of Fed officials that gave little clarity to how soon the central bank might reduce its bond-buying program.

The S&P 500 broke below 1,694, its 14-day moving average, which had served as a support level. The broad market index is down 1.1 percent for the week, on track for the worst weekly performance since a drop of 2.1 percent during the week of June 21 after the Fed's last policy meeting. However, the index is still up 18.6 percent this year after closing at a record high on Friday.

Federal Reserve Bank of Cleveland President Sandra Pianalto said on Wednesday that the central bank would be prepared to scale back asset purchases if the labor market remains on the stronger path followed since last fall.

Walt Disney was the Dow's worst performer. The stock fell 1.7 percent to $65.91 a day after the company projected a massive loss on its film "The Lone Ranger." Disney's adjusted earnings slightly beat expectations.

First Solar fell13.4 percent to $40.47 a day after the solar panel manufacturer reported results that missed expectations and cut its full-year outlook. Ralph Lauren Corp shares fell 8.6 percent to $173.13 after the fashion retailer reported a lower profit and disappointing sales at its own stores. The two stocks were the S&P 500's worst performers.

Equity markets have been closely tied to central bank policy, with many investors concerned that economic growth isn't robust enough to boost stocks without the Fed's help. Last week, the July payroll report was much weaker than expected.

Charles Evans, the president of the Federal Reserve Bank of Chicago, said on Tuesday that the Fed would probably scale back its bond-buying program later this year, perhaps beginning as early as next month, depending on economic data.

That echoed comments made earlier on Tuesday by Dennis Lockhart, the president of the Federal Reserve Bank of Atlanta, though he told Market News International that the Fed might continue its stimulus program if growth doesn't meet its targets.

After the closing bell, Tesla Motors shares jumped 12.7 percent to $151.25 after the electric-car maker reported a second-quarter profit of 20 cents a share versus an expected non-GAAP loss of 17 cents.

Volume was once again light, with approximately 5.49 billion shares changing hands on the three major equity exchanges, a number far below the daily average of 6.35 billion. Actually, volume on Monday was the lowest of the year for a full trading session.

Of the 434 companies in the S&P 500 that had reported earnings through Wednesday morning, Thomson Reuters data showed that 66.8 percent topped analysts' expectations, in line with the 67 percent beat rate over the past four quarters. On the revenue side, 54.1 percent have reported revenue above estimates, more than in the past four quarters, but below the 61 percent average since 2002.

Potash Sees Breakup as Short-Term

Potash Chief Executive Bill Doyle said on Wednesday he doesn't expect the breakup of Belarusian Potash to last long, and he disputed predictions that the split would spur a steep potash price drop. Doyle, who heads up the world's largest potash producer by capacity, was making his first public comments since Russia's Uralkali exited BPC last week in a dispute with partner Belaruskali.

BPC's breakup and Uralkali's decision to maximize production spooked investors in the potash sector, where the two dominant players, BPC and North American potash export company Canpotex Ltd, have long matched supply to demand to support the crop nutrient's prices.

"My guess is (the breakup will last) shorter rather than longer, and the reason I say that is logic tends to prevail," Doyle said in a question-and-answer session streamed on the company's website. "I don't find too many people that self-destruct intentionally,"

Doyle said he does not see changes ahead for Canpotex and said there are no plans at Potash to alter strategy. Potash, Agrium Inc (AGU.TO), and Mosaic Co (MOS.N) are the members of Canpotex.

Doyle dismissed Uralkali's prediction that prices could drop 25 percent to less than $300 per tonne as a result of its split from BPC and its push to ramp up production, saying that Potash Corp has seen no sign of that in the past week and doesn't expect to see it.

Emphasizing volume sales over price is not new to the potash industry, he said, going as far back as the 1970s, and the producers that do so "end up hurting themselves more than anyone else".

Potash's dividend and share buyback program are not in jeopardy, Doyle said, and he expects Canpotex to eventually agree on a new potash supply contract with China's Sinofert Holdings.

The previous contract, which traditionally sets a floor price for globally traded potash, expired after the first half.