MarketView for December 8

Summary 

Wall Street fell on Thursday after the European Central Bank dashed hopes that policy-makers were preparing a financial "bazooka" to contain the debt crisis, and Germany rejected some proposals to add power to the euro zone's bailout fund. Unfortunately, our markets have been on edge all week in anticipation of a summit deal that would come to grips with the euro zone's growing debt crisis, and pave the way for greater action by the ECB to hold down bond yields. Therefore, actions from Europe - both early and late in the day - were a stark disappointment.

Before the market's open, ECB President Mario Draghi discouraged expectations that the central bank would massively increase its purchases of government bonds after a crucial Brussels summit on Friday.

Shortly before the closing bell, Germany rejected some measures in draft conclusions from the summit, including giving the European Stability Mechanism (ESM) a banking license and issuing common euro-zone debt. U.S. stocks and the euro fell sharply following the news.

More than 44,500 S&P E-Mini futures contracts traded between 3:40 p.m. and 3:45 p.m., when the Germany headline appeared. This was the busiest five minutes of the day, other than the last five minutes of trading, which typically has the highest volume.

There were sharp losses in the shares of European banks as the European Banking Authority (EBA) sees the capital shortfall at European banks at about 114.7 billion euros ($154 billion). Meanwhile, the shares of Morgan Stanley, a barometer of risk aversion due to its perceived exposure to Europe's crisis, fell 8.4 percent to $15.88.

The latest developments from Europe overshadowed a cut in the EU Bank's interest rate to a record low 1 percent and extra liquidity provisions for banks.

However, Thursday's pullback on Wall Street was concentrated in economically sensitive areas and was a far cry from the wild swings of recent months when uncertainty over Europe has dominated headlines. That is being seen as a sign of resilience and I believe we are still going to see seasonal strength as we end the year.

Yields on European sovereign debt spiked. Ten-year Italian government bond yields rose 44 basis points to 6.51 percent -- the day's high. German Bund futures hit a session high of 136.89, up 109 ticks on the day.

About 7.55 billion shares changed hands on the three major equity exchanges, slightly below the daily average of 7.95 billion.

Claims for Unemployment Insurance Fall

The number of Americans filing new claims for unemployment benefits fell to a nine-month low last week, suggesting the labor market's recovery was gaining momentum. Initial claims for state unemployment benefits fell 23,000 to 381,000, the Labor Department said, the lowest since late February.

The report, coming after data last week showed a rise in hiring and a sharp drop in the unemployment rate to a 2-1/2-year low, implied further improvement in a sector that has been the Achilles heel of the U.S. recovery. It was the latest sign of acceleration in economic growth from the third quarter's tepid 2 percent annual pace.

While the global economy is slowing and parts of the euro zone are already in recession, the United States continues to display relative strength, with data ranging from jobs to manufacturing suggesting growth is quickening.

The pickup in the labor market could improve President Barack Obama's prospects of winning a second term in what is shaping up to be a tough election next November, when the economy's performance will be front and center.

However, there are concerns that the festering euro zone debt crisis could hit the U.S. recovery hard next year, meaning that the U.S. unemployment  number could rise after the surprise decline to 8.6 percent in November.

The drop in claims last week more than unwound the prior two weeks' increase, and pulled them back below the 400,000 level usually associated with improving labor market conditions. The four-week moving average of claims, considered a better measure of labor market trends, fell 3,000 to 393,250, the lowest since early April

A drop in the number of people still receiving benefits under regular state programs after an initial week of aid also offered a sign of an improving labor market. That figure fell to 3.58 million in the week ended November 26, the lowest since mid-September 2008.

Wholesale Inventories Rise

Wholesale inventories in the month of October rose by the most in five months, a sign businesses were rebuilding depleted inventories. According to a report released by the Commerce Department Thursday morning, wholesale inventories increased 1.6 percent during October after gaining 0.3 percent in September. A liquidation of inventories cut into GDP growth in the third quarter and a restocking is expected to help lift the economy in the final three months of the year.