MarketView for December 14

 

 

Summary 

  

It was red ink all around for a third consecutive day as the major equity indexes reached their lowest level in two weeks on Wednesday, the result of widespread risk aversion that sent commodity prices sharply lower and the euro to an 11-month low against the dollar. At the same time, Italy’s borrowing costs reached an euro-era high.

 

A key reason is the world-wide disappointment that the European Central Bank is not buying more bonds of troubled European countries, a move that was widely seen as a requisite next step after leaders at last week's EU summit agreed to strengthen fiscal unity in the bloc.

 

With the euro zone debt crisis showing no signs of abating as Europe slides into recession, the outlook for the world economy is growing bleaker, while the S&P 500 index has fallen more than 3 percent so far this week.

 

A 5 percent slump in oil prices hit energy stocks, with Chevron ending the day down 3 percent, making it the largest decliner among those stocks that make up the Dow Jones Industrial Average except for Caterpillar. Shares of Caterpillar, whose global operations are sensitive to the economy, fell 4.4 percent to $87.

 

From a technical aspect, the S&P 500 fell below its 50-day moving average, signaling a breakdown of its recent trading range between that level and the 200-day moving average at the top end. The move has some analysts expecting further weakness.

 

Volume was moderate with 7.8 billion shares changing hands on the three major equity exchanges, or about 5 percent below the 200-day moving average -- a further sign of the difficulties traders and investors face under current market conditions.

 

December can be a volatile month, with traders closing books and everything from window-dressing ahead of the year-end to tax-loss selling contributing to swings in prices.

 

The price of copper fell near a three-week low, the price of aluminum hit its lowest level in 17 months, and tin hit a three-month low.

 

Italy's borrowing costs rose to a euro-era record after an auction of five-year debt, while the euro fell to an 11-month low against the dollar. Italy paid 6.47 percent to sell five-year paper just minutes after Berlin placed 4 billion euros ($5.2 billion) of two-year bonds at an average yield of just 0.29 percent - a sign of the extent that investors favor safety over returns.

 

Share prices have been weighed down this week on fears that the agreement at last week's European Union summit did not go far enough to resolve the two-year-old debt crisis.

 

Gold dropped to its lowest level since early October as the weak euro and a shortage of dollar funding near the year-end prompted investors to sell aggressively. Commodity-related shares were further pressured by the stronger U.S. dollar.

 

January crude fell $5.19, or 5.18 percent, to settle at $94.95 a barrel. Shares of Chevron closed down $3.09 at $100.53. Federal prosecutors in the Brazilian state of Rio de Janeiro filed a lawsuit on Wednesday against Chevron and rig contractor Transocean over an oil spill off Brazil's coast last month, seeking 20 billion reais ($10.6 billion) in damages.

 

Wall Street was also disappointed that the Fed made no mention of possible new stimulus measures after its Tuesday meeting.

 

Technology shares sold off sharply. A number of companies in the industry and beyond have cut earnings outlooks over recent days, another sign of the fallout from a slowing economy. The latest was First Solar, a manufacturer of solar power systems that closed down 21.4 percent to $33.45 after it cut its 2011 sales and profit forecast and said next year's profits would fall below Wall Street's view.

 

First Solar joins a list of companies, including Intel, DuPont and Texas Instruments, all of which have cut their outlooks in recent days. An index of home builder stocks fell 3.3 percent after the National Association of Realtors said data on sales of previously owned homes will be revised downward because of double counting.

 

The Fed Will Not Bail Out Europe

 

Federal Reserve Chairman Ben Bernanke told Republican senators on Wednesday the Fed can't and won't provide bailout funds to support European banks or nations, lawmakers said.

 

"We're all concerned, is the American taxpayer going to be bailing out European nations and banks," Senator Lindsey Graham told reporters after a meeting with the Fed chairman.

 

"He said, no, he doesn't have the intention or authority to do that," Graham said.

 

Saudi Arabia Rules the Roost

 

OPEC oil producers on Wednesday sealed their first new output agreement in three years in a deal that settles a 6-month-old argument over supply policy firmly in Saudi Arabia's favor. The Organization of the Petroleum Exporting Countries agreed a target of 30 million barrels daily, ratifying current production near 3-year highs. It did not discuss individual national quotas.

 

The deal vindicates Saudi Arabia after its proposal to raise output in June to stem rising prices was rejected by price hawks led by Iran, Algeria and Venezuela. Saudi said it pumped 10 million barrels a day last month, 25 percent above its old OPEC quota, in what Gulf delegates said was a demonstration of strength to the price hawks ahead of the meeting.

 

In theory the agreement caps output for all 12 OPEC members for the first half of 2012 at levels that should permit a modest rebuilding of lean global inventories.

 

"We're not going to bypass it, we're going to adhere to it," promised OPEC Secretary General Abdullah al-Badri of the new supply limit. "Saudi Arabia will abide by this decision for sure."

 

That will depend on whether or not Saudi and its Gulf Arab allies decide to ease back supply as post-civil war Libya heads towards full production or keep the taps open to drive oil below $100 a barrel.

 

Saudi Arabia did not allay doubts about its intentions. "If Libya increases it doesn't necessarily mean Saudi will cut," said Saudi Oil Minister Ali al-Naimi. "We don't react to that, we react to market demand," he said.

 

Oil analysts warned that without defined individual national quotas, leakage above the new limit was very possible. Those concerns helped undermine oil prices. London Brent lost $4.67 to $104.83 a barrel, down from a year-high $127 in April. U.S. crude fell $5.19 to near $94.95.

 

Rising supply from Saudi Arabia and its Gulf Arab neighbors Kuwait and the United Arab Emirates has kept a leash on oil prices as Riyadh seeks to help nurture global growth by keeping fuel costs under control.

 

OPEC's price hawks, all of whom already pump at full capacity, want to keep prices above $100.

 

"We think the present level is appropriate for producers and consumers," Algerian Oil Minister Youcef Yousfi said of prices.

 

"Prices are reasonable," said Iranian Oil Minister Rostam Qasemi.

 

The Gulf Arabs would prefer prices that don't hinder economic growth while meeting their budget and oil investment needs. The UAE said recently that $80-$100 was reasonable.

 

"Saudi Arabia is the central banker of the oil market and the decision that they will bring more oil to the market is definitely a good one," said Fatih Birol, chief economist at consumer body the International Energy Agency.

 

World oil inventories should now rise, enhanced by Libyan oil output that hit 1 million bpd this week on the way back to pre-war output of 1.6 million. OPEC's secretariat calculates that 30 million barrels a day from the group will meet demand in the first half of the year and build stocks by 650,000 bpd.

 

According to the U.S. Energy Information Administration that would lift inventories among industrialized OECD nations from 56 days of OECD demand now to 60 days by the middle of 2012.

 

OPEC next meets on June 14. Badri said OPEC would be ready by then to tackle the tricky issue of re-establishing individual quotas. That could prove difficult. Saudi Arabia and others who have seen market share rise in the past two years are unlikely to not cede ground on quotas to those who have lost share and cannot pump more.