MarketView for December 15

 

 

Summary 

  

The major equity indexes ended the day well into positive territory on Thursday, as signs of strength in the economy and higher-than-expected profit at FedEx outweighed more warnings about Europe. Positive news from FedEx raised the market's sentiment, as its share price rose 8 percent to close at $82.47. The company is viewed as an economic bellwether.

 

The news from FedEx, along with two strong regional manufacturing surveys and other data, was welcomed after some high-profile companies recently warned about falling profits. On Thursday, Honeywell International said Europe's slowing economy would take a toll on orders. Honeywell ended the day up 1.7 percent to close at $52.41.

 

According to a report released by the Labor Department, weekly applications for unemployment insurance fell to a 3-1/2 year low. At the same time a gauge of New York state manufacturing activity rose to its highest level since May and another measure of factory activity in the mid-Atlantic region showed a surge in new orders.

 

Trading was volatile ahead of Friday's quadruple witching expiration when not only equity options expire, but also stock index futures, stock index options and individual stock futures.

 

Earlier stocks pared some of their gains after Christine Lagarde, the head of the International Monetary Fund, said the world economic outlook is "quite gloomy" and will require action by all countries to head off an escalating crisis that carries risks of a global depression.

 

Large cap technology shares slipped somewhat. For example, Apple Ended the day down 0.3 percent to $378.94 and IBM, which was down 0.7 percent to close at $187.48.

 

Novellus Systems rose 16.3 percent to $40.37 a day after it agreed to be bought by larger rival Lam Research for $3.3 billion in stock.

 

Michael Kors Holdings rose 21 percent to $24.20 in their debut on the New York Stock Exchange after the luxury goods company went public at $20 per share on Wednesday. The stock climbed as much as 25 percent to a session high at $25.23.

 

About 6.72 billion shares changed hands on the major equity exchanges.

 

The Economy Continues to Show Strength

 

The number of Americans filing new claims for jobless benefits fell to a 3-1/2-year low last week and factory activity in parts of the Northeast gained speed in December, suggesting a further strengthening of the economic recovery.

 

While other data on Thursday showed industrial output shrank for the first time in seven months in November, much of the decline came from auto production, which was held back by temporary supply disruptions.

 

Although growth is quickening from the third quarter's 2 percent annual rate, troubles in debt-stricken Europe pose a major risk to our economy. The fourth quarter growth pace is expected to top 3 percent. However, much of the rest of the global economy is already weakening, with the euro zone expected to slip into recession.

 

Initial claims for state unemployment benefits dropped 19,000 to 366,000, the lowest since May 2008, the Labor Department said. That follows on the heels of a report earlier this month that showed the jobless rate hit a 2-1/2-year low of 8.6 percent in November.

 

The economy's firming tone was also emphasized by data showing acceleration in factory activity in New York State and the Mid-Atlantic region this month. The Philadelphia Federal Reserve Bank said its index of business conditions rose to its highest since March as new orders surged. A separate report showed business activity in New York State at its highest since May, with a strong rebound in new orders and an improvement in hiring.

 

But the Fed's industrial production report took off some of the shine from the two regional factory surveys. Output at the nation's mines, factories and refineries dropped 0.2 percent in November after rising 0.7 percent in October. The decline was led by a 0.4 percent drop in factory output, which reflected a 3.4 percent slump in motor vehicle production.

 

However, a scarcity of auto parts from flood-ravaged Thailand for the weakness. They said it also likely weighed on production of high-technology goods, which were down sharply for a third month running.

 

FedEx Corp provided a further signal the economy was gaining momentum, saying demand for residential delivery services was rising with "healthy growth" in online shopping.

 

Honeywell International also struck an upbeat note on the economy and forecast strong sales growth next year.

 

Another report from the Labor Department indicated that wholesale prices rose 0.3 percent last month, reversing October's 0.3 percent fall, as food prices climbed 1 percent. Yet when you exclude food and energy, producer prices were up a mild 0.1 percent last month after being flat in October, suggesting little buildup in broad inflationary pressure.

 

Someone Feels Euro Zone On Track

 

Mario Draghi, Europe's top central banker, said on Thursday that euro zone governments are on the right track to restore market confidence but reminded them that an emergency program to buy their bonds was "neither eternal nor infinite".

 

Draghi's comments came after a smooth Spanish bond auction eased fears of an accelerating slide in European markets following a summit last week that failed to reassure investors the single currency area is closer to resolving its debt crisis.

 

The European Central Bank chief said in a speech in Berlin that the 17 euro zone governments "are now on the right track and they are right in implementing budgetary consolidation resolutely. The unavoidable short-term (economic) contraction may be mitigated by the return of confidence," Draghi said.

 

To mitigate risk aversion rife in markets, Draghi said more policy clarity was necessary, and he urged politicians to "speak unambiguously", then "deliver".

 

Spanish bond yields fell, narrowing the spread over German Bunds, after the country surprised markets by selling far more than the amount targeted in its last bond sale of the year, although come of its costs of borrowing remained close to euro-era highs.

 

The euro rose for a while above $1.30 after touching an 11-month low of $1.2945 on Wednesday, and European shares gained more than three-quarters of a percent partly due to relief over the Spanish auction.

 

With many financial institutions closing their books for the year, the next major market test for the euro zone is widely expected in mid-January, when Italy has to start rolling over more than 100 billion euros of expiring debt by April.

 

To try to restore market confidence in the euro zone's third largest economy, Rome's new technocratic government has called a confidence vote in parliament on Friday to speed up approval of a 33-billion euro ($43 billion) austerity package.

 

Prime Minister Mario Monti is trying to push through a law that cuts spending and raises taxes to shore up public finances and cut a debt running at 120 percent of gross domestic product. The government resorted to a confidence vote to curb debate on dozens of amendments, many tabled by the opposition Northern League.

 

European Union leaders will hold another summit in Brussels in late January or early February to discuss economic growth and jobs as the 27-nation bloc heads into a "quasi-recession," European Council President Herman Van Rompuy said on Thursday.

 

"In times of stagnation, in times of even quasi-recession, it is very important to have those topics on the agenda and not only speaking on fiscal consolidation," Van Rompuy said.

 

There are growing concerns that policymakers' focus on cutting spending to rapidly reduce deficits is making it harder to stimulate growth and create jobs, especially for the young.

 

One economic camp says that the harsh austerity budgets being implemented across southern Europe will plunge those countries deeper into recession, fuelling a vicious cycle of economic contraction and falling revenues, and risking severe social unrest.

 

Greece, crushed under a debt mountain equivalent to 160 percent of annual output, is the most striking illustration. Its economy is now expected to contract by 6 percent this year and its budget deficit will top 10 percent of GDP despite draconian spending cuts.

 

The International Monetary Fund's chief negotiator with Athens, Poul Thomsen, urged the Greek government on Wednesday to rethink "taboos" and start laying off state workers because it could no longer rely on more tax increases and across-the-board spending cuts.

 

Draghi said that in the medium term, "sustainable growth can be achieved only by undertaking deep structural reforms that have been procrastinated for too long".

 

Speaking to the economically conservative Ludwig Erhard Foundation in Berlin under a banner bearing the quotation "Inflation is an expropriation without compensation for the benefit of the public purse", the Italian ECB chief was given a warm reception by the guardians of German monetary orthodoxy.