MarketView for December 28

 

 

Summary 

  

The major equity indexes fell more than one percent on Wednesday after a hefty year-end rally and the S&P 500 erased gains for the year on renewed concerns about the euro zone's financial health. The selloff followed the euro's slide to an 11-month low against the U.S. dollar as regional debt worries prompted a wave of selling, with thin trading exacerbating volatility.

 

A recent rally on Wall Street had been supported by a series of positive economic data that encouraged investors to shift their focus from fears about Europe's debt crisis sparking a global recession to optimism that the U.S. economy was on track to recovery.

 

Stock index futures had advanced earlier in the session after an Italian debt auction where short-term borrowing costs were halved, potentially a good sign for a sale of longer-dated bonds on Thursday. However, those gains were short-lived, as the euro fell to a session low of $1.2938, its lowest since January, before rising back to trade at $1.2949.

 

After a 5 percent rally last week that helped Wall Street add to what has been the best quarter in over a year, the S&P 500 pulled back below its 200-day moving average, a closely watched indicator of market strength it has struggled to hold this year.

 

For the quarter, the S&P 500 is up 10.5 percent. For the year, the Dow is up 5 percent, while the S&P 500 is down 0.6 percent, and the Nasdaq is off 2.4 percent.

 

In Wednesday's session, investors concentrated on 2012 with Europe's debt crisis as well as a slowdown in Asia and the impact of Europe's recession on a U.S. recovery on the agenda.

 

The biggest gaining sectors over the last five days, in cyclical areas like materials and energy, led the market lower on Wednesday, sparked by a drop in commodity prices. Gold sank, tracking industrial metals, on concerns about the prospects for global economic growth next year. It was gold's biggest one-day drop in two weeks.

 

Citigroup fell 2.9 percent to $26.13 after regulators won a delay in a securities fraud lawsuit against the bank. The U.S. Securities and Exchange Commission is seeking to appeal a judge's decision to reject its $285 million settlement with the bank.

 

Volume was light in the post-Christmas period and ahead of the New Year's Day holiday with 4.31 billion shares changing hands on Wednesday, well below the year's daily average of around 7.9 billion shares.

 

Retail Looking Good

 

Retail sales look poised for a solid finish to the holiday season as warm weather and deep discounts encouraged shoppers to hit stores or go online to snap up last-minute gifts, according to data released on Wednesday.

 

Sales in the week ending December 24 soared 14.8 percent from a year ago to about $44 billion, helped by Christmas Eve falling on a Saturday, according to ShopperTrak, which monitors traffic at shopping malls. Good weather also helped as snowstorms had blanketed some areas at the same time last year.

 

Sales on December 26, a public holiday this year, soared 25.5 percent to $7.1 billion, ShopperTrak said. Steep discounts were prevalent throughout the season and drove the sales growth, but could crimp retailers' profits.

 

Amid concerns about profit margins, the latest data had little impact on retail stocks with the S&P Retail index ending down 1.05 percent, only slightly better than the 1.25 percent drop in the broader S&P 500 index.

 

Sales at stores in the week ending December 24 rose 37.8 percent from sales in the week ending December 17, ShopperTrak said, suggesting procrastinators were drawn in by offers.

 

Besides ShopperTrak, two other sets of data indicated solid sales last week. The ICSC/Goldman Sachs weekly chain store sales index rose 4.5 percent during the week ending December 24, versus a holiday-shortened pre-Christmas Day week in 2010. Redbook Research put the year-over-year gain at 4.3 percent.

 

Adjusted for the calendar mismatch, the ICSC/Goldman index rose 0.9 percent for the week ending December 24, compared with the prior week.

 

ShopperTrak predicted in mid-December that sales for the two months combined would rise 3.7 percent, while the National Retail Federation expects a rise of 3.8 percent and the International Council of Shopping Centers is looking for a 3.5 percent increase.

 

Visits to stores rose 6.5 percent in the week ending December 26, according to the NPD Group, a market research firm. The conversion rate, which measures the proportion of shoppers making a purchase, was 67.9 percent. That was down slightly from the previous week, but ahead of the first part of December, NPD data show. The biggest shopping malls and regional malls saw the strongest customer traffic since the first week of 2011. Factory outlets remained busy, but less so than the prior week, he said.

 

Wednesday's retail data points underscore recent economic data that show the economy is in recovery mode, albeit slowly. Part of the problem for chains such as Sears and the now-shuttered Borders Group may be competition with online retailers, who saw faster sales growth this holiday season, suggesting e-commerce took market share from brick-and-mortar stores.

 

Online sales, still a small component of overall sales, continued to grow at a faster clip than sales in stores, according to comScore data on Wednesday. Online spending in the United States reached a record $35.27 billion from November 1 through December 26, up 15 percent versus the corresponding period last year, comScore reported. For the week ending December 25, consumers spent $2.83 billion online, up 16 percent from the corresponding period in 2010, comScore also said.

 

Italy Does Better at Auction

 

Italy's short-term debt costs halved at auction Wednesday as a new austerity package and an injection of cheap long-term money from the European Central Bank won Rome some respite in thin year-end markets.

 

However,  Italy faces a tougher test on Thursday as it sells up to 8.5 billion euros ($11.1 bln) of longer-term bonds, including three- and 10-year paper. Still, the lowest six-month auction yield and strongest bid-to-cover ratio since September added to a sense that some of the tension around the countries now at the center of Europe's debt problems had eased for a moment.

 

The outcome provided a temporary boost to European stocks .EU and the euro. Caution returned later in the session pushing Italian bond yields higher ahead of Thursday's sale.

 

Italy paid an average rate of 3.25 percent to sell 9 billion euros of six-month BOT bills, down from a euro lifetime record of 6.50 percent just a month earlier. It also sold 1.7 billion euros of 24-month, zero-coupon bonds, near the low end of its target range. The yield fell to 4.85 percent, from 7.8 percent a month ago.

 

Since then the ECB has flooded euro zone banks with almost 500 billion euros of longer-term liquidity and the Rome government has overcome internal opposition to a radical pension reform as part of Italy's third budget package since the summer.

 

Spain's six-month debt costs also more than halved to 2.4 percent at an auction on the eve of the ECB's bumper tender for three-year money on December 21.

 

Doubts about how much of the ECB money would find its way to troubled government bonds have weighed on Italian and Spanish yields and investors are mindful that Rome must refinance some 91 billion euros in bonds in the first four months of next year.

 

Italian 10-year yields reversed an earlier fall to climb back above 7 percent in the afternoon, ahead of Thursday's auction. That pushed the premium over safer German Bunds above 500 basis points in thin trading.

 

While Rome can count on healthy appetite from domestic retail investors for short-term bonds and bills, longer-term debt sales are a better measure of underlying interest from external buyers.

 

Italy paid a euro lifetime record high yield of 7.56 percent to sell 10-year bonds at the end of November and even more to sell three-year paper in a sign of the nervousness in the market.

 

Standard & Poor's - which is expected to release its eagerly awaited verdict on debt ratings for 15 euro zone countries in January - has warned that the first quarter of next year will be "tough," especially for Italy.

 

In a push to regain market confidence, Italy's parliament gave the final seal in the run-up to Christmas to an emergency austerity budget rushed through by a new technocrat government.

 

Market attention has now turned to the reform agenda of Prime Minister Mario Monti who has promised to tackle Italy's chronic low-growth problems - after inaction by former PM Silvio Berlusconi pushed the country to the brink of financial disaster. Monti has convened a cabinet meeting Wednesday to outline his plans and he could provide some indications to investors in his traditional year-end press conference Thursday.