MarketView for January 4

 

 

Summary 

  

It was a relatively dull low volume trading session on Wall Street on Wednesday, reminiscent of what we saw during the recent holiday season. About 6.23 billion shares changed hands on the three major equity exchanges, compared with last year's daily average of about 7.84 billion shares. The good news was that the key equity indexes held on to the previous day's large gains even as the euro dropped sharply against the dollar. Notably, banks held up well, even though bad news in Europe centered on the difficulties for some European lenders.

 

Tight credit markets are making it expensive for European banks to raise capital and for euro-zone countries to refinance debt. The latest sign of stress came from Italy's biggest bank, UniCredit, which fell nearly 10 percent after it offered to sell 7.5 billion euros ($9.8 billion) in shares at a steep discount to shore up its balance sheet.

 

Meanwhile, the Street was encouraged by a sharp rise in new orders for factory goods in November, further evidence the economy is recovering.

 

The euro, which moved in lockstep with equities for most of the past quarter, slumped to its lowest level against the dollar in nearly a week. The once-tight relationship between the S&P 500 and the euro continues to fray. The 50-day correlation coefficient between S&P e-mini futures and the single currency fell to 0.22, its lowest since mid-September. A perfect correlation score is 1; a score of 0 indicates no correlation.

 

New vehicle sales released on Wednesday showed automakers ended the year with strong sales, but they forecast lower growth in 2012. GM rose 0.5 percent to close at $21.15, while Ford was up 1.5 percent to close at $11.30.

 

Netflix, which fell more than 60 percent last year, led consumer stocks higher with a 11.4 percent rise to $80.45.

 

Yahoo fell 3.1 percent to $15.78 after it named PayPal president Scott Thompson as its chief executive, taking over on January 9 from interim CEO Tim Morse, who will resume his role as chief financial officer.

 

AT&T agreed on Tuesday to pay TiVo a minimum of $215 million and additional monthly licensing fees to settle a patent infringement dispute. AT&T rose 0.2 percent to close at $30.43, while TiVo saw a gain of 10.1 percent to close at $9.82.

 

Factory Orders Rise

 

According to a report released by the Commerce Department on Wednesday, new orders for factory goods rose solidly during the month of November, but business spending on capital goods slowed. According to the Department, orders for manufactured goods increased 1.8 percent, ending two consecutive months of declines, as demand for transportation equipment rose sharply. It was the largest increase since July.

 

October's orders were revised to show a smaller 0.2 percent decline, which was initially reported as a 0.4 percent drop. Orders excluding transportation rose 0.3 percent in November after advancing 0.4 percent the prior month.

 

However, orders for non-defense capital goods excluding aircraft - seen as a measure of business confidence and spending plans - fell 1.2 percent after declining 0.9 percent in October. The closely tracked shipments for this category fell 0.8 percent after dropping 0.9 percent in October, indicating businesses' appetite for capital spending may be waning. November marked the third straight month of declines.

 

Business spending is up sharply since the end of the Great Recession and was one of the drivers of the recovery.

 

Unfilled orders of non-defense capital goods rose 0.9 percent after increasing 1.0 percent in October.

 

Data on Tuesday showed manufacturing activity grew at its fastest pace in six months in December, but slowing global growth could take some edge of U.S. factories this year.

 

The Commerce Department report showed orders for transportation equipment increased 14.7 percent in November as demand for civilian aircraft soared 73.9 percent. Orders for motor vehicles increased 0.9 percent, adding to October's 1.3 percent gain.

 

Outside of transportation equipment, details of the report were mixed, with strong demand for primary metals and furniture, and decent growth in orders for machinery. Orders for computers and electronic products fell. There was also weak demand for electrical equipment and appliances.

 

In a sign of strength in the manufacturing sector, overall shipments of new orders rose for a sixth consecutive month in November and unfilled orders increased 1.3 percent after rising 0.4 percent in October.

 

Inventories remained lean, rising 0.5 percent after increasing 0.9 percent in October. The careful management of inventories bodes well for continued production.

 

The department also said orders for durable goods, meaning products expected to last three years or more, was revised to 3.7 percent instead of the 3.8 percent increase reported last month. The increase in durable goods orders excluding transportation was unrevised at 0.3 percent.

 

Middle East Concerns Raise Crude Prices

 

Brent crude rose for the second straight day on Wednesday, touching a seven-week high after the European Union reached a preliminary agreement to ban imports of Iranian crude, escalating tensions in the West's standoff with Tehran that has gripped oil markets for weeks.

 

European diplomats said they had a preliminary agreement but had yet to decide when an embargo would be put in place. The news sent Brent crude up nearly $2 a barrel.

 

A senior Iranian official responded that the OPEC member already has alternative outlets available to maintain its 2.3 million barrels per day (bpd) of oil exports, including sending more crude to China, the world's No. 2 consumer.

 

The tensions stemming from Iran's nuclear ambitions have supported oil prices in recent weeks. Tehran last week threatened to cut off oil flows through the strategic Strait of Hormuz in the event of an oil embargo. About 35 percent of all seaborne oil moves through the strait.

 

By early afternoon, Brent February crude had traded up 78 cents at $112.91 a barrel, off a session high of $113.97, highest for front-month Brent since November 14.

 

February crude was down 17 cents at $102.79, off the session high of $103.74, its highest price since last May. As a result, Brent's premium against U.S. crude widened to above $10, after closing at $9.17 on Tuesday.

 

Brent trading volume was up 30 percent over its 30 day average while U.S. crude lagged, with dealings down 12 percent from the 30-day average, according to Reuters data.

 

Iran supplies about 450,000 barrels per day to EU member states, making the bloc collectively the second-largest market for Iranian oil after China.

 

While oil markets braced for a potential supply problem, the United States believes Tehran's oil revenues can be choked off through a well-timed, phased-in curtailment of purchases that will not disrupt global oil markets. New sanctions signed into law on New Year's Eve envision such a phased-in approach.