MarketView for January 12

 

 

Summary 

  

The S&P 500 closed at a five-month high for the third day on Thursday but had difficulty extending gains in the face of lackluster economic data and another European bond market test.

 

Energy shares were lower after Chevron, the second-largest U.S. oil company, projected that its fourth-quarter earnings number would be far below the previous quarter. Chevron closed down 2.6 percent at $104.97, making it the largest drag on the Dow Jones industrial average. In its fourth day of gains, the S&P 500 has risen 1.4 percent, but it's added only 0.3 percent since Tuesday as Wall Street wants to see more convincing evidence of an improving economy, solid corporate earnings and progress toward resolving the euro zone's debt crisis.

 

JPMorgan Chase, will report earnings on Friday and the Street will be looking for signs the banking sector's recent gains are justified.

 

On the euro-zone front, Spanish and Italian government bond yields fell as solid auctions for government debt in the two countries were an encouraging sign for investors, who will brace for another Italian bond sale on Friday.

 

Retail sales rose at the weakest pace in seven months in December and first-time claims for jobless benefits moved higher last week, denting optimism about the economic recovery after a string of upbeat economic data.

 

Among individual stocks, Wynn Resorts fell 1.9 percent to $109.80 after Vice Chairman Kazuo Okada, who is also a major shareholder, sued the casino operator, claiming it was blocking his attempts to review business accounts despite repeated requests.

 

Volume was modest, with about 6.66 billion shares changing hands on the three major exchanges, a number that was slightly below the daily average of 6.7 billion shares.

 

Cheap Money Did the Trick

 

The European Central Bank's flood of cheap three-year money is helping the euro zone's banking system substantially and supporting confidence in the bloc's economy which is showing some signs of stabilization, its president said on Thursday.

 

The ECB left interest rates on hold, pausing to assess the impact of back-to-back cuts and a slew of other measures it unleashed late last year that are showing signs of helping fight the euro zone debt crisis.

 

"The extensive recourse to the first three year refinancing operation indicates that our non-standard policy measures are providing a substantial contribution to improving the funding situation of the banks, thereby supporting financing conditions and confidence," ECB President Mario Draghi told a news conference after it held its benchmark rate at 1.0 percent.

 

To help fight the euro zone debt crisis, the ECB provided banks with nearly half a trillion euros of three-year money in December, called LTRO, and will make a similar offer in February.

 

French President Nicolas Sarkozy has urged banks to use the cheap three-year loans to buy sovereign bonds of euro zone strugglers and strong debt auctions in Spain and Italy on Thursday suggested some may be doing that, with analysts saying abundant liquidity helped support demand.

 

"The more time passes ... the more we see signs it has been an effective policy measure," Draghi said. "This decision has prevented a credit contraction that would have been ... much, much more serious."

 

Banks remain very reluctant to lend to each other, so the ECB's action has helped keep the system working although there is less evidence that the money is making its way into the real economy.

 

At the first chance to get 3-year funds, banks took a record amount of 489 billion euros in late December, though so far much of the money has returned to the ECB as overnight deposits.

 

The decision to leave rates on hold after cuts in November and December - taken unanimously - was in line with market expectations and financial markets showed little reaction.

 

Alongside the extraordinary liquidity to banks, the ECB has eased its collateral rules and kept buying Italian and Spanish government bonds although it continues to baulk at doing so to the more dramatic extent which some policymakers have urged.

 

Spanish and Italian yields both fell sharply at Thursday's auctions and Spain shifted twice the amount of bonds it expected to.

 

Draghi said the euro zone economy continued to face high uncertainty but added there were some signs of stabilization. At his first meeting at the helm in November, Draghi said the euro faced a mild recession. He did not repeat that in his early comments on Thursday.

 

"Ongoing financial market tensions continue to dampen economic activity in the euro area, while, according to some recent survey indicators, there are tentative signs of stabilization activity at low levels," he said.

 

Draghi also said the ECB was pleased that euro zone leaders had confirmed the involvement of private creditors in the second Greek bailout was "unique and exceptional."

 

Greece's prime minister held crunch talks with the head of a group representing private sector banks on Thursday, as officials said negotiations on a voluntary swap of bonds to lighten the country's debt burden entered the final stretch.

 

But senior European bankers say talks about private sector creditors paying for part of a second Greek bailout are going badly, raising the prospect that euro zone governments will have to increase their contribution to the aid package. The ECB has persistently argued against private sector involvement, arguing it would increase contagion risks.

 

Retails Rise but Weaker

 

Retail sales rose at the weakest pace in seven months in December increasing a less-than-expected 0.1 percent, despite continued strength in auto purchases and first-time claims for jobless benefits moved higher last week, signs the economic recovery is shaky despite a recent pick-up in growth.

 

Robust factory output and improved hiring have fueled the view that the U.S. economy has so far resisted a global slowdown as the euro zone grapples with a likely recession.

 

A separate report showing 0.3 percent growth in business inventories during November buttressed the case the economy accelerated in the last three months of 2012 as firms restocked their shelves.

 

A Labor Department report that showed a surprisingly sharp increase in initial unemployment claims to a six-week high of 399,000 last week reinforced lingering concerns about the economy.

 

Within the retail report, the government revised upward its estimate for November sales growth to 0.4 percent, suggesting that front loaded holiday shopping was the result of retailers discounting heavily and extending store hours in the days following Thanksgiving. However, by the end of the season consumers had cut back, with spending at electronics and appliance stores down 3.9 percent in December. Shopping at department stores slipped 0.2 percent. receipts at gasoline stations fell 1.6 percent, a decline analysts partly attributed to falling prices.

 

Heavy discounting may have depressed retail sales for the entire season because consumers realized they had spent too much in prior months. A recent drop in the saving rate has led many economists to think American shoppers were getting ahead of themselves.

 

A 1.5 percent jump in sales of motor vehicles and parts helped lift the retail sector in December. Excluding autos, retail sales fell 0.2 percent, the first decline since May 2010.

 

With the health of U.S. consumers in question, housing still on the rocks and global conditions threatening, some Federal Reserve officials have said more monetary stimulus for the economy may be needed, although no action is expected at the next Fed meeting on January 24-25.

 

Even though growth likely accelerated in the fourth quarter from the 1.8 percent rate clocked in the July-September period, output is seen slowing in the first three months of this year.

 

A wave of foreclosures has kept downward pressure on home prices, although a report from real estate data firm RealtyTrac on Thursday showed foreclosure activity slowed last year as lenders tried to clean up problems in the foreclosure process, such as the "robo-signing" of loan documents.

 

Housing activity has remained weak, even though mortgage rates are at historic lows. The average rate on 30-year fixed rate mortgages hit a fresh record low of 3.89 percent this week, mortgage finance firm Freddie Mac said.

 

Business Inventories Up 0.3 percent in November

 

According ot a Commerce Department report released Thursday morning, business inventories rose 0.3 percent in November, reinforcing the view that fourth-quarter economic growth could get a boost as companies restock their shelves. According to the Department, inventories rose 0.3 percent to $1.55 trillion after climbing 0.8 percent the prior month.

 

Manufacturing stocks rose 0.5 percent, while retailers gained 0.3 percent and wholesalers' stocks edged 0.1 percent higher. Business sales advanced 0.3 percent to $1.22 trillion. The inventory-to-sales ratio, which measures how long it would take to clear shelves at the current sales pace, was unchanged at 1.27 months.

 

Grain Supplies Increase

 

The United States painted a rosier picture than expected for global grain stocks and our domestic winter wheat crop on Thursday, sending prices in a free fall toward recent-year lows. The Agriculture Department projected that, after a larger-than-expected harvest last year, corn and soybean stocks will be much higher at the end of this marketing year than traders had predicted.

 

Farmers were also taking advantage of good soil conditions to sow a bigger-than-expected winter wheat crop while world wheat stocks were pegged the largest in 12 years and the second largest in the past 50 years. After big declines in European trading, corn, soybean and wheat futures fell sharply after markets opened in Chicago. CBOT corn fell its daily limit, dropping 40 cents to $6.11-1/2 a bushel.

 

The report, however, will be welcomed by inflation-minded governments around the globe that fear a worsening drought in South America could strain grain stocks, which remain relatively thin.

The U.S. corn stocks projection was still the smallest in 16 years, leaving little margin if the United States is struck by foul weather or drought in the year ahead.

 

Grain prices had been on the rise since reaching a more-than-one-year low in December on concern that Argentina's corn crop was shrinking under a withering drought. But Thursday's report took the wind out of the market's sails.

 

USDA projected corn ending stocks at 846 million bushels, 2 million bushels lower than its estimate last month. Soybean ending stocks rose for a third consecutive year to the highest level in five years. At 275 million bushels, the supply was 18 percent higher than traders had forecast.

 

USDA's January crop data has a tradition of roiling markets with surprises, and it will stir more controversy with grain traders who have been caught wrong-footed by several recent government reports.

 

The USDA increased its corn production estimate marginally, where analysts had expected a small dip. At the same time, the agency stood pat on its estimates of corn consumption by livestock operations and the ethanol industry.

 

The USDA projected corn exports jumping by some 50 million bushels, aided by the drought that is shriveling the crop in Argentina. However, the agency was conservative on how badly the dry conditions have reduced potential South American production.

 

The USDA cut its estimate of corn production in Argentina by 10 percent, which was not as much as some traders had expected. It held steady on Brazil corn production, which analysts expect will drop. For soybeans, a small bump-up in USDA production estimates was coupled with a 2 percent cut in exports and a drop in domestic use.

 

In the first estimate of wheat acreage for the year ahead, the report showed farmers took advantage of good fall moisture conditions to plant 41.947 million acres, up 3.2 percent from a year earlier and 2.5 percent beyond trade expectations ahead of the report. The winter wheat seedlings were up for a second consecutive year and represented the largest acreage since 2009.

 

Crude Prices Fall

 

Crude oil prices fell late Thursday, selling off early gains following a report that the European Union could delay a ban on Iranian exports by six months. Prices dropped right after 2 p.m. EST after Bloomberg News reported the embargo: "will likely be delayed for six months to allow countries such as Greece, Italy and Spain to find alternative supply," citing an EU official with knowledge of the matter.

 

EU diplomats had said a consensus was emerging to grant a grace period before banning new deals with Iran -- six months for crude oil purchases and three months for petrochemicals. The embargo is the latest pressure from the West to curb Iran's nuclear program.

 

ICE Brent crude for February delivery settled down 98 cents at $111.26 a barrel, well off an earlier peak of $115.12, the highest level since November 9.

 

U.S. February crude oil fell $1.77 to settle at $99.10 a barrel, off session highs of $102.98. Oil had traded higher for most of the day after the main oil union of OPEC member Nigeria threatened shut output on Sunday as Africa's biggest oil producer entered its fourth day of nationwide protests over the loss of fuel subsidies.