MarketView for July 29

Summary 

Stock prices were lower across the board on Wednesday over concerns that China could be considering reducing its lending programs, a move that could curb demand and hinder the global economic recovery. The concerns being raised over China combined with a steep drop in durable goods orders for June lead to increased fears of continuing economic weakness.

China's two largest state-owned commercial banks have put a lid on their 2009 lending targets, according to domestic media reports, a move that will significantly slow overall Chinese credit growth in the year's second half.

Meanwhile, crude oil futures settled down $3.88 per barrel, or 5.8 percent, at $63.35, after government data showed a surprisingly large increase in crude inventories last week. Further weighing down stocks, yields of shorter-dated Treasurys briefly hit five-week highs after the week's second poor auction, increasing concern of a possible spike in borrowing costs.

After the closing bell, Visa reported better-than-expected quarterly earnings. Nonetheless, its share price fell 1.2 percent, or 78 cents, to $66. During the regular session, Visa's stock rose 48 cents, or 0.7 percent, to close at $66.78.

In Wednesday's regular session, the S&P 500's only positive sectors were telecommunication services, healthcare and consumer staples, the ones seen as able to better weather economic downturns.

The Commerce Department reported that durable goods orders for June fell 2.5 percent, the largest decline since January, after rising by a downwardly revised 1.3 percent in May. Durable goods are manufactured goods intended to last three years or more.

Caterpillar, part of the Dow Jones industrial average, was a major drag on the blue chips, falling 2.5 percent to $41.83. Among the Nasdaq's major decliners, Yahoo fell after the Internet media company announced an advertising deal with Microsoft because there was disappointment regarding the deal's scope. In contrast, Microsoft rose 1.4 percent to close at $23.80. Shares of Google, a direct competitor of the new partnership, fell 0.8 percent to $436.24.

In earnings-related news, shares of Sprint Nextel fell 11.8 percent to $4.05 after the company posted a wider quarterly loss than it did a year ago and revenue fell 10 percent.

Crude Oil on the Skids

The price of crude oil futures fell nearly 6 percent on Wednesday in the largest one-day slide since April,  after data showed a surge in inventories on higher imports and lower refinery activity.

Crude stocks were up 5.1 million barrels in the week to July 24, according to data from the Energy Information Administration, countering analyst expectations for an inventory drawdown. The build came as crude imports hit a six-month high and refiners, their profits hurt by poor demand, reduced their processing rates.

Domestic sweet crude futures for August delivery settled down $3.88 per barrel, or 5.77 percent, at $63.35 in the largest percentage decline since April 20. London Brent settled down $3.35 per barrel at $66.53.

Over the past four weeks fuel consumption fell 4.1 percent against year-ago levels, led by a 10.7 percent drop in demand for distillates, which include key industrial fuels such as diesel. Distillate stocks rose to the highest level in nearly 25 years, while gasoline stockpiles fell.

Conoco Leads Oil Sector Downward

ConocoPhillips’ earnings fell sharply on the heels of lower crude prices, as both it and Hess saw their refineries sink into the red as the recession continued to sap demand for gasoline and diesel fuel. The drop in oil prices has sliced profits across the energy sector, forcing producers to pare their spending plans and cancel new projects. With inventories of fuels like heating oil and diesel at 25-year highs, many refineries have seen their profits vanish.

The weak earnings from Conoco, although in line with estimates, helped push energy company share prices lower. The sagging global economy has also hit demand for natural gas, knocking Britain's BG Group profits down 31 percent and prompting it to lower its 2009 production target. Conoco's net profit fell 76 percent in the second quarter to $1.3 billion, or 87 cents per share. The nation's third biggest refiner also posted a $52 million loss at its refining and marketing arm.

Hess earnings fell 89 percent to $100 million, largely because of the drop in its average selling price for crude oil to $49.27 per barrel from $104.29 a year ago. Its refining operations posted a loss of $26 million. On Tuesday, BP said its quarterly profit fell by half, and it raised its cost-cutting target by 50 percent to $3 billion as part of its effort to control costs.

Total oil products demand was down 4.1 pct from a year-ago for the four week period ended July 24, according to the latest data provided by the government. Yet, despite the weak current market conditions, an economic recovery would likely send oil and gas usage back up, boosting energy companies' fortunes.

Both Exxon Mobil and Chevron are expected to post steep declines in quarterly profits when they announced earnings on Thursday and Friday, respectively.

Also on Wednesday, Canada's Talisman Energy, Canada's third largest independent oil explorer, said its earnings sank 85 percent because of the lower prices to C$63 million ($58.1 million).

Beige Book Indicates Recession Coming To An End

The pace of the recession has slowed or stabilized in most areas of the United States, according to the most recent issue of the Fed’s Beige Book, despite the protracted job market weakness even as the economy transitions to recovery. Labor markets across the country were "extremely soft," with little upward pressure on wages, the Fed said in its Beige Book survey of economic conditions through July 20.

Wages and compensation were steady or falling in most areas, said the Fed -- the U.S. central bank. Employers reported different methods of cutting pay in addition to, or instead of, freezing or lowering wages, it added.

Fed officials have indicated that they expect growth to return in the second half of the year, but warn they expect the recovery will be sluggish and high unemployment will persist for a while. The Fed has promised to keep benchmark rates exceptionally low for an extended period and to keep its supportive policies in place to support the fragile turnaround.

Factory activity was depressed in many areas although the Fed said some districts saw signs of modest improvement.

Residential real estate markets were weak in most districts although many reported evidence things were getting better. The outlook for commercial real estate, which Fed officials have cited as a potential problem in the future, was mixed, with some Fed contacts forecasting further deterioration into late 2010.

Commercial real estate markets weakened in two thirds of Fed districts and remained slow in others, the Fed said.