MarketView for February 14

 

 

Summary 

 

Energy and commodity shares had the S&P 500 index showing a small gain on Monday, but the day's total overall volume for the three major exchanges, a mere 6.6 billion shares as compared to the 8 billion average so far this year, indicated that the rally in stocks could be nearing either a top or a well-deserved plateau. The S&P 500 reached its highest point since June 2008, nominally a good sign, but the index was stuck in the 1,325-1,333 area without enough buyers to get through this technical hurdle.

 

Three-month copper hit a record high after Chinese import figures suggested strong demand for basic materials. Freeport McMoRan Copper & Gold rose 4.9 percent to close at $56.14.

 

Wal-Mart was one of the worst performers on the Dow after JPMorgan downgraded the stock. The retail giant’s shares ended the day down 1.6 percent to close at $54.80.

 

President Obama proposed a federal budget that he said would cut the deficit by $1.1 trillion over the next 10 years. Congress must approve the plan, and Republicans, who are in the majority in the House, said it did not curb spending enough.

 

Obama's budget would provide $8 billion for investment in clean energy, but the large pharmaceutical companies might take a hit from generic competition under two proposals in the plan. Among alternative energy companies, Trina Solar rose 5.2 percent to $28.79, while GT Solar International was up 2.7 percent to $11.50. Merck was down 0.8 percent to close at $32.82.

 

Green Mountain Coffee Roasters rose 6.7 percent to $46.35 after Reuters reported the company has been in partnership negotiations with Starbucks. Meanwhile, EchoStar agreed to acquire Hughes Communications for about $1.33 billion. Shares of Hughes fell 3.7 percent to $59.47 while EchoStar rose 3.2 percent to $30.84. Private equity firm Clayton, Dubilier & Rice agreed to take Emergency Medical Services private for about $3 billion. Emergency Medical fell almost 11 percent to $62.92

 

Brent Crude at $102 per Barrel

 

Brent crude futures ended up more than 2 percent on Monday, posting their highest settlement in 28 months, on fears that Middle East tensions could create instability among oil producers and disrupt supplies to Europe.

 

In London, ICE Brent crude for April delivery settled up $2.14, or 2.12 percent, at $103.08 a barrel, the highest since Sept. 26, 2008, when front-month Brent closed at $103.54. Helping to support the price was the latest Chinese trade data showing rising crude imports in the world's second-largest consumer.

 

Crude speculators also kept an eye on Egypt's political transition, following the ouster of President Hosni Mubarak and its potential spillover effects in both the Middle East and North Africa, together the source of more than a third of the world's oil.

 

U.S. crude, also known as West Texas Intermediate or WTI, for March closed up 32 cents to $85.13. The premium of Brent to U.S. crude reached a record $16.24 on Friday, the last day of trading for the March Brent contract. The spread between the April contracts was around $12 on Monday.

 

Domestic crude has been weighed down by near-record inventories at the Cushing, Oklahoma delivery point, while a steady fall in North Sea supplies, the physical basis for the Brent contract, has supported the European market. Chinese crude oil imports rose 27 percent from a year ago to the fourth highest on record.

 

China’s Trade Surplus Falls

 

China's trade surplus fell to its lowest in nine months in January after imports surged, supporting the government's case ahead of a G20 meeting that it is doing enough to spur domestic demand without speeding up currency appreciation as China’s trade surplus shrank to $6.5 billion from $13.1 billion in December.

 

Now the thought is that China's massive appetite for raw materials and its solid export growth could help solidify economic recoveries both here and abroad. In the past, a weaker surplus would have caused concern for the Chinese government, but more recently it has been trying to shift the economy toward greater reliance on consumption and less on exports, in part to address critics who say that its success has come at the expense of other countries.

 

It was the third consecutive month of a declining trade surplus, and though not enough to mark a definitive change, that streak provides a symbolic boost to China before the G20 meeting this week of finance ministers from the world's biggest developed and developing economies.

 

The G20 meeting in Paris on Feb 18-19 will try to work out a global plan for tackling the world’s economic imbalances that probably exacerbated the financial crisis in 2008, with China's yawning trade surplus seen as a key contributing factor.

 

China's imports rose 51 percent in January from a year earlier, blowing past market forecasts for a 28 percent rise. Exports rose 37.7 percent in January, topping expectations for a 22.4 percent rise, the customs administration said. Iron ore prices edged up further to fresh highs after the data, which showed that China was building steel product stockpiles in anticipation of more demand.

 

Yu Song and Helen Qiao, economists at Goldman Sachs, wrote in a note to clients that the import and export growth reflected well on both the Chinese and global economy.

 

"The strong exports growth momentum is supported by improvements in economic conditions in China's major trading partners, and strong imports growth momentum is supported by strong domestic demand growth," they wrote in a note. "Besides, the rise in imported commodity prices likely contributed to strong imports data as well."

 

Copper and iron ore prices ran near record highs for much of January and oil was also costly, pushing up China's import bill. As a result, commodity-exporting countries were the clear beneficiaries. Imports from South Africa were up 212.5 percent year on year, while shipments from Canada and Brazil were up 146.7 percent and 95.4 percent, respectively.

 

China will report its January inflation data on Tuesday. Analysts polled by Reuters had expected prices to rise 5.3 percent in the year to January, a 30-month high, but traders said on Monday that the increase was likely to be 4.9 percent, because adjustments of the consumer price index will have reduced the weight given to fast-rising food prices.

 

The combination of slower inflation and a narrower trade surplus will embolden Chinese officials who have resisted faster currency appreciation. The yuan has risen 3.5 percent against the dollar since it was theoretically decoupled from the dollar in June 2010, but it has been largely level this year.

 

Critics say that China keeps the yuan weak in order to make its goods cheaper in global markets, giving its exporters an unfair advantage. The United States has long voiced these complaints, but in recent weeks Brazil and India, China's fast-growing developing peers, have also expressed frustrations. The Treasury Department, in a long-delayed report, declined to say this month that China manipulates its currency for trade advantage, noting that higher inflation was making its goods more expensive.

 

Is the Economy Well – Not Yet Says President of NY Fed

 

The economy is heading in the right direction and will pick up steam over the next two years, but high unemployment and low inflation still paint an unsatisfactory picture, New York Federal Reserve President William Dudley said on Monday.

 

"The economy is healthier, but it is not yet well," Dudley said in remarks prepared for a press briefing. "In order to reduce joblessness significantly over the coming quarters, the economy needs to grow at a considerably faster rate than we have seen so far in this recovery."

 

Dudley said persistently low inflation probably hit a trough in the second half of last year but said it would take time for the jobless rate, currently at 9 percent, to fall. He also said it could take up to a year to see a "meaningful recovery" in the housing market.

 

Dudley is considered one of the more dovish members of the Fed's policy-setting committee and as head of the New York Fed has a permanent voting seat on the panel.

 

While the unemployment rate fell unexpectedly in January, Dudley said that was not "an unmitigated positive" and partly reflects people leaving the workforce.

 

But he said the Fed's $600 billion bond-buying program has helped to ease financial strains and stimulate growth. He expects brisker growth this year and in 2012, adding the "risk of a double-dip has subsided."

 

"Viewed through the lens of the Federal Reserve's dual mandate -- the pursuit of the highest level of employment consistent with price stability -- the current situation remains unsatisfactory," he said. "However, we appear to be heading in the right direction."

 

The U.S. economy grew at a rate of 2.9 percent in 2010 after contracting the previous year, and most economists expect quicker growth in 2011.

 

Dudley, who was speaking at a briefing on economic conditions in the New York Federal Reserve district, also noted that the flow of credit to households increased in the final three months of 2010. For the first time in two years, he noted, households increased their non-mortgage debt, albeit slightly, by $7.3 billion in the fourth quarter to $2.31 trillion.

 

For example, the number of credit card applications increased, indicating a pick-up in consumer demand for credit.

 

Total U.S. consumer indebtedness declined to $11.4 trillion as of December 31, continuing a two-year trend, according to a Fed survey also released on Monday.