MarketView for July 6

 

 

Summary  

 

It was with welcome relief that Wall Street saw its major equity indexes move into the black on Tuesday. The unfortunate part of it all was that the Street gave up a triple digit gain on the Dow Jones industrial index after key buying interest evaporated in the afternoon and the all too familiar bearish sentiment reasserted itself.

 

Ending a five-day string of losses, the major indexes hit their stride into positive territory after the S&P 500 closed at a 10-month low on Friday. However, it appeared that investors used the morning's gains as an opportunity to sell rather than establish new long positions. Nonetheless, Bank of America managed a nice gain, up 1.6 percent to $14.06. Goldman Sachs rose 0.9 percent to $132.26.

 

The Institute for Supply Management's reading on service sector activity showed economic growth in June but at its slowest pace since February, heightening concerns over the actual strength of the economic recovery going forward.

 

Retailers were the top decliners after Citigroup reduced its target price on a number of retail stock prices, including Home Depot, Macy's and JC Penney. ome Depot fell 1.5 percent to $27.32 and Macy's fell 2.5 percent to $17.41. JC Penney shares were off 1.6 percent at $20.83.

 

In the options market, the most active trades were on put options for exchange-traded funds that track the S&P 500 benchmark and the Nasdaq, suggesting that investors are betting on further declines.

 

BP ruled out a share issue amid talk of a sovereign wealth fund's interest in a stake, boosting its shares even as the Gulf of Mexico oil slick spread to the Texas coast. A BP relief well is seven days ahead of schedule, the U.S. spill incident commander said. BP's U.S.-traded stock gained 8.7 percent to $31.91.

 

Service Sector Slows

 

The service sector expanded in June for the sixth straight month but the rate of growth slowed to its slowest rate of increase since February, the latest evidence that the economic recovery is cooling somewhat. However, according to the data released on Tuesday by the Institute for Supply Management, the economy is not slipping back into recession. Nonetheless, it is also evidence that the economy is in need of additional stimulus until such time as the economy is on firmer footing.

 

That is substantiated when you consider that the data on business activity in the service sector, which dominates the economy, was in line with a series of weak reports in recent weeks on consumer spending, factory activity, employment and the housing market that have raised fears about the path of the recovery.

 

According to the ISM, its service sector index fell to 53.8 from 55.4 in May. A reading above 50 indicates expansion in the sector, while a reading below 50 indicates contraction. New orders also fell, to 54.4 from 57.1, suggesting growth may be moderating, while export orders turned negative.

 

The ISM report's data on employment gave a more pessimistic picture of the economy. The employment component declined to a reading of 49.7 from 50.4, contracting once again after having turned positive last month and confirming weak reports on the labor market.

 

On Friday, the Department of labor reported that private payrolls rose only modestly in June and overall employment fell for the first time this year as thousands of temporary government census jobs ended. The health of the labor market is considered key to the U.S. economic recovery because jobs are critical to powering consumer spending, which drives about two-thirds of the country's economy.

 

Separate data on Tuesday gave a somewhat more positive reading on the labor market. The Conference Board, a private research group, reported its gauge of the U.S. job market improved in June for the 11th straight month, but at a moderate pace amid weak private-sector job creation. The Conference Board said its Employment Trends Index rose to 96.7, up from a revised 96.1 in May. The index is up about 9.8 percent from a year ago, the Board said.

 

"The weak growth in private sector employment in the last two months has been disappointing, given the robust recovery in production in recent quarters," said Gad Levanon, associate director for macroeconomic research at The Conference Board. "The moderate increase in the Employment Trends Index in the last two months suggests that many employers are now concerned that the recovery is losing momentum."

 

Crude Prices Pulls Back - Again

 

The price of crude oil fell for a sixth straight session on Tuesday, ending near a one-month low hit overnight, before giving into move upward that was tied to rising share prices. The crude markets and the equity markets have been moving in lock-step.

 

Sweet domestic crude futures for August delivery fell 16 cents, or 0.22 percent, to close at $71.98 a barrel. It retreated from a $73.86 intraday peak, having earlier touched $71.09, the lowest price since June 8. ICE Brent crude for August fell 2 cents to $71.45 a barrel.

 

That decline came despite a decline in the dollar against a basket of currencies, which usually boosts crude by making prices for buyers using other denominations more attractive. Oil prices did try to rebound on Tuesday after weak employment numbers and disappointing manufacturing data from the United States and China helped knock oil prices down 8.5 percent the previous week.

 

After Hurricane Alex swept into Mexico last week, oil traders on Tuesday eyed a low pressure system that the U.S. National Hurricane Center said had a 30 percent chance of developing into a tropical depression as it moves northwest toward Mexico's Yucatan peninsula.

 

The weekly oil inventory report from the American Petroleum Institute will be delayed to Wednesday due to Monday's U.S. holiday and government statistics from the Energy Information Administration will be published on Thursday.

 

Global Growth Retreats

 

The pace of global expansion in the private sector sagged in June to a four-month low, according to a survey on Tuesday that pointed to slowing growth in order books and employment.

 

The Global Total Output index, produced by JPMorgan with research and supply management organizations, fell to 55.4 in June from 57.0 in May, although still above the 50 mark that divides growth from contraction. The Global Services index eased to 54.9 in June from 56.3 in May, pulled down by a new business component that saw a marked fall to 52.6 from 54.2. The survey also showed employment barely grew last month.

 

Signs of a slowdown were also in evidence in the 16-nation euro zone, according to surveys on Monday that suggested private sector growth may have already peaked in the second quarter. The global index combines survey data from countries including the United States, Japan, Germany, France, Britain, China and Russia.

 

BP Says No Shares in Offing

 

BP Plc said on Tuesday that it could cover the costs of the Gulf of Mexico oil spill without selling new shares, despite reports it was talking to government-owned funds in the Middle East about buying a stake to ward off takeover attempts.

 

The speculation sent the oil company's shares higher even as oil from the slick spread to the coast of Texas, which had been the last Gulf states whose shores were untainted by the environmental disaster.

 

The spill is wreaking havoc on coastal ecosystems, fishing communities and a tourist industry seen as especially important during a time of high unemployment. Vacationers largely avoided beaches tarred by the leaking well during the three-day U.S. July 4 Independence Day holiday weekend.

 

BP saw its share price increase by nearly 7 percent on Tuesday after gains in London that were also supported by a brokerage upgrade. The market moves came on the 78th day after the Deepwater Horizon rig exploded. At one stage after that disaster BP had lost $100 billion in market value.

 

On Tuesday, a source in the United Arab Emirates said BP executives held talks with sovereign wealth funds in Abu Dhabi, Kuwait and Qatar, as well as one in Singapore, to find a partner who might help it avoid being taken over by another major oil company.

 

BP declined to comment on talk of a stake sale. It did say there were no plans to issue new equity to anyone, allaying some investors' fears of a share issue to help pay for a spill expected to cost tens of billions of dollars. The company's bill for the spill has already passed $3 billion.

 

"We're always happy to welcome new shareholders or existing shareholders who wish to increase their holdings but there are no plans to issue new equity to anyone," a BP spokesman said. A top 10 shareholder said any move to issue shares would be viewed extremely negatively.

 

Several sovereign funds already hold BP stakes. Norway and Kuwait control about 1.8 percent each, China has 1.1 percent and Singapore 0.7 percent, according to Thomson Reuter’s data. Royal Bank of Scotland upgraded BP to "buy" from "hold."

 

"Our base case scenario is significantly less pessimistic and in our view, the risk/reward profile of the shares is currently favorable," it said in a note. Just two out of 37 brokers have an "underperform" or "sell" rating on BP's stock and over two-thirds rate it "buy" or "strong buy," according to Thomson Reuter’s data. The stock's 12-month forward price-to-earnings ratio makes it easily the cheapest among the major oil companies.

 

Britain's Times newspaper reported the British government was drafting contingency plans for a possible BP collapse. The British government declined to comment.

 

U.S. government tests showed tar balls that washed up on the Texas coast were from the spill, meaning every U.S. Gulf state -- Louisiana, Mississippi, Alabama, Florida and now Texas -- has been hit by the largest offshore oil spill in U.S. history. In addition, The U.S. Coast Guard also reported an oily sheen and tar balls in the inland estuary of Lake Pontchartrain, which surrounds much of the city of New Orleans and its Louisiana suburbs.

 

On the site of the spill itself, attempts to stop the flow have not worked. BP has pinned hopes on a relief well that should be completed in August. Meanwhile, weather over the southern Gulf of Mexico could strengthen into a tropical storm this week, the U.S. National Hurricane Center said.

 

Although it was not expected to travel over the site of the blown-out BP well, it could come closer than Tropical Storm Alex, which interrupted the cleanup operations last week. Coast Guard spokesman Commander Charles Diorio said on Tuesday rough seas and high winds continued to hamper oil skimming operations.

 

Offshore skimming crews were unable to collected any oil-fouled water on Monday off the coasts of Alabama, Mississippi and the Florida Panhandle, Diorio said on a conference call from a regional command center in Mobile, Alabama, responsible for the area. Meanwhile, tests on a supertanker adapted to skim large quantities of oily water from the surface were inconclusive because of high seas, ship owner TMT Shipping Offshore said.