MarketView for July 9

 

 

 

Summary

 

The major equity indexes were lower on Monday, after a holiday shortened work week, in light trading. Driving prices lower was a combination of weak economic data from Asia and signs of economic trouble in Europe, underscored by higher Spanish and Italian bond yields.

 

 Monday's decline, the third in a row for the S&P 500 index, comes as quarterly earnings reports get under way. The Street is anxious to see what impact weak demand in Europe and slowing growth in Asia will have had on corporate America. From a technical standpoint, the S&P 500 remains about 10 points above the 1,342 support level and the 50-day moving average at 1,340.

 

Alcoa, always the first of the companies comprising the Dow Jones Industrial Average to report earnings at the end of each quarter, fluctuated throughout the day, ending up 0.3 percent at $8.76 in the regular session. Alcoa's shares rose 2 percent in extended trading after the company released its results. Alcoa posted a second-quarter loss but results, excluding items, beat Wall Street estimates.

 

Corporate outlooks are at their most negative in nearly four years, and companies that have already reported have shown lackluster growth. Nearly two dozen S&P firms have already cited Europe's woes - which seem to be worsening - as a concern. While a majority of corporations may beat lowered analyst expectations, investors will be focused on how well companies are handling weakness overseas.

 

Volume was among the lightest of the year. About 5.1 billion shares changed hands on the three major equity exchanges, as compared with the year-to-date daily average of 6.85 billion shares.

 

In economic news, machinery orders in Japan fell at a record pace in May, while inflation in China eased to a 29-month low, suggesting falling demand from Europe and the United States for exports.

 

Among the day's decliners, Visa fell 1.3 percent to $123.65 and MasterCard saw its share price fall 2.3 percent to $431.27. UBS Investment Research downgraded the payment processors to sell, citing slower consumer spending in the United States and sluggish global economic growth.

 

On a positive note, Amerigroup rose 38 percent to $88.80 after the company agreed to be acquired by rival WellPoint for about $4.46 billon. WellPoint shares advanced 3.4 percent to $61.95. Wellcare ended the day up 18.4 percent, closing at $62.56.

 

Advanced Micro Devices' shares fell 11 percent to $5 after it warned that its revenue would decrease about 11 percent in the second quarter compared with the previous quarter due to softer-than-expected sales in China and Europe and weak consumer spending.

 

Alcoa Exceeds Expectations

 

Alcoa's quarterly revenue and profit exceeded Street expectations even though prices for its aluminum are at nearly two-year lows, and it forecast growing demand in the aerospace and auto sectors. Chief Executive Klaus Kleinfeld said low metal prices were a result of the global economic malaise rather than any fault with market fundamentals.

 

"I want to make one thing crystal clear here, the market is working," he told Wall Street analysts on a conference call. "We do see that people are moving forward with curtailing (production) and responding by slower build as we see in China and that's clearly a function of the low LME (London Metal Exchange) pricing that we currently have in the market."

 

With high inventories and a 20 percent drop in prices since March, many aluminum producers are losing money. Benchmark three-month London Metal Exchange aluminum stood at $1,925 a ton on Monday - hovering above the $1,880 low of June 2010.

 

Recent production cuts helped bring the aluminum market into deficit, Kleinfeld said, suggesting prices might now rise according to historical patterns in cyclical metals markets.

 

"The real question is: has the general economic sentiment currently overtaken the market fundamentals? I guess ... the answer to that is 'yes.' "In the end I believe the fundamentals prevail."

 

Kleinfeld said Alcoa was sticking with its forecast that global aluminum demand will grow by 7 percent this year. "China continues to grow substantially - 11 percent.

 

"We are seeing positive growth continuing in most of our end markets," he said. Alcoa said it sees 13 percent to 14 percent growth in aerospace this year, 4 percent to 8 percent growth in automotive, and 2 percent to 3 percent global growth in beverage cans.

 

Kleinfeld also said the world market for alumina -- refined bauxite that is then smelted into aluminum -- is moving back into balance, driven partly by refinery curtailments in China.

 

Alcoa, traditionally the first Dow Jones Industrial Average components to report quarterly results, reported that it had a second-quarter operating profit of $61 million, or 6 cents per share, excluding a $45 million charge as part of its effort to settle a lawsuit with Aluminium Bahrain, in addition to some other items. On that basis, it beat Wall Street estimates of 5 cents per share, which were lowered in recent weeks as aluminum prices dropped.

 

On a net basis, Alcoa lost $2 million, or nil cents per share. That compared with a net profit of $322 million, or 28 cents per share, in the same quarter last year. Revenue fell 9 percent to $6 billion, as aluminum prices dropped 18 percent from last year Alcoa said. But that also exceeded analyst expectations of $5.8 billion.

 

Alcoa is locked in a lawsuit with Aluminium Bahrain, which has accused it of conspiring to overcharge the company, known as Alba, for alumina supplies. Alcoa could take another $75 million charge based on that effort to settle the lawsuit. It said it had also held talks with the U.S. Department of Justice and the Securities and Exchange Commission to settle ongoing investigations, which could lead to additional charges.

 

Alcoa stock rose 2 cents to $8.78 in after-market trading.

 

Spain Receives a Break But There is Still a Long Ways to Go

 

European ministers apparently are ready to grant Spain an extra year to reach its deficit targets in exchange for further budget savings but remained far from pinning down details of bank rescues and emergency bond-buying that are of greater concern to markets.

 

As finance ministers of the euro zone met in Brussels late on Monday, a top European Central Bank policymaker said the 17-nation currency area's debt crisis was now more acute than the 2008 financial turmoil that felled U.S. investment bank Lehman Brothers.

 

"The euro zone crisis is now much more profound and more fundamental than at the time of Lehman," ECB Executive Board member Peter Praet told a conference in Lisbon.

 

Eurogroup finance ministers were tasked with adding some solid material to a bare-bones agreement reached by EU leaders at a summit last month on establishing a European banking supervisor and using the bloc's rescue funds to stabilize bond markets.

 

However, with differences persisting between north European countries such as Finland and the Netherlands and southern states led by Italy and Spain, EU officials said no breakthroughs were likely this week.

 

ECB President Mario Draghi endured at times hostile questioning in the European Parliament, notably from German, Dutch and Finnish lawmakers concerned at the prospect of European bank bailouts using taxpayers' money.

 

German Finance Minister Wolfgang Schaeuble sought to defuse growing opposition at home by saying it would take time to establish a European bank supervisor and only once it was fully in place might ministers decide to allow direct recapitalization of ailing banks by the euro zone's rescue fund. Schaeuble said he expected ministers to agree on a timetable for up to 100 billion euros ($123 billion) in aid for debt-stricken Spanish lenders.

 

A wider gathering of EU finance chiefs on Tuesday is set to ease a deficit reduction goal that has forced Madrid to make punishing cuts that are exacerbating a recession. Spanish and Italian borrowing costs continued to rise on Monday, with Spain's 10-year bond topping the critical 7 percent level, and world shares fell with a darkening global growth outlook and little prospect of early process on the euro zone's debt crisis.

 

Spanish Economy Minister Luis de Guindos was to spell out to finance ministers his government's plan for a package of up to 30 billion euros over several years through spending cuts and tax hikes that are due to be announced this Wednesday.

 

It appears that about 10 billion euros of cuts could come this year and that the measures would include a hike in VAT sales tax, reduced social security payments, reduced unemployment benefits and changes to pension calculations. In return, the European Commission will propose easing Madrid's deficit goal for this year to 6.3 percent of economic output, 4.5 percent for 2013 and 2.8 percent for 2014, officials said.

 

The new targets may still prove difficult to reach, according to the draft recommendation from the European countries to Spain, loosening its goals and demanding the country be subjected to three-monthly checks.

 

The figures highlighted Spain's dramatic fiscal slippage due to a worsening recession. Madrid was originally meant to cut its budget shortfall to 4.4 percent this year. Prime Minister Mariano Rajoy unilaterally changed the target to 5.8 percent in March before eventually accepting an agreed goal of 5.3 percent.

 

The Commission will make the new proposal on Tuesday to the EU's finance ministers, who would have to agree for the targets to become binding, two officials told Reuters.

 

Madrid had been due to reduce its national deficit to 3 percent of gross domestic product by the end of 2013. But a deep recession has put that beyond reach.

 

Spain hopes to reach an agreement on a memorandum of understanding on the bank rescue on Monday, which would be followed on July 20 by a final loan agreement. As part of that, Spain will create a single bad bank to house toxic assets from its banking sector. Spain and Italy again stepped up pleas for European action to put a cap on their borrowing costs.

 

Alongside Spain, euro zone ministers were also due to consider aid to Cyprus and whether to grant concessions to Greece, which has admitted it is missing its bailout program targets. EU leaders want to break the link between banks and sovereigns by not lumbering governments with debts for rescuing their lenders, making it harder for them to borrow.

 

They decided in principle on June 29 that euro zone rescue funds could be used to buy government bonds to lower borrowing costs, with conditions attached but without a full program. However Finland, and to some extent the Netherlands, have since opposed such purchases. Helsinki insists that there was no agreement on bond-buying by the ESM in secondary markets at the leaders' summit.

 

Much depends on the ECB's role as banking supervisor, which will need to be grounded in European law. It falls to the European Commission to propose such legislation, which is not expected until at least September. Coordinating euro zone finance ministers has been the job of Luxembourg Prime Minister Jean-Claude Juncker since 2005, but his terms ends on July 17 and ministers were due to discuss his successor on Monday. French Finance Minister Pierre Moscovici said he expected Juncker's term to be extended, depending on how long he was prepared to stay on.

 

Ministers were also due to receive a report on the first mission by the "troika" of the EU, the ECB and the International Monetary Fund to Greece since June 17 elections. Highlighting resistance to the harsh austerity conditions imposed on Greece, Deputy Labor Minister Nikos Nikolopoulos resigned from the new government that won a parliamentary vote of confidence only on Sunday, saying it was not forceful enough in pushing lenders to ease the bailout terms.