MarketView for July 10

Summary

The major equity indexes fell for a fourth day on Tuesday as more pessimism from companies compounded worries a sluggish world economy cannot help but take a toll on profit growth. A sales warning from Cummins came on top of earlier weak forecasts from chipmakers Applied Materials and Advanced Micro Devices, causing the market to extend losses in afternoon trading. Cummins cut its full-year sales forecast, citing weakness overseas and a stronger dollar. As a result, Cummins was among the day’s largest decliners, it shares falling 8.9 percent to close at $86.91.

At the same time, Advanced Micro Devices saw its share price fall 11.2 percent to $4.99 after the chipmaker slashed its outlook for second-quarter revenue following disappointing sales in China and Europe. Applied Materials fell 2.7 percent to close at $10.71 after the chip-equipment maker said it expects to miss its full-year estimates and its third-quarter results will be at the low end of its previous outlook.

The news sent the S&P 500 down for a fourth consecutive day, the index's longest downward streak since May when it fell for six straight days. The S&P 500 ended at technical support, which is seen in the 1,340 to 1,345 range. The 50-day moving average at 1,337 is also eyed as support where clusters of buying would be expected.

Recent data showing slower growth in Europe, China and the United States has weighed on the stock market, while domestic companies have warned about overseas weakness and a stronger dollar hurting companies that rely heavily on exports.

Alcoa, which kicked off the earnings period, fell 4.1 percent to $8.40, a day after it reported a quarterly loss and lower sales. Bank stocks also fell, with the euro hitting a two-year low against the dollar amid uncertainty about progress in tackling the euro zone crisis.

Research In Motion fell 5 percent to $7.29. The BlackBerry maker's shareholders elected the company's slate of directors at its annual meeting - the first presided over by new Chief Executive Thorsten Heins, who faces an uphill battle to get the embattled company back on track.

Volume was lighter than average with about 6.22 billion shares changed hands on the three major equity exchanges, as compared to the year-to-date daily average of 6.85 billion shares.

Spain Vows to Clean Up Its Act

A euro zone bailout for Spain's crippled banks paves the way to clean up the financial sector within 18 months and will also put the economy on a path to recovery, Spain said on Tuesday. Euro zone finance ministers agreed on Monday a rescue package of up to 100 billion euros ($123 billion) for Spanish banks devastated by a burst housing bubble.

"This puts us in a position to clean up the Spanish financial system that I think is going to go very deep," Economy Minister Luis de Guindos said after the meeting in Brussels, where ministers approved the deal and will sign off on it on July 20. "We must make maximum use of the next 18 months to do this clean up...and bring down debt levels in the Spanish economy," he told a news conference.

Following the formal signing of the deal, Madrid expects 30 billion euros in a first tranche of money that will be available immediately for state-rescued banks that urgently need funds. That will make Spain the fourth euro zone nation to receive emergency aid in a debt crisis that started in Greece and has spread across the bloc.

De Guindos said Finland was the only euro zone country that has asked for collateral on the loans to Spain, which will be first provided by the bloc's temporary rescue fund, the European Financial Stability Facility (EFSF). The loans will have an average maturity of 12.5 years and a maximum of 15 years, with interest rates of between 3 percent and 4 percent, de Guindos said.

Once the permanent European Stability Mechanism (ESM) is operational sometime over the European summer, it will take over the job of funding Spain's program.

Under the terms of the bank bailout's draft memorandum of understanding (MoU), 14 banking groups that make up about 90 percent of the banking system will be tested for their recapitalization needs in a review due to be completed by the second half of September.

All Spain's banks will have to increase their core capital ratios to 9 percent by the end of 2012 and keep them at this level until the end of 2014. However, the government will review by December the requirements for setting aside capital to cover losses on real estate assets.

There will be a special focus on savings banks, or "cajas", which had close links with local governments and were responsible for much of the unsustainable lending over the last decade, and their governance structure, will be reviewed.

According to the MoU, Spanish authorities will prepare by the end of November a new law to reduce the stakes that savings banks have in commercial lenders to non-controlling levels. Banks that are controlled by the cajas and receive state aid would be become listed companies. The measure is mostly symbolic; applying only to a handful of banks representing a small share of Spain's banking system, but a failure to implement it could worry investors.

The document also says that holders of hybrid capital and subordinated debt in state-rescued banks will have to take a haircut on their investments in order to minimize the cost to taxpayers of the restructuring. Hundreds of thousands of small shareholders who bought instruments such as preference shares are likely to be affected.

The first injection of capital into banks not already rescued by the state and unable to raise capital by themselves can be expected by October, after reviews by the Spanish government and the European Commission. Spain wants to avoid the bailout money adding permanently to its debt and deficit load because that could push the country towards a sovereign bailout.