MarketView for July 10

Summary

The Dow Jones Industrial Average chalked up a small loss, while the S&P 500 index edged up less than a point on Wednesday, interrupting a four-day rally, as Wall Street continued to engage in the fruitless game of, “When will the Federal Reserve scale back QE3?” The S&P 500 is now up more than 2 percent over the past five sessions, pushing the benchmark index to just about 1 percent below its May 21 all-time closing high of 1,669.

Analysts expect S&P 500 companies' earnings to grow 2.6 percent in the second quarter from a year ago, while revenue is forecast to increase 1.5 percent from a year ago, according to Thomson Reuter’s data.

Minutes from the Federal Reserve's June policy meeting released on Wednesday afternoon indicated many officials wanted more reassurance that the labor market was improving before reining in stimulus measures. At the same there appeared to be a consensus building within the Fed that there probably was a need to some degree to begin reducing QE3 in the not too distant future.

The three major equity indexes recovered some ground immediately on the headlines following the release of the minutes. But those gains were short-lived as Wall Street parsed the details of the minutes.

There appeared to be a greater mood of congeniality brought about by the speech given by Fed Chairman Ben Bernanke that was delivered after the market closed. Bernanke said highly accommodative monetary policy is needed for the foreseeable future and that the unemployment rate at 7.6 percent may be overstating the job market's health.

Bernanke's comments sent stock index futures higher. The central bank has said it will continue buying bonds until the labor market outlook improves substantially. This was in direct contrast to Bernanke’s inadvertent spooking of the markets last month when he said the economy's expansion was strong enough for the central bank to start slowing the pace of its bond purchases later this year.

Some in the market have pegged September as when the Fed could potentially start pulling back, but the minutes suggested that was not a foregone conclusion. With the Fed's quantitative easing program a significant driver of this year's rally in the stock market, the question of when and by how much the central bank could pull back has been a major focal point for investors.

After an initial selloff following Bernanke's comments in June, equities have taken a more positive tone in recent days on optimism that the economy is indeed on firm enough ground to justify slowing the $85 billion a month in bond purchases, known as QE3. That view was reinforced by last week's stronger-than-expected jobs report for June.

In the retail sector, Family Dollar Stores ended the day up 7.1 percent to close at $68.50. The stock, which ended at a seven-month high, was the S&P 500's top performer after the discount chain posted quarterly earnings.

On the downside, Nabors Industries fell 6.3 percent to $14.99. The stock was the S&P 500's worst performer after the owner of the world's largest land-drilling rig fleet warned on Tuesday that its second-quarter operating profit would fall short of market expectations.

After the closing bell, Yum Brands reported a drop in June sales at restaurants in China, though the decline was not as steep as the month before. Its shares edged up 0.5 percent at $72.70 in after-hours trading. During the regular session, Yum Brands shares fell 0.4 percent to end the day at $72.36.

Approximately 5.7 billion shares changed hands on the three major equity exchanges, as compared to the year-to-date average daily closing volume of 6.4 billion shares.

OPEC Will Lose Out

OPEC's share of the world market will shrink in 2014 as rising supply of U.S. shale oil gives the exporter group little comfort from the fastest growth in world demand in four years. In a monthly report, the Organization of the Petroleum Exporting Countries forecast demand for its oil in 2014 would average 29.61 million barrels per day (bpd), down 250,000 bpd from 2013 and 770,000 bpd less than it produced in June.

"This would imply a further build in global crude inventories, which currently stand at high levels," OPEC said in reference to the market outlook for next year.

The report is a further illustration that technology for extracting oil and gas from shale is reducing dependence on OPEC. Rising output will make it harder for the 12-member group to keep its own output at high rates without risking a drop in prices below $100 a barrel, its preferred level.

OPEC also forecast a recovery in demand next year as economic growth gathers pace. World oil use will expand by 1.04 million bpd in 2014, the strongest growth since 2010, it said.

However, the non-OPEC supply of crude, the source of two in every three barrels, is expected to increase by 1.14 million bpd, more than demand, led by further growth in the United States.

The U.S. shale boom has already curbed imports from OPEC members such as Nigeria and Algeria. OPEC expects U.S. oil output to rise by 560,000 bpd next year - the biggest rise among non-OPEC countries - to 11.33 million bpd.

"The outlook in 2014 is supported by anticipated healthy onshore tight oil developments, aided by rising investment," OPEC's report said. "In 2013, oil drilling activities continue to improve."

After initially downplaying shale, OPEC is looking more closely at its impact. At its last meeting, on May 31 in Vienna, the group's oil ministers spent some time discussing the issue and set up a committee to study it.

OPEC's report is the second of this month's trio of oil supply and demand forecasts to emerge. The U.S. Energy Information Administration in a report released on Tuesday raised its 2014 demand growth estimate by 50,000 bpd to 1.24 million bpd. The International Energy Agency, adviser to 28 industrialized countries, issues its report on Thursday.