MarketView for June 15

Summary 

The equity markets took their worst beating in the past month on Monday after regional manufacturing data reversed the recent optimism about the economy's health.  After a series of signs the economy may be stabilizing, Wall Street now want to see more definitive data indicating that the economy is doing more than just providing a glimpse of all too fleeting data of a positive variety.

There had been some expectation of a slight improvement in the New York Fed's Empire State index, but the survey showed the factory sector shrank at a much more severe rate in June than the previous month. As a result, the shares of some major manufacturers, such as #M and Caterpillar moved lower in price. 3M close down 28 percent at $59.31, while Caterpillar closed down 4.3 percent at $36.12.

Oil prices were also lower after Russia expressed confidence in the dollar as the world's reserve currency, increasing the greenback's safe-haven appeal. Commodity prices and the dollar have moved inversely of late. A stronger dollar means that oil becomes more expensive for holders of other currencies.

While the recent run-up in commodity prices had helped stocks extend their rally, there has also been concern that a surge in oil and other commodities could hamper any budding economic recovery. Higher energy costs are a drag on consumer spending and corporate profits.

The CBOE Volatility Index .VIX, known as Wall Street's fear gauge, closed above the 30 level for the first time since early June, suggesting more turmoil could be in store. The VIX jumped 9.5 percent to end at 30.81, its biggest percentage gain since late April.

This week marks quadruple witching, a term used to describe the quarterly expiration of June equity options, index options, single stock futures and index futures. This can bring more volatility as players adjust or exercise their derivative positions.

Also adding to the glum mode on the Street was a report from Goldman Sachs in which it cut its rating on Wal-Mart to "neutral" from "buy," writing that the firm did not see a lot of positive catalysts to drive Wal-Mart’s shares higher in the near-term as expense pressures and tougher sales comparisons persist.

Wal-Mart, a Dow component, fell 2.8 percent to $48.46, and was among the top drags on the blue-chip Dow Jones industrial average.

The technology sector, which has helped lead the market rally, also fell on profit-taking. Bellwether Qualcomm closed down 3.8 percent to $44.31 and Oracle fell 3 percent to $20.22.

Crude Oil Falls Nearly 2 Percent

The price of crude oil fell nearly 2 percent on Monday, extending its retreat from a near eight-month high. Sweet domestic crude futures for July delivery settled down $1.42 per barrel at $70.62, after optimistic signs of an economic recovery sent crude above $73 a barrel last week.

Brent crude for July, which expired on Monday, settled down $1.48 per barrel at $69.44.

Gains in the dollar, which makes oil more expensive for holders of other currencies, helped pressure prices. The price of crude oil is up from around $51 per barrel at the end of April to hit near eight-month highs on Thursday on economic optimism, stirring concerns that speculation in the market has pushed oil up too high too fast.

French Economy Minister Christine Lagarde said G8 ministers want measures to curb volatility in oil markets, which put at risk growing signs that their economies are heading toward recovery. OPEC Secretary General Abdullah al-Badri said that a rapid rise in oil prices could harm a global economic recovery, though he said a price of $80 a barrel would not stem growth.

Traders were also keeping a close eye on post-election political turmoil in OPEC nation Iran. Armed men fired on a rally supporting defeated presidential candidate Mirhossein Mousavi on Monday, killing one and wounding many, a witness was quoted in the media as saying.

In Nigeria, the main militant group said on Monday it had sabotaged an oil pumping station in the Niger Delta operated by Chevron, the fifth attack claimed against the company in less than a month.

The next weekly government inventory data on will be released on Wednesday and will likely show a drawdown in inventories.

Homebuilder Sentiment Falls

Homebuilder sentiment fell in June, as higher mortgage rates and an ongoing credit crunch damped expectations for the sector according to the National Association of Home Builders/Wells Fargo Housing Index. The index was down to 15 from 16 in May.

The housing market has shown some signs of life recently. However, the NAHB said consumer anxiety over jobs and the economy's health has created an uncertain picture for the sector's recovery.

"Home builders are facing a few headwinds, including expiration of the tax credit at the end of November; a recent upturn in interest rates; and especially the continuing lack of credit for housing production loans," Joe Robson, the chairman of the trade association, said in a statement.

Earlier this year, Congress authorized an $8,000 tax credit for first-time home buyers and home builders have called for that credit to be expanded beyond this year. And while rates on 30-year mortgages touched record lows in April, they have climbed since then on the expectation of rising economic growth.

30-year mortgages rates, which touched a low of 4.78 percent in April, reached 5.59 percent last week, the highest level since November, according to mortgage finance company Freddie Mac.

On a bright note new homes inventory has been shrinking. In April, the inventory of homes available for sale fell 4.2 percent to 297,000 homes, the lowest level since May 2001. New data will be available on Tuesday.

The overall housing market has been crippled since a five-year boom turned into a record number of defaults in 2006. Nonetheless, many homeowners have rushed to refinance, and potential buyers have been nudged off the fence by the low mortgage rates of recent months but that mini bubble appears to be coming to an end. An index of mortgage activity fell to a four-month low in early June as climbing rates turned consumers away, the Mortgage Bankers Association said.