MarketView for June 23

 

 

Summary  

 

Another delay by Boeing of its 787 Dreamliner helped to keep the Dow Jones industrial average under water for the day on Tuesday, while the S&P 500 index fared a bit better as bottom fishers sent it into positive territory for the day. As a result, Boeing’s shares were the Dow's largest drag after the company said the inaugural flight of its long-delayed 787 Dreamliner will be postponed so it can reinforce a section of the aircraft. Boeing ended the day down 6.5 percent to close at $43.87, marking for the worst one-day drop for Boeing’s shares since November.

 

 

Meanwhile, shares of companies that led the market down on Monday, when the market suffered its worst one-day loss in two months on Monday, were among the positive influences, including banks, energy and materials. JPMorgan Chase closed up 2.1 percent at $33.57 after falling 6.1 percent on Monday, while Bank of America gained 2.4 percent to close at $12.23 a day after sliding 9.7 percent.

 

After the close, shares of Oracle rose 1.4 percent to $20.14. The software company reported earnings and sales that exceeded forecasts. The stock had closed out the regular trading day at $19.87.

 

Wall Street remained cautious a day ahead of the Federal Reserve's assessment of economic conditions. After its two-day meeting ends Wednesday, the Fed is widely expected to leave the benchmark fed funds rate at almost zero. But the Street will check its statement closely for clues on the central bank's economic outlook.

 

On the economic front on Tuesday, data showing sales of used homes rose in May at a pace that was below expectations. However, the data also showed it was the first time the numbers rose in two consecutive months since September 2005.

 

The price of domestic crude oil settled up $1.74 per barrel at $69.24, also reversing a slide of almost 4 percent from the previous day. Exxon Mobil gained 0.2 percent to $68.95 after losing 3.1 percent on Monday. Chevron was up 0.3 percent to $65.96 after losing 3.4 percent on Monday.

 

Price of Crude Oil Sharply Higher

 

The price of domestic sweet crude oil rose nearly 2 percent on Tuesday as the dollar weakened and disruptions from OPEC member Nigeria stoked supply concerns. Italian oil company ENI declared force majeure on shipments of Brass River crude oil from Nigeria. Persistent militant attacks over the past three years have cut oil output in the OPEC member, the world's eighth biggest crude oil exporter, to less than two thirds of its installed capacity of 3 million barrels per day (bpd).

 

Royal Dutch Shell (RDSa.L) said it was still checking its oil operations in Nigeria's Niger Delta after militants claimed they had launched three attacks against its facilities at the weekend. Nigerian security forces arrested nine gunmen suspected to be involved in last week's pipeline attack that forced Agip to halt some oil output in the Niger Delta.

 

The price of domestic crude oil for August delivery settled up $1.74 per barrel at $69.24. London Brent settled up $1.82 per barrel at $68.80. At the same time, the U.S. dollar fell against the euro on speculation the Fed may lower expectations of an interest rate rise when it concludes its meeting on Wednesday.

 

The chief economist for the International Energy Agency warned that any strong price rise could clip a rebound in the global economy. At the same time, Kuwait's oil ministers said OPEC will not cut oil output at its meeting in September, after the producer group last year agreed to a series of output cuts to help lift prices.

 

"Nobody expected the price to reach $70 a barrel so quickly," Kuwait's Oil Minister Sheikh Ahmad al-Abdullah al-Sabah told reporters at parliament, adding OPEC would likely call for greater compliance with current output targets. "It was forecast by the fourth quarter. So it slipped a bit but still, if we achieve $75-$80 by the end of the year that would be fine." OPEC's president has previously said the cartel wants an oil price of $75 a barrel by the end of the year.

 

President Obama strongly condemned the OPEC country's crackdown on the anti-government protesters, who have taken to the streets following disputed elections earlier this month after Iranian authorities said they would teach an exemplary lesson to "rioters" held in the worst unrest since the birth of the Islamic Republic and accused Western powers of inciting the violence.

 

U.S. inventory data from the American Petroleum Institute will be released later on Tuesday, with U.S. Energy Information Administration data due out on Wednesday.

 

Dollar Under Pressure

 

The dollar was lower on Tuesday as a result of speculation the Federal Reserve may attempt to keep debt costs low by reducing expectations for higher interest rates at the conclusion of its meeting on Wednesday. If consumer and business borrowing costs were to rise, it would jeopardize or delay an economic recovery.

 

The euro jumped more than 1 percent to trade above $1.41 as financial markets also awaited the auction results of a record $104 billion in U.S. debt issuance this week. A $40 billion auction of two-year Treasury notes on Tuesday saw a high yield of 1.151 percent, the highest since November 2008, with strong demand. Low demand for remaining auctions would intensify concerns about how the United States will finance its huge deficits.

 

The Fed's policy-setting Federal Open Market Committee is scheduled to make its policy announcement on Wednesday at the end of a two-day meeting, at about 2:15 p.m. With no move on rates expected, investors will focus on what the Fed says about the economic outlook and its debt-buying program.

 

In late afternoon trading in New York, the euro rose 1.6 percent against the dollar to $1.4075 after hitting a session peak of $1.4106. It was the largest one-day percentage gain since May 8, at current prices. It rose as high as $1.4109 on electronic trading platform EBS. Investors were also buying euros ahead of the European Central Bank's first-ever one-year refinancing operation on Wednesday, aimed at getting banks lending again.

 

The dollar has come under pressure in recent weeks as more upbeat economic data fueled hopes that a global economic recovery was on track. However, an outlook by the World Bank on Monday stirred worries about global growth, pushing stocks sharply lower and reviving safe-haven flows into the greenback.

 

Concerns about reserve diversification away from dollar assets also weighed on the dollar on Tuesday after Moody's said one risk to the United States' AAA rating would be if there was a severe challenge to the dollar as the main reserve currency. It said the U.S. rating is safe unless the government is unable to bring debt back down.

 

The dollar has tended to fall when risk sentiment improves as investors move money away from safe-haven investments into riskier ones. The dollar also fell against the yen, extending losses after an industry survey showed sales of previously owned homes in the United States rose less than expected in May. The data pointed to a sluggish recovery from the severe economic recession.

 

The dollar last traded 0.7 percent lower at 95.21 yen, after earlier touching a three-week low of 94.88 yen, according to electronic trading platform EBS. Adding to support for the euro were comments by European Central Bank Governing Council member Axel Weber on Tuesday that he saw no need for further policy measures at the moment to get the economy back in shape.

 

Fed Starts Two Day Meeting

 

The Federal Reserve began a two-day meeting on Tuesday at which it is expected to dampen expectations for interest rate hikes this year, while holding steady on its plans for asset purchases. A Fed official said the meeting got under way at around 1 p.m. A statement announcing the policy decision is expected at about 2:15 p.m. on Wednesday.

 

It is widely expected that the Fed will hold its target for the federal funds rate, the rate banks charge each other for overnight loans, in the zero to 0.25 percent range reached in December. The meeting comes at a difficult juncture for the Fed and its chairman, Ben Bernanke.

 

Hints the economy is nearing recovery have some market participants arguing the Fed must act soon to prevent inflation from taking hold by withdrawing the extraordinary stimulus it has put in place. Others see a risk of a plunge back into a deep recession if emergency efforts are removed too soon.

 

President Obama said on Tuesday that Bernanke had done a good job since the start of the financial crisis, but gave no hint whether he wants him to carry on when his term ends in January. Bernanke's Fed has put in place an unprecedented array of emergency programs to fight the crisis, including large-scale purchases of mortgage debt and longer-dated U.S. government bonds.

 

At its June meeting, the Fed is not expected to ramp up asset purchases above an existing promise to buy $300 billion in government bonds and $1.45 trillion of mortgage debt. It may, however, stretch out its buying of U.S. Treasury debt to last until year-end, or divert cash now earmarked for mortgage-related debt to government bonds.

 

One reason it may stop short of ramping up the actual amount of Treasuries it plans to purchase is worry among some policy-makers about inflation. Fed officials are sensitive to accusations that it is 'monetizing' our debt by printing money to purchase government bonds, which critics claim could lead to a problematic outbreak of inflation. It is a charge Bernanke has denied.

 

"An unchanged $300 billion program would make it easier to maintain this position because it would keep the Fed's total holdings of Treasuries just below pre-crisis levels," Goldman Sachs wrote in a note to clients.

 

The Fed subsequently ran down these holdings as it sold billions of dollars of Treasuries last year to sterilize the balance-sheet impact of other asset purchases it made to ease credit markets in the middle of a financial panic. However, the Fed is expected to push back against speculation that it will raise rates before the end of the year, and economists were focused on how the language of its policy statement could be tweaked to accomplish this tricky mission.

 

Interest rate futures markets had priced in a hike in the federal funds rate to 0.5 percent by year-end, which accompanied rising yields on longer-term U.S. Treasuries that pushed mortgage rates higher, but this view has softened somewhat in the last week. Still, markets continue to price in a 38 percent perceived likelihood the fed funds rate will be 0.5 percent in December, and policy-makers may want to shift that expectation lower.

 

Home Sales Fail To Meet Expectations

 

Sales of previously owned homes rose for a second straight month in May but were weaker than expected, adding to growing fears of an anemic economic recovery from a deep recession. The chief economist of the National Association of Realtors, which released the data on Tuesday, said sales in some areas appeared to be slowing and warned of the danger of a "delayed" housing market recovery.

 

According to the NAR, sales climbed 2.4 percent last month to an annual rate of 4.77 million units. While that pace was below market forecasts it was the second straight month sales had risen, for the first back-to-back gain since September 2005. Despite signs the market is stabilizing, the NAR said the median national home price fell 16.8 percent in May from a year earlier, the third-largest drop on record.

 

A separate government report on Tuesday showed home prices fell 6.8 percent year-on-year in April after dropping 7.3 percent the previous month.

 

The Realtors report showed sales remained down 3.6 percent compared to May last year. Distressed sales made up 33 percent of the sales in May, but this compared to the 45 to 50 percent seen in the past few months. It also showed sales of single-family homes rose 1.9 percent last month to an annual rate of 4.25 million, while multifamily units -- the hardest-hit sector -- surged 6.1 percent to a 520,000-unit annual pace.

 

Sales in May were up in two of the four regions and flat in the South. According to the NAR, markets which had shown robust gains were starting to taper off. The supply of unsold homes fell 3.5 percent to 3.80 million. At the current sales pace, it would take 9.6 months to clear that supply, down from April's 10.1 months.

 

Oracle Beats Forecasts

 

Oracle's quarterly earnings beat market expectations as profit margins hit a record high and software sales fell less than anticipated, sending its shares up 2.5 percent. The country’s third largest software manufacturer said on Tuesday that it gained share from SAP AG in the market for business management software, a sign it may be continuing to weather the economic downturn better than its main rival.

 

Oracle had helped set analysts' forecasts in March, when executives warned that the recession and strong dollar would take a substantial bite out of profits. Since then, the economy has stabilized and the U.S. currency has weakened, setting Oracle up to beat those conservative estimates.

 

New software sales, a closely watched revenue measure, fell 13 percent to $2.7 billion in Oracle's fiscal fourth quarter ended May 31. Oracle reported earnings, excluding items, of 46 cents per share. The company said its adjusted operating margin was 51 percent, up 2.4 percentage points from a year ago.

 

Its margin rose on an increase in revenue from its highly profitable software maintenance business. Its costs also benefited from the decline in new software sales, because the company paid less in commissions to its sales staff, whose bonus targets were set a year ago when the economy was in better shape.

 

Oracle reported that net income fell 7 percent to $1.9 billion, or 38 cents a share, from $2.0 billion, or 39 cents, a year earlier.