MarketView for June 8

 

 

Summary  

 

Share prices staged another late move on Tuesday, only this time it was upward and not downward.  The rally was led by materials and financial shares, as the Street shied away from large cap technology shares on concerns regarding their European exposure. At the same time, Fed Chairman Ben Bernanke said the U.S. economy seemed to have enough momentum to avoid a "double-dip" recession, giving support to domestic-oriented companies.

 

Banks, telecommunications services and consumer staples shares ranked among the top performers. AT&T, a Dow component, rose 2.7 percent to $24.97. Bank of America closed up 3.4 percent to $15.33 and Procter & Gamble was up 2.5 percent to close at $62.14.

 

From a technical perspective, short-term momentum is showing negative signals as the S&P's 14-day moving average has traded below the 200-day moving average for a week. At its lowest during the session, the benchmark managed to stay above its 2010 low, with the 1,040 level seen as key support.

 

The economy of Brazil, Latin America's largest and strongly supported by basic materials, surged at its fastest pace in at least 14 years in the first quarter, fueled by strong investment and domestic demand, government data showed.

 

An S&P materials stocks index rose 2.5 percent and ranked as the best-performing sector in the broad S&P 500. Freeport-McMoRan Copper and Gold rose 4.8 percent to $61.48 and U.S. Steel gained 2.6 percent to $41.34. McDonald's closed up 2.5 percent to $68.41 after the company reported a stronger-than-expected rise in global same-store sales for the month of May.

 

The technology sector was hit after Bank of America-Merrill Lynch cut price targets on several Internet stocks, citing uncertainty over earnings due to the dollar's gains against the euro since April. Amazon.com Inc (AMZN.O) fell 2.6 percent to $118.84.

 

Another drag on tech was Microsoft, which lost 0.7 percent to $25.11 after the Dow component said it planned a private offering of senior notes in a move to repay short-term debt.

 

As European Union finance ministers discussed how to reduce swollen budget deficits to contain a debt crisis, Spanish public service workers staged a one-day strike that underlined the problems governments face in implementing austerity measures.

 

Interest Rates to Remain Low

 

Chicago Federal Reserve Bank President Charles Evans said on Tuesday that high unemployment and low inflation justify holding benchmark interest rates ultra-low for "quite some time" and that European debt woes are unlikely to derail the domestic economic recovery.

 

"We have a little bit more risk with the European situation; the (U.S.) outlook looks good but not so strong as to reduce the unemployment rate very quickly; I don't see inflationary pressures at the moment," Evans said.

 

"So I think we will continue to have an accommodative policy stance for quite some time," Evans told business leaders in Chicago in response to an audience question.

 

Evans, who is not a voter on the Fed's policy-setting Federal Open Market Committee this year, reiterated that the Fed's pledge to keep rates low for "an extended period" means about six months to him.

 

Evans' comments reflect a division at the Fed, the U.S. central bank, over interest rate policies. With many economists believing the recession has been over for almost a year, some officials think the Fed should consider dropping its promise to hold rates at rock bottom levels for a long time, if not actually begin to raise borrowing costs.

 

However, the predominant view at the Fed is that with a relatively sluggish rebound and unemployment hovering just below 10 percent, and with some indicators of inflation at multi-decade lows, it is too early to start tightening credit conditions.

 

Evans said the economy is recovering, but growth is moderate and the jobless rate may remain stubbornly high, a view underscored by what he called "disappointing" jobs growth in May. Europe's sovereign debt crisis is unlikely to deal a strong blow to the U.S. economic recovery, but the situation merits careful monitoring, he said.

 

Concern over escalating debt problems in some European countries, most recently Hungary, has roiled global markets for more than a month, boosting the dollar as investors seek safer assets, and clouding the outlook for European economic growth.

 

Evans downplayed the impact of any slowdown in European growth on the United States, saying that the trade effects "are likely to be limited" because Europe accounts for just 15 percent of U.S. exports.

 

"Nonetheless, if events in Europe evolve so that they have a more severe and broad impact on financial markets, then the scope of the problems for the U.S. could be magnified," he said.

 

The Fed last month opened dollar lending lines to the European Central Bank and other major central banks to head off potential stress in the international banking system from the crisis, but so far they have not been heavily utilized.

 

April Job Openings at Highest Level Since Late 2008

 

The number of job openings rose to 3.1 million from 2.8 million in March, the Labor Department reported in its monthly Jobs Opening and Labor Turnover survey. The April figure was the highest level since December 2008. That left the job openings rate at 2.3 percent, up from 2.1 percent in March.

 

The rate of hires, measured as a percentage of the total number of people employed, remained unchanged in April at March's two-year high of 3.3 percent.

 

The separation rate, which includes workers who quit, retire or get laid off or fired, remained at its record low of 3.1 percent. The report lags last week's announcement that the unemployment rate fell to 9.7 percent in May as the economy added 431,000 jobs in the month, mostly temporary Census workers.

 

The economy added just 41,000 private-sector jobs in May. The private-sector hiring rate remained at 3.7 percent in April, while the private-sector job openings rate rose to 2.4 percent in April from 2.2 percent in March. The private-sector separation rate fell to 3.4 percent in April from 3.5 percent in the previous month.

 

JPMorgan Chase Misjudges Coal

 

JPMorgan Chase has incurred heavy losses from bad bets on coal prices, traders dealing with the bank said. Keep in mind that this news comes at a time when proprietary trading at deposit-taking banks faces increased regulatory scrutiny.

 

In recent months, JPMorgan has aggressively bet on the unusual discount of coal in Europe to South African coal, but was caught out when demand in Europe picked up and the discount narrowed.

 

Coal delivered into Europe is normally more expensive than that bought on a free on board (FOB) basis in South Africa because the European price reflects the cost of shipment.

 

"It was the implied freight which racked up the losses. We think around $175 million loss in April and another big loss in May," said a source at a large European utility, which is an active player on the coal swaps market.

 

The story was first reported by the New York Post, which said JPMorgan may have been hit by a loss of $250 million this quarter, due to wrong bets on coal.

 

The impact of the trading loss would be minimal for JPMorgan, the New York Post said, but would provide ammunition to politicians, who advocate the curbing of such proprietary trading by deposit-taking banks.

 

The coal swaps and physical markets are extremely illiquid and immature compared with the oil market, and trading counterparties tend to know each other well because there is very little central clearing and settlement.

 

Coal can be vulnerable to aggressive trading, but its direction can be hard to predict, because the market moves rapidly from physical glut to tightness. JPMorgan had been selling European physical coal delivered into Amsterdam-Rotterdam-Antwerp and API2 coal swaps, which settle against physical prices, hoping to maintain the unprecedented spread between the European prices and the API4 South African swaps, traders said.

 

But it was caught out as the discount of API2 to API4 -- known as the implied freight because it normally indicates just shipping costs -- had shrunk to a few dollars at most, they said.

 

API4 coal swaps settle against the API4 physical index which is a benchmark for FOB Richards Bay South African coal cargo prices. API2 swaps settle against the API2 physical index, the delivered Europe coal price.