MarketView for June 9

 

 

Summary  

 

It was another lost day on Wall Street as the now all too familiar end-of-the-day roller coaster ride returned once again to plague the day’s returns by the primary equity indexes. Pull share prices lower was the continued probe into the BP disaster in the Gulf of Mexico. Shares of BP fell 15.8 percent to below $30 over growing concerns regarding the costs BP will have to shoulder as a result of its perceived negligence. Wall Street traded higher for most of the session before negative sentiment stemming from the slide in BP shares overtook investor optimism.

 

On the other side of the coin, BP officials have said repeatedly that they have enough cash to handle the crisis, but the cost of protecting BP's debt against default hit record highs, suggesting increased worry regarding the company’s ability to handle its growing obligations.

 

With Wednesday's decline, BP has given up more than half its market value since the explosion that triggered the spill in late April. On April 20, the day of the offshore oil rig explosion, BP's New York-traded shares closed at $60.48. On Wednesday, the shares ended at $29.20.

 

Banking shares also fell near the end of the trading day in sympathy with energy shares.

 

Sentiment was positive earlier in the session as of result of rumors on the Street that China's May exports data came in above expectations, which would mean in turn that Europe's debt problems have not dampened demand for foreign goods to the degree expected.

 

The S&P found technical resistance at its session high around the 1,078 level, which roughly coincides with its 14-day simple moving average. The index's moving average convergence divergence, or MACD, a widely followed momentum indicator, fell slightly short of generating a 'buy' signal and also provided resistance.

 

On a more positive note, airline shares rose after UBS raised its price target on various top carriers, including AMR, Delta and Continental. An index of airline shares rose 0.3 percent after having gained more than 2 percent earlier.

 

In the world of mergers and acquisitions, Allscripts-Misys Healthcare Solutions said it would acquire Eclipsys in a $1.3 billion deal. Eclipsys shares rose 2.8 percent to $19.02, while Allscripts fell 9.7 percent to $16.64.

 

Recovery on Solid Footing Says Fed Chief

 

Federal Reserve Chairman Ben Bernanke said on Wednesday the economic recovery was on a solid footing but cautioned it could be years before the jobs lost during the deep recession of 2008-2009 are restored.

 

While Bernanke said the economy had made an "important transition" to relying less on government support, his emphasis on the struggles of the job market suggested the central bank was in no rush to raise interest rates.

 

"A significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009," he told the House of Representatives Budget Committee. "In this environment, inflation is likely to remain subdued."

 

Bernanke said the economic recovery's reliance on government spending would probably diminish over time, while increasing private demand would take over the job of stimulating growth, as recent data showed.

 

That view was bolstered by a report from the Fed that said the economy strengthened last month, even as worries about Europe's debt crisis dented confidence.

 

"Economic activity continued to improve since the last report across all twelve Federal Reserve districts, although many districts described the pace of growth as 'modest'," the Fed said in its Beige Book, an anecdotal report on economic conditions. The Open Market Committee of the Fed will play close attention to the Beige Book at their next meeting on June 22-23 as they weigh how quickly they should move to withdraw economic support.

 

Bernanke told lawmakers weak housing and commercial property markets, and budget cutting by states, were among the "significant restraints" holding back the U.S. recovery, and he said the unemployment rate would only decline slowly.

 

In response to a question, Bernanke said gold prices, which hit an all-time high on Tuesday, could reflect anxiety about financial market instability rather than inflation worries. Gold futures extended losses after Bernanke's comment.

 

Bernanke did play down the discouraging data, noting that private payrolls have risen by an average of 140,000 per month over the past three months. The Fed expects monthly gains of 150,000 to 250,000, he said.

 

Bernanke said the Fed is keeping a close watch on the European debt crisis for any spillover to the U.S. economy. Actions taken by European leaders show a firm commitment to calming strains and restoring stability, he said.

 

"If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest," he said.

 

Another drag on the recovery is the housing market, which has faltered with the expiry of federal tax credits for buyers, Bernanke said. Weekly mortgage loan data released on Wednesday showed mortgage applications slumping in the most recent week to a fresh 13-year low. ernanke also renewed his warning that as the population ages, government pension and health care obligations to retirees put the budget on an unsustainable path.

 

"We should be planning now on how we meet these looming budgetary challenges," he said. However, he said now was not the time to tighten the U.S. budget, because the economy was still in need of support.

 

The budget deficit hit $1.4 trillion last year and is projected at $1.6 trillion this year. A Treasury Department report to Congress last week said the ratio of debt to gross domestic product could rise to 102 percent by 2015 from 93 percent this year.

 

Fed’s Beige Book Says Economy is Improving...Modestly 

 

Economic activity improved nationwide last month, but worries about Europe's debt crisis dented confidence, the Federal Reserve said in its Beige Book collection of anecdotal reports.

 

"Economic activity continued to improve since the last report across all 12 Federal Reserve districts, although many districts described the pace of growth as 'modest,'" the central bank said.

 

The report, compiled by the Chicago Fed based on information collected through May 28, showed consumer and business spending picking up and the job market improving slightly, while inflation remained in check. That recipe lends support to the Fed's pledge to keep its benchmark interest rate ultra-low for an extended period. The Fed will use this report at its next policy-setting meeting later this month, and is widely expected to leave rates unchanged near zero.

 

Financial activity was little changed since the last Beige Book, published in April, although business contacts in some regions reported improved demand for business loans. Loan quality was stabilizing or gradually improving in most districts, although that "remained an issue for banks with large exposures to real estate."

 

The Fed also noted some contacts cited concerns over how Europe's fiscal troubles might affect financial and business conditions, and said uncertainty increased.

 

The Beige Book, named for the color of the report's cover, provides the central bank with anecdotal evidence of the economy's health to help guide policy decisions.

 

Wednesday's report stated that sales of spring and summer apparel were strong in Boston, New York, Philadelphia, St. Louis, Kansas City and Dallas districts. In the Boston district, retailers noted "some potholes in the recovery path" but said sales were generally positive. Auto and parts production increased in the Cleveland, Richmond, and Chicago districts, while crop planting was generally ahead of the seasonal norm.

 

On the inflation front, the Fed said wage pressures were limited, although San Francisco reported some upward pressure on employee benefit costs. Prices of final goods and services were largely unchanged.

 

In the St. Louis region, which was the only one of the 12 that did not report a strengthening economy in the previous Beige Book, manufacturing activity increased. A greater number of contacts reported new hires and plant openings than reported job layoffs and plant closings," the report said.

 

The Boston Fed said some of the staffing firms in its region reported a mismatch between job seekers and the needs of employers.