MarketView for June 29

Summary  

Overdone, ridiculous, unnecessary but nonetheless a day with which to be concerned but not paralyzed. Yet, from the market’s perspective, it was the worst trading day since the May 6 "flash crash," with all but one stock in the S&P 500 closing out the day in negative territory as escalating doubts about the stability of Europe's banks roiled the financial markets once again.

The S&P 500 fell below its 2010 intraday low of 1,040.78 during the day’s trading session, which could ignite further declines. The index closed at its lowest level since October 30, breaking its closing low for the year at 1,050.47 -- another bearish signal for markets.

Economically sensitive sectors such as materials, industrials and financials were among the hardest hit. Boeing was down 6.3 percent to $63.04 and Caterpillar fell 5.5 percent to $60.85. 3M, which raised its second-quarter sales outlook last night, was not immune to the selling pressure, dipping 0.6 percent to $78.49.

Fears about the strength of the banking system surfaced again, with investors worried about a potential liquidity shortfall of more than 100 billion euros in the financial system as European banks repay 442 billion euros ($545.5 billion) in emergency loans on Thursday.

The CBOE volatility index .VIX, known as Wall Street's fear gauge, was up 22 percent to a session high of 35.39, its highest level since early June, in a sign that additional volatility could be in the offing.

Earlier in the day, the Conference Board corrected its leading economic index for China to an April gain of 0.3 percent from a previously reported rise of 1.7 percent, a sharp revision that undermined confidence in China's ability to sustain strong growth. The update resulted in a global sell-off. The Shanghai Composite Index fell 4.3 percent to end at a 14-month low.

Consumer confidence also fell sharply in June, after rising for three months, as concerns over the labor market persisted, according to a report from the Conference Board. The news heightened fears of an economic slowdown after a recent spate of weak data from the housing and job markets.

Congress Continues to Weaken the Financial Reform Bill

Democrats on Tuesday were be forced to strip out a controversial tax from their landmark financial reform bill in order to win the swing votes needed to pass it through Congress. With a threat of a filibuster hanging over their head, Democrats were weighing alternative ways to fund the most sweeping rewrite of the Wall Street rulebook since the 1930s.

Though a supposedly final version of the bill had been hammered out last week, Democrats in charge of the process called a fresh negotiating session, during which it appears that a $17.9 billion tax on large financial institutions will be removed. Instead, they would cover most of the bill's costs by ending the $700 billion bank-bailout program.

The bill had been expected to pass both chambers of Congress this week in time for President Barack Obama to sign it into law by July 4. However, with marginal votes threatening to withdraw support, that goal was in jeopardy.

Apparently, the Democrats are now two votes short of the 60 needed to clear a Republican procedural hurdle in the Senate. Democratic Senator Robert Byrd died on Monday, depriving his party of a needed vote, and Republican Senator Scott Brown said on Tuesday he would withdraw his support unless Democrats strip out a $17.9 billion tax that would apply to large financial institutions. The tax was added to cover the costs of the bill during a final all-night negotiating session last week.

Other moderate Republican senators who previously supported the bill have also expressed reservations over the new tax. One of those Republicans, Senator Susan Collins of Maine, told reporters she was working with Dodd to get away from the tax and they were "making progress."

"The bill is not perfect. But I believe if you take out the new bank tax that, on balance, it would improve our financial system and I would support it," she told reporters.

The plan under consideration would shut down the $700 billion Troubled Asset Relief Program, which was set up in 2008 to buy up toxic assets from banks but was quickly used to bail out teetering Wall Street giants instead. It has since been tapped to save Detroit automakers, and Democrats considered using it to spur job creation earlier this year.

Shutting it down before it expires in October could please Republicans who have fought its expansion. It also would raise $11 billion to defray the bill's costs, Dodd said. The shutdown would not affect companies like General Motors that currently rely on the money, a Democratic aide said.

One memo being circulated on Tuesday showed Dodd was also considering a proposal to raise the Federal Deposit Insurance Corp premium ratio to 1.35. Currently the FDIC by law must maintain the insurance fund at 1.15 percent of banks' covered deposits. The increase in the premium ratio would result in a rate hike on banks.

If negotiators agree on a solution, the House could vote on the measure on Wednesday. That conceivably could give the Senate enough time to approve it and send it to Obama by July 4.

The legislation would force banks to reduce, but not cease, risky trading and investing; set up a new government process for liquidating troubled financial firms; and establish a new consumer-protection bureau.

Bank stocks fell sharply when the market opened on Tuesday and closed down 4.4 percent, a sharper drop than markets as a whole. The reform bill, instability in Europe and fears of weaker-than-expected earnings were all responsible for sending prices lower.

A Drop in Consumer Confidence

Consumer confidence fell in June after rising for three months, adding to the view the economic recovery is slowing, while home prices unexpectedly climbed in April. The report released on Tuesday by The Conference Board, indicated that the drop in confidence came from worries over the labor market which has been one of weakest areas of the economy, as evidenced by the high unemployment rate. As such, the index consumer confidence fell to 52.9 in June from a downwardly revised 62.7 in May. The number was a bit of a shock to the Street.

Assessment of the labor market also worsened, with the "jobs hard to get" index rising while the "jobs plentiful" index slipped. At the same time, the confidence report was at odds with last Friday's consumer sentiment data from the Thomson Reuters/University of Michigan Surveys of Consumers. That survey showed sentiment in June rose to its highest since January 2008.

Tuesday's report comes just days ahead of the government's monthly data on employment, one of the most widely watched economic indicators. At the same time, President Obama said that he and Fed Chairman Ben Bernanke agree the economy is strengthening and is in recovery mode but that more needs to be done with regards to the issue of unemployment.

In another report, Standard & Poor's/Case Shiller home price indexes showed an unexpected rise as a rush to take advantage of the federal tax credit for home buyers pushed prices up before the credit expired at the end of April.

The S&P composite index of home prices in 20 metropolitan areas for April rose 0.4 percent on a seasonally adjusted basis, compared with a forecast for a 0.1 percent decline, after a downwardly revised 0.2 percent drop in March. March prices were previously reported as unchanged. On an unadjusted basis, prices gained 0.8 percent in April following March's 0.5 percent drop. Home sales have fallen since the April 30 end of tax credits. The housing market has yet to show signs of a sustained recovery.