MarketView for June 6

Summary  

Wall Street watched as the S&P 500 index fell to its lowest level since March 18, primarily due to the Street’s angst over the lack of a strong economic resurgence. Sectors most closely associated with country’s economic fortunes were hit the hardest, with shares of Bank of America Corp down 4 percent to close at $10.83, the lowest point for those shares since May 2009. Without virtually any buying support, the S&P 500 has fallen through a series of technical support levels.

Stocks have been battered over the past five weeks on a number of disappointing reports, culminating in Friday's employment report, which showed employers added a meager 54,000 jobs last month and the unemployment rate rose to 9.1 percent. Trading activity was light with about 6.8 billion shares changing hands on the major exchanges, a number that was below the daily average of 7.61 billion shares.

Energy shares were among the hardest-hit sectors, as evidenced by Chevron, whose shares ended the day down 1.3 percent to close at $9.68, making it the largest drag on the Dow Jones industrial average. Oil was also lower in choppy trading on increased expectations OPEC will boost production targets this week as concerns about high prices curbing oil demand lingered.

With the second-quarter earnings season more than a month away, the market focused on the uncertain economic outlook. In a sign a slowing economy could hurt earnings, JP Morgan cut its rating on home improvement chain Lowes, citing softening home prices and stagnant job growth. Lowes ended the day down 2.3 percent to close at $22.87.

Apple fell 1.6 percent to $338.04 despite an appearance by Chief Executive Steve Jobs at the company’s annual world developers conference where he unveiled a music-streaming service the company hopes will power its next stage of growth.

ECB Likely to Raise Interest Rates

The European Central Bank is likely to signal a July interest rate rise on Thursday while continuing to provide banks with unlimited amounts of cash to help weaker lenders hit by the euro zone debt crisis. Specifically, the ECB is expected to use higher staff inflation forecasts, to be published during Thursday's post-policy meeting news conference, as justification for higher interest rates to come -- probably starting with a rise to 1.50 percent next month.

However, the ECB will also be careful not to withdraw support to the economy and the banking system so fast as to stall the recovery or endanger banks' ability to cope with limited liquidity, which would add further pressure to short-term market rates.

The ECB raised its main refinancing rate to 1.25 percent from 1.0 percent in April, the first such tightening in two years.

ECB President Jean-Claude Trichet is likely to say the ECB will exercise "strong vigilance" over price pressures, deploying a phrase that in the past signaled a rate rise was only a month away. He used that code in March to flag April's rate rise.

With inflation pressures holding up, the ECB will want to show it is determined to stop higher energy costs seeping into other prices. In recent months, euro zone inflation has risen well above the ECB's target of just below 2 percent on the back of higher energy and food prices. It slowed marginally to 2.7 percent last month, but is seen remaining above 2 percent for some while.

Recent data also shows evidence of second-round effects -- where supply-related cost increases begin to have an impact on wage demands and other prices. Producer prices in the common currency bloc rose more than expected in April, data showed on Monday. ECB staff projections are likely to be lifted, both for inflation and economic growth.

In the last set of forecasts, published in March, the ECB forecast inflation of around 2.3 percent this year and 1.7 percent next. Those projections now seem outdated. The central bank is likely to also increase its euro zone growth forecast for this year after a positive surprise in the first quarter, when the annual rate hit 2.5 percent, while it is seen keeping next year's estimate around 1.8 percent. The ECB is also due to announce its third-quarter liquidity plans.

While policymakers have said money markets have improved, the sovereign debt crisis -- focused again on Greece -- and fears it might spill over to the banking system will keep the ECB from reintroducing liquidity auctions.

Banks in bailed out euro zone members have been shut out of credit markets and data from the Bank for International Settlements showed German banks held $22.7 billion of Greek government debt at the end of December, down by over $3 billion in the fourth quarter but well above the $15 billion held by French banks.

The ECB started handing out unlimited cash in all liquidity operations in October 2008, after the collapse of investment bank Lehman Brothers intensified financial market turmoil. Since then, it has scrapped the ultra-long six- and 12-month liquidity operations and moved back to auctions in three-month tenders last year. However, it returned to full allotment for those operations quickly after the Greek crisis intensified.

Even though the ECB has said the problem of banks being dependent on central bank funds is for governments to solve, it will be careful not to remove their lifeline without other measures in place.