MarketView for June 21

Summary  

It was another good day on Wall Street on Tuesday as the major equity indexes posted their fourth consecutive day of gains as a result of growing hopes that Greece will avoid a debt default, thereby adding momentum to the market's recent rebound.

The Nasdaq chalked up its largest percentage gain since October, while the S&P 500 marked its best day in two months in what is likely short-term buying from deeply oversold levels. The Nasdaq also reclaimed positive territory for the year and led the market's advance, aided by an increase in semiconductor shares.

The Nasdaq ended Tuesday's session above its 50- and 200-day moving averages, for the first time since May 31. However, the Nasdaq still ended the week in the minus column.

The S&P 500 is down 5 percent since its May 2 high. After nearing its 200-day moving average Monday, the S&P 500 rebounded solidly above the level.

In a vote after the market's close, Prime Minister George Papandreou's cabinet won a vote of confidence. It is seen as the first step in moving closer to a resolution of Greece's debt crisis. That in turn could pave the way for more aid and also removes a source of constant worry about global banks' exposure to the euro zone's debt problems.

Nonetheless, volume was lighter than normal, as 6.69 billion changed hands on the major equity exchanges, compared with a daily average of 7.58 billion.

During the session, the Nasdaq received a lift from Research In Motion, which gained 10.3 percent to $28.55 after falling about 7 percent on Monday. Best Buy closed up 2.7 percent to $32.38 after the company raised its dividend and approved a stock-repurchase plan. On the downside, Walgreen fell 4.2 percent to $43.28 after it failed to renew a deal with pharmacy benefits manager Express Scripts. Express Scripts shares rose 0.4 percent to $54.99.

Home Sales Decline

Sales of previously owned U.S. homes hit a six-month low in May and supply rose, pointing to a housing market still struggling to regain its footing. The National Association of Realtors said on Tuesday that sales slipped 3.8 percent month over month to an annual rate of 4.81 million units, the lowest since November.

It was the second straight month of declines. The drop was smaller than expected, but the April sales figure was revised lower, leaving a report that was largely in line with expectations in financial markets. While the fall in sales last month was partly due to tornadoes and flooding, with sales in the Midwest and South hit the hardest, it underscored fundamental weakness.

At May's weak sales pace, it would take 9.3 months to clear the inventory of previously owned homes on the market. That is up from a 9.0 months' supply in April.

The report was the latest to confirm a sustained weakness in the economy through the second quarter, which has been marked by a sharp slowdown in regional factory activity, soft retail sales and anemic employment growth. However, the smaller-than-expected decline in sales was yet another hopeful sign that the economy was set to regain momentum in the second half of the year. In the 12 months to May, home re-sales were down 15.3 percent.

The housing market has lagged the broader economic recovery, squeezed by a 9.1 percent unemployment rate and the overhang of unsold homes and tide of foreclosures, which are depressing prices. There were 3.72 million previously owned homes on the market in May, excluding so-called shadow inventory. The month's supply was the highest in six months and a supply of between six and seven months is generally considered ideal, with higher readings pointing to lower house prices.

The generally weak housing market tone was underscored by the median home price, which at $166,500 was 4.6 percent lower than a year earlier. That compared to a 6.6 percent drop in April.

According to NAR economist Lawrence Yun, sales have reached their bottom for the year and said indications were that pending contracts for May rose by at least 15 percent.

Foreclosures and short sales -- which typically occur at about 20 percent below market value -- accounted for about a third of transactions in May, down from 37 percent in April. Cash purchases made up 30 percent of sales, while investors accounted for 19 percent of transactions. Sales of multifamily dwellings declined 8.1 percent and single-family home units fell by 3.2 percent.

Fed Begins Two Day Meeting

The Fed began a two-day meeting against the backdrop of a weakening economy that will likely force policymakers to plan for the possibility that things may get worse. The central bank's quarterly forecasts, which will be released after the meeting, are likely to be revised down to reflect the recent weakness in the recovery, though officials should reiterate their expectation for a second-half rebound.

With underlying inflation moving higher and the barrage of criticism that followed the Fed’s latest round of stimulus, it remains leery of taking any additional steps to support the recovery. However, recent signs the economy is sputtering, evident in manufacturing activity and employment, will put any debate about withdrawing stimulus on the backburner.

For now, the Fed looks set to repeat its commitment to keeping interest rates low for an extended period, while also reiterating its intention to continue reinvesting proceeds from maturing bonds it holds back into the Treasury market. It will also have to describe the inflation outlook with some nuance, since energy costs have come down rapidly even as "core" inflation readings that exclude food and energy have moved higher. The Fed's post-meeting statement is due at around 12:30 p.m. EDT on Wednesday.

The Fed has made it quite clear that the hurdle to any further easing is high but that there are options the Fed could pull from its unconventional policy playbook if needed.

A speech by Fed Chairman Ben Bernanke in August provides the clearest roadmap for steps the central bank might consider if the economy stumbles badly. Such steps include not only additional bond purchases but also a potential bolstering of the extended period language -- some economists say even possibly a vow to keep the balance sheet steady at a record $2.8 trillion.

Bernanke is likely to face tough questions about Greece's debt problems and their implications for Europe and the global financial system. But he probably will not offer many specifics, saying simply the Fed is monitoring the situation and does not expect a major impact on the United States.

At the same time, high commodity and energy costs that some blame on the Fed's ultra-easy policy stance have come back to haunt consumers, retarding the recovery.

For now, the Fed will be looking to buy some time to see how the economy performs over coming months. Its April forecasts saw the economy expanding between 3.1 percent and 3.3 percent this year. The extent to which policymakers revise these numbers will offer hints into how dire they believe prospects have become.

S&P Threaten Rating Drop

The risks of the U.S. losing its prized triple-A rating over the medium term have increased as the country faces a political impasse and nears its debt ceiling, Standard and Poor's said on Tuesday. The United States is expected to exhaust its ability to meet financial obligations by August 2, but the Treasury department has said that date could shift.

Standard & Poor's threatened in April to downgrade the United States' AAA credit rating unless the Obama administration and Congress find a way to slash the yawning federal budget deficit within two years.

Earlier on Tuesday, Fitch ratings said it saw risks of a debt default in the United States, whose top-rated bonds may suffer if the country doesn't lift its fiscal borrowing ceiling.

Euro zone finance ministers decided on Monday that the region’s permanent bailout fund will not have preferred creditor status if it lends to Greece, Ireland or Portugal, but would get paid back first in other cases.