MarketView for June 4

Summary

 

The S&P 500 equity index ended the day on Monday with virtually little change after chalking up a series of sharp losses over the past couple of weeks. One key reason is that worries over the European debt crisis, combined with weaker economic data, has kept investors on the sidelines.

 

Signs of economic weakness around the globe and Europe's intensifying debt crisis have rattled markets leading many to move out of equities and into the safety of Treasury securities. The flat session on Monday comes on the heels of Friday's slide of more than 2 percent that erased the Dow Jones Industrial Average's gains for the year.

 

The S&P 500 is now up just 1.6 percent for 2012 and is approaching correction territory, which would be a decline of at least 10 percent from its most recent high in April. It did not help that Friday's U.S. jobs report was much weaker than expected. The Nasdaq ended the day higher, due in no small part to gains in Amazon.com, up 3.1 percent to close at $214.57.

 

On Monday, U.S. data showed orders for manufactured goods dropped 0.6 percent in April, its third decline in four months and confounding expectations calling for a 0.2 percent gain.

 

In a potential boost to markets looking for measures to end the debt crisis, German Chancellor Angela Merkel is pressing for much more ambitious measures, including a central authority to manage euro-area finances and major new powers for the European Commission, European Parliament and European Court of Justice.

 

Spanish Prime Minister Mariano Rajoy is advocating a direct European rescue for the country's banks with moral support from the European Commission, but Germany appeared cool to such a move for the euro zone's fourth biggest member.

 

The market's technical picture remains bearish, with the S&P 500 on Friday breaking below its 200-day moving average. In the near term, however, the benchmark S&P 500 is in an area that could attract buyers.

 

Bank shares have a toe in the waters of a bear market as Europe's debt crisis pressures the sector. Morgan Stanley has come under pressure as bond markets treat the bank as a junk-rated company, and the higher borrowing costs could already be putting it at a disadvantage even before an expected ratings downgrade. On Monday, Morgan Stanley's stock fell 2.9 percent to $12.36.

 

Shares of Facebook continued to struggle to find solid footing, hitting a new low of $26.44 since going public about two weeks ago. The stock ended the day down 3 percent to close at $26.90.

 

Among the day's decliners, Delta Air Lines fell 11.6 percent to close at $10.18. It reported results for Ma, while. Grupo Aeromexico said Delta bought a 4 percent stake in the airline for $65 million.

 

Approximately 7.15 billion shares changed hands on the three major equity exchanges, while the year-to-date daily average has been about 6.85 billion shares changing hands.

 

Factory Orders Down Unexpectedly

 

According to a report released by the Commerce Department Monday morning, new orders for factory goods fell in April for the third time in four months as demand slipped for everything from cars and machinery to computers.

 

In the latest worrisome sign for the economy, the Commerce Department said on Monday orders for manufactured goods fell 0.6 percent during the month. The government also revised its estimate for new orders in March to show a steeper decline. The report indicated broad weakness in a sector that has carried the economic recovery, adding to a growing body of soft economic data in the United States.

 

The Commerce Department report showed new orders for motor vehicles and parts fell 0.5 percent in April.An increase in new orders for civilian aircraft buoyed the overall transportation sector.

 

Outside transportation, orders fell 1.1 percent, with machinery down 2.9 percent and orders for computers and electronics off by 0.8 percent. The government also revised downward its estimate for new orders of long-lasting manufactured goods in April.

 

Orders for non-defense capital goods excluding aircraft - seen as a measure of business confidence and spending plans - dipped 2.1 percent in April. Shipments of this category, which go into calculations of gross domestic product, fell 1.5 percent during the month.

 

Emergency Talks in Europe

 

Finance chiefs of the Group of Seven leading industrialized powers will hold emergency talks on the euro zone debt crisis on Tuesday in a sign of heightened global alarm about strains in the 17-nation European currency area.

 

With Greece, Ireland and Portugal all under international bailout programs, financial markets are anxious about the risks from a seething Spanish banking crisis and a June 17 Greek election that may lead to Athens leaving the euro zone.

 

"Markets remain skeptical that the measures taken thus far are sufficient to secure the recovery in Europe and remove the risk that the crisis will deepen. So we obviously believe that more steps need to be taken," White House press secretary Jay Carney told reporters.

 

Canadian Finance Minister Jim Flaherty said ministers and central bankers of the United States, Canada, Japan, Britain, Germany, France and Italy would hold a special conference call, raising pressure on the Europeans to act.

 

"The real concern right now is Europe of course - the weakness in some of the banks in Europe, the fact they're undercapitalized, the fact the other European countries in the euro zone have not taken sufficient action yet to address those issues of undercapitalization of banks and building an adequate firewall," Flaherty told reporters.

 

The disclosure of the normally confidential teleconference came as European Union paymaster Germany said it was up to Spain, the latest euro zone country in the markets' firing line, to decide if it needed financial assistance, after media reports that Berlin was pressing Madrid to request aid.

 

German Chancellor Angela Merkel and leaders of her centre-right coalition said in a statement: "All the instruments are available to guarantee the safety of banks in the euro zone."

 

They effectively ruled out Spanish calls to allow euro zone rescue funds to lend money directly to recapitalize Spanish banks, which are weighed down with bad property debts, without the government having to take a bailout program.

 

Berlin is pressing reluctant euro zone partners, including close ally France, to agree to give up more fiscal sovereignty as part of a closer European fiscal union.

 

There are also concerns regarding the risk of a bank run in Spain, which is struggling to recapitalize nationalized lender Bankia and smaller banks stricken by the collapse of a property bubble.

 

The United States, which holds the G7 chair, has long pressed Europe to deal more forcefully with its crisis. President Barack Obama has pointed to Europe's crisis as a problem for the weakening U.S. economic recovery.

 

Spain's borrowing costs have soared to around 6.6 percent for 10-year bonds with the risk premium over safe haven German Bunds reaching a euro era record. Madrid plans to issue 1-2 billion euros in 10-year debt on Thursday in a key market test.

 

The United States has said it is unwilling to provide more money to the International Monetary Fund, which could support the euro zone, and the G7 source said there was little prospect of the global community acting as one to contain the crisis.

 

The euro climbed and safe-haven U.S. and German bonds eased off last week's record low yields as speculation mounted that authorities will act to overcome the crisis.

 

EU leaders hold a summit on June 28-29 and their chairman, Herman Van Rompuy, said he would put forward a roadmap for closer economic union by the end of 2012. He said he would present the main building blocks at the summit, including banking integration proposals on "supervision, on deposit insurance and on resolution".

 

Germany, keen to limit liabilities for its taxpayers as the biggest contributor to euro zone rescue funds, has so far rejected proposals for a banking union with a joint deposit guarantee and a common resolution fund for failing banks. Officials say such measures can come only at the end of a drive to closer fiscal union.

 

Before meeting European Commission President Jose Manuel Barroso in Berlin, Merkel said they would consider the "medium-term goal" of the need to put systemically important banks under a European supervisory authority.

 

"The world wants to know how we conceive the political union that will accompany monetary union, and we have to provide an answer to this question in the foreseeable future," she said.

 

Underscoring how complex the process of deeper political union in Europe is likely to be, a German government paper seen by Reuters said Germany does not expect Europe to take any final decisions on strengthening economic policy coordination between member states until the spring of next year.

 

China, another major G20 power, has instructed key agencies including the central bank to come up with plans to deal with potential economic risks of a Greek withdrawal from the euro zone. The plans may include measures to stabilize the yuan currency, increase checks on cross-border capital flows and policies to stabilize China's economy, they said.

 

Euro zone officials have sought to persuade Beijing, which has vast foreign currency reserves mostly in U.S. Treasury bonds, to back the euro zone by buying its troubled countries' bonds. But Chinese officials have been reticent, concerned at the risks and mindful of Chinese public criticism.

 

In a ray of light, Portugal's international lenders said its year-old bailout plan was on track, boosting Lisbon as it seeks to avoid following Greece into a second rescue package.