MarketView for June 13

Summary

It was another down day on Wall Street on Wednesday as fears ahead of the weekend elections in Greece finally drove down a market that began with a nice rally but was soon overcome by nightmares of what might happen in Europe in the worst case. As usual, the Street was once again culpable of building large mountains out of small mole hills.

Meanwhile, as much as 800 million euros ($1 billion) have been pulled out of Greek banks daily ahead of the cliffhanger election on Sunday, which many fear will result in Greece leaving the euro zone. If that happens, there is somewhat of a pervasive fear that other peripheral nations may also have to exit. The euro zone's cloudy future has made investors inclined to quickly reverse positions. On Wednesday, they pounded shares in financial, energy and materials sectors into the close.

Volume surged after three weak sessions. About 7.1 billion share changed hands on the three major equity exchanges, a number that was slightly above the 20-day moving average.

Also weighing on sentiment, the government reported retail sales fell in May to their worst level in two years, the latest data to point to sluggish economic  growth after a weaker-than-expected jobs report in May that sparked widespread fears of a slowdown.

There was a defensive tilt to trading for much of the day as gains in sectors such as healthcare and telecoms managed for a time to offset declines in cyclical areas. Shares of AT&T hit a 52-week high at $35.06, before closing unchanged at $34.98.

Shares of JPMorgan Chase were a standout, rising 1.6 percent as the bank's chief executive, Jamie Dimon, defended the portfolio behind JPMorgan's recent multibillion-dollar trading loss, telling lawmakers it was a genuine hedge that would make the firm a lot of money if a credit crisis hit.

Investors have pushed Spain's 10-year borrowing costs to their highest level since the launch of the euro in 1999, adding to uncertainty over the plan to bail out the country's struggling banks.

In company news, Dell said it aims to raise its target on dividends and share buybacks to 20 to 35 percent of free cash flow, saying its corporate software and services business is on track to grow by an average of 10 percent annually until 2016. Its shares advanced 2.5 percent to $12.27.

An influential government adviser in China was quoted as saying the country's economic growth could fall below 7 percent in the second quarter if weak activity persists in June. Investors have been looking to China's relatively robust expansion to pick up the slack from Europe, especially demand for commodities.

Shares of Celgene rose 0.8 percent to $63.59 after the biotechnology company authorized a stock buyback program of $2.5 billion.

Environment Conducive For Fed Action

Retail sales fell for a second straight month in May and wholesale prices dropped by the most in three years, raising chances of further action by the Fed to shore up the ailing recovery. The data on Wednesday added to a number of other recent pieces of economic data, including reports on employment and manufacturing, that have pointed to a slowdown in the economic recovery.

Consumer spending was one of the key pillars of support for the recovery in the first quarter, and the retail sales data led a number of economists to cut their forecasts for second-quarter growth. However, a report by the Commerce Department indicated that retail sales fell 0.2 percent as demand for building materials sagged and declining gasoline prices weighed on receipts at service stations. April's sales were revised to show a 0.2 percent drop.

Motor vehicle sales rose 0.8 percent, a surprise given that manufacturers reported a drop in the number of automobiles sold. Excluding autos, sales fell 0.4 percent, the biggest decline in two years, after dropping 0.3 percent the prior month.

Separately, the Labor Department reported that its producer price index fell by 1.0 percent last month after slipping 0.2 percent in April with energy costs falling 4.3 percent. Wholesale prices outside food and energy rose 0.2 percent for second month.

A combination of the worsening debt crisis in Europe and uncertainty over whether Congress will manage to stave off the scheduled expiration of various lower tax rates at year-end, dubbed the "fiscal cliff," is souring business and consumer confidence. Job growth has slowed in the past three months, with employers adding the fewest jobs in a year in May.

The slackening recovery has increased expectations of a further easing of monetary policy by the Fed, although economists are divided on whether the central bank will act when it holds its next policy meeting, on Tuesday and Wednesday.

Opinion is split between those that believe that a third round of asset purchases - or quantitative easing - may be coming, and those that believe the Fed is more likely to extend a program to re-weight bonds it already holds toward longer maturities to push long-term borrowing costs down further. Naturally there is also a segment that takes the position that they expect no action at all - at least not yet.

While weak receipts at suppliers of building materials and service stations accounted for the bulk of the fall in sales last month, details of the report were generally in line with other recent data showing a step down in economic activity.

A Reuters poll published on Wednesday showed economists over the past month had trimmed forecasts for growth and hiring. Job gains are expected to average only 147,000 a month between now and October - too slow to do much to cut the nation's 8.2 percent jobless rate ahead of the presidential election.

The weak retail sales numbers and a separate report on Wednesday that showed businesses accumulated inventories at a modest pace in April led some economists to cut their second-quarter growth estimates. JPMorgan lowered its forecast to an annual pace of 2 percent from 2.5 percent.

Sales last month were dragged down by the biggest drop in gasoline station receipts in five months as prices declined. Sales at building materials and garden equipment suppliers fell 1.7 percent. Yet, declining gasoline prices offer a silver lining in an otherwise darkening economic outlook and could free up households' discretionary income and help to keep inflation pressures contained.

Core retail sales, which exclude autos, gasoline and building materials, rose 0.1 percent in May after that number chalked up a similar gain in April. Core sales correspond most closely with the consumer spending component of the government's GDP report.

Consumer spending, which accounts for 70 percent of all domestic economic activity, was on course to rise at a 2.1 percent rate this quarter. Spending grew at a 2.8 percent in the first quarter.