MarketView for June 21

MarketView for Friday, June 21
 

 

 

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Friday, June 21, 2013

 

 

Dow Jones Industrial Average

14,799.40

p

+41.08

+0.28%

Dow Jones Transportation Average

6,110.43

q

-31.69

-0.52%

Dow Jones Utilities Average

471.77

p

+6.20

+1.33%

NASDAQ Composite

3,357.25

q

-7.39

-0.22%

S&P 500

1,592.43

p

+4.24

+0.27%

 

 

Summary 

 

The major equity indexes ended mostly higher on Friday, with the Dow Jones Industrial Average and the S&P 500 indexes ending two days of heavy losses, although there was continued concern over planned changes to the Federal Reserve's easy money policy.

 

On a weekly basis, the major indexes posted their largest declines since April, while the Nasdaq fell for a third straight day on a steep decline in Oracle. Markets were volatile, with the Nasdaq at one point dropping more than 1 percent.

 

Shares have slumped since Wednesday when Federal Reserve Chairman Ben Bernanke laid out the Fed's plans to scale back on its $85 billion in monthly asset purchases. The S&P broke under its 50-day moving average, contributing to 4.6 percent pullback from its all-time closing high reached on May 21. This retreat represents the largest since an 8.9 percent decline between September and November.

 

When trading began on Friday, the S&P 500 had fallen nearly 5 percent from an all-time closing high of 1,669.16 on May 21. However, stocks rebounded after a Wall Street Journal analysis said the market may be misreading the Fed and that a reduction in bond buying may not come as soon as some expect.

 

While the S&P turned positive in afternoon trading, the 10-year Treasury yield rose to 2.531 percent as investors reset expectations after Bernanke gave a more explicit timeline for scaling back its bond-buying.

 

Volatility has spiked since May 22 when Bernanke first hinted that the Fed may begin to rein in its stimulus measures. Analysts cited the quarterly expiration and settlement of June equity options and futures contracts on Friday as another source of volatility and higher volume.

 

The CBOE Volatility Index fell 8 percent to 18.86. On Thursday, it jumped 23 percent and closed above 20 for the first time this year.

 

For the week, the Dow fell 1.8 percent, the S&P was down percent 2.1 percent, and the Nasdaq lost 1.9 percent. It was the largest weekly decline for all three since April and also the fourth week of losses out of the past five.

 

Shares of major banks were hit hard as the Treasuries sell-off continued on fears of losses from their bond holdings. Citigroup fell 2.2 percent to $46.87 and Morgan Stanley lost 1 percent to $24.91. Bank of America was down 1.6 percent, closing at $12.69.

 

Oracle fell 9.3 percent to $30.14, a day after the tech giant missed expectations for software sales and subscriptions for a second straight quarter. Oracle was the largest drag on both the S&P 500 and the Nasdaq.

 

China's central bank faced down the country's cash-hungry banks on Friday, letting interest rates spike as it increased pressure on banks to curb rampant informal lending and speculative trading. This approach could backfire, creating the potential for defaults and gridlock in the money markets of the world's second-largest economy.

 

Approximately10.29 billion shares changed hands on the three major equity exchanges, a number that was above the daily average so far this year of about 6.36 billion shares.

 

Bullard Takes Unusual Step

 

James Bullard, President of the St. Louis Federal Reserve Bank, issued a sharp rebuke of his colleagues' decision this week to announce a plan to reduce the central bank's bond buying, calling the move premature and worrying the Fed is risking its credibility as a force for price stability.

 

Neither the central bank's own economic growth forecasts nor its expectations for continued weak inflation supported a decision to dial back soon on the $85 billion a month it has been pumping into the financial system, the St. Louis Fed said in explaining Bullard's thinking.

 

"President Bullard ... felt that the committee's decision to authorize the chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed," the regional Fed bank said in a statement.

 

Bullard's vote against the majority, his first-ever dissent, was one of two cast by members of the U.S. central bank's policy-setting Federal Open Market Committee. The other dissent, by Kansas City Fed President Esther George who has cast a no vote at each meeting this year, was in the opposite direction, as she worried that bond buying could stoke financial instability.

 

Bernanke's detailed outline of the strategy for closing out the central bank's bond-buying program, which came in a news conference following the policy statement, surprised markets. It was unusual for the committee to deputize the chairman to offer policy guidance during the news conference that went well beyond the panel's written statement.

 

The central bank, which has held overnight interest rates near zero since 2008, is buying bonds at an $85 billion monthly pace to put downward pressure on longer-term borrowing costs. These steps are designed to boost U.S. growth and hiring.

 

Highlighting an apparent contradiction, the St. Louis Fed noted that the 19 Fed officials who took part in the policy discussion on Wednesday released economic projections in which they marked down forecasts for U.S. growth and inflation in 2013, while "simultaneously announcing that less accommodative policy may be in store."

 

"President Bullard felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement," it said.

 

In a detailed explanation, it also repeated that Bullard thought the Fed should have more strongly signaled a willingness to defend its 2 percent inflation target, in light of recent low inflation readings, which was the explanation for his dissent offered in a statement issued by the Fed on Wednesday.

 

Bullard worries the Fed risks losing its credibility as the chief agent for price stability if it does not take measures to drive prices upward when inflation is below its target, as well as downward when they are above it.

 

The so-called PCE price index, the Fed's favored inflation gauge, was up just 0.7 percent in the 12 months through April. The core index, which strips out food and energy costs to provide a better sense of inflation trends, was up just a bit more than 1 percent, a record low increase.

 

The FOMC estimated the PCE price index would rise between 0.8 percent and 1.2 percent this year, on average. That marked a sharp cut from March when it forecast a range of 1.3 percent to 1.7 percent.

 

Its 2013 GDP growth forecast came in at 2.3 percent to 2.6 percent, just a bit softer from the 2.3 percent to 2.8 percent projection policymakers had made in March.

 

Furthermore, the St. Louis Fed said that Bullard viewed the decision to lay out a rough timeline for scaling back bond buying, which Bernanke explained would likely come to a halt around mid-2014, was a step away from a policy that was dictated solely by economic conditions, rather than calendar dates.