MarketView for March 24

 

 

 

Summary 

 

Stock prices were lower on Wednesday as the downgrade of Portugal's credit rating, combined with a weak Treasury note auction, once again raised concerns over weak economic numbers and rising sovereign debt and the ability of countries to pay that debt.

 

As a result, the major equity indexes eased back a day after hitting 18-month highs, with losses across most sectors coming on light volume. The session's declines follow the market's push to 18-month highs on Tuesday, with the Dow Jones industrial average chalking up a 10th day of gains out of the past 11 sessions. For the month so far, the S&P 500 is up about 6 percent.

 

Portugal's rating was lowered by one notch to AA-minus, compounding problems in the euro zone, where diplomats have still not agreed on a safety net for heavily indebted Greece.

 

Sentiment also soured after a weak auction of five-year U.S. Treasury notes, the second lackluster debt sale after Tuesday's tepid auction of two-year notes.

 

The Portugal credit rating downgrade drove the dollar up against the euro, which in turn pushed down prices of commodities denominated in the dollars. Oil prices also declined after data showed crude inventories rose nearly five times more than expected last week, a bearish sign for demand. Crude oil futures for May settled down 1.6 percent, or $1.30 per barrel, at $80.61. As a result, Chevron was one of the major losers on the Dow, off 1.1 percent at $73.93.

 

Limiting the Dow's decline was Bank of America,  the index's top percentage gainer after it said it plans to offer about $3 billion in loan forgiveness to about 45,000 troubled homeowners. The move is an effort to prevent foreclosures when home values drop sharply below the amount owed. The bank’s shares rose 2.6 percent to $17.57.

 

The biggest drag on the Nasdaq was Genzyme, which fell 6.4 percent to $55.33 after it said the U.S. Food and Drug Administration will take enforcement action following problems at one of its plants. Genzyme makes drugs to treat rare and chronic diseases.

 

On the earnings front, General Mills reported third-quarter earnings that beat expectations, but gave a full-year profit view that was below consensus, sending the stock down 1.9 percent to $72.18.

 

Lennar gained 3.7 percent to $17.69 after reporting a first-quarter loss that was much narrower than expected.

 

Data released earlier in the day sent mixed signals about the economy, with new home sales unexpectedly falling to a record low in February, but new orders for durable manufactured goods rose for a third straight month in February. 

 

Economic Data Continues Mixed

 

New home sales fell for a fourth straight month to a record low in February, but another rise in new orders for durable goods was a positive note with regard to the economic recovery. According to a report released by the Commerce Department on Wednesday prior to the opening bell, sales of new single-family homes fell 2.2 percent to a 308,000 unit annual rate from 315,000 units in January.

 

The data came on the heels of report on Tuesday showing existing home sales fell for a third straight month in February while the supply of houses on the market jumped. Sales have barely responded to the extension and expansion of a popular tax credit, which boosted purchases in the second half of 2009, raising concerns over the fragile housing market's recover given that the Federal Reserve will end purchases of mortgage-related securities next week, which had lowered the cost of home loans to record lows.

 

A report by the Mortgage Bankers Association on Wednesday showed U.S. mortgage applications fell for a second straight week, with demand for home loan refinancing sinking to its lowest level in a month as interest rates jumped.

 

Meanwhile, the Commerce Department also reported that durable goods s\orders were up 0.5 percent in February, making it the third consecutive month of increases. At the same time, January's figures were revised sharply upward to show a 3.9 percent increase in durable goods sales. The sustained rise in durable goods orders came as businesses rebuilt inventories by the largest margin in more than a year and pointed to continued strength in manufacturing.

 

Durable goods inventories rose 0.3 percent, the biggest gain since December 2008, after rising 0.1 percent in January. Orders were likely lifted by sturdy aircraft bookings, which offset another decline in orders for motor vehicles and parts. Non-defense aircraft orders rose 32.7 percent last month after a surging 134.9 percent in January. Vehicle orders fell 1.9 percent after a 2.3 percent drop the prior month.

 

New durable goods orders excluding transportation rose 0.9 percent in February after falling 0.6 percent the previous month. Excluding defense, orders were up 1.6 percent after a 1.7 percent rise in January. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, rebounded 1.1 percent last month after a 3.9 percent fall in January.

Durable goods orders are a leading indicator of manufacturing activity, which in turn provides a good measure for overall business health.

 

Fitch Downgrades Portugal

 

Fitch Ratings cut Portugal's sovereign credit rating by one notch to AA- on Wednesday, citing budgetary underperformance in 2009 and warning that a similar outcome this year and next could cause another downgrade.

 

The change underlined concerns that the debt troubles that have afflicted Greece will move to other of the euro zone's weaker economies, and it drove European stocks and an already battered single currency lower.

 

The premium Portugal has to pay on its bonds compared to German Bunds briefly hit a high of 129 basis points after the announcement but then began to tighten again, and analysts said the move had been well-flagged by Fitch and still left the rating comparable with other agencies.

 

Fitch also said the government's long-term budget austerity plan was broadly credible and it did not expect political instability to upset the passage of the necessary legislation.

 

Fitch's AA- rating is now comparable with Moody's Aa2 rating and both are above S&P's A+. In any case, the rating remains in Fitch's "very high quality" range.

 

The finance ministry after the decision again urged the opposition to support the government's long-term austerity plan to send a clear signal to calm jittery investors about the country's public finances.

 

The minority Socialist government on Thursday will ask parliament to pass a resolution of support for the plan, which seeks to cut the deficit to 2.8 percent of gross domestic product in 2013 from 9.3 percent last year.

 

The leader of the largest opposition party, the Social Democrats, was meeting members of parliament from her party on Wednesday to discuss the program. It was not yet clear whether the party will decide on how it votes.

 

An abstention by the Social Democrats would allow the ruling Socialists to pass the resolution, which analysts say would pre-commit parliament to approve specific bills to meet the program's targets. The opposition party abstained in the vote on the 2010 budget on March 12, allowing its passage.

 

Finance Minister Fernando Teixeira dos Santos warned on Tuesday that without the political consensus, the program would have no purpose and fears about Portugal's ability to finance itself will persist.

 

Although Fitch said the program was credible, it saw a "significant" risk of macroeconomic disappointment with knock-on effects for the deficit particularly in 2012-2013. In the meantime, the agency said the likelihood of Portugal facing a liquidity crisis was low.