MarketView for March 25

 

 

 

Summary 

 

After an early rally evaporated it became pretty much of a do nothing day on Wall Street on Thursday with the major equity indexes closing out the day mostly unchanged. The primary reasons for the abrupt turnaround appeared to be a combination of a weak Treasury bond auction and some new concerns over global debt in general and that of Greece in particular. Nonetheless, for much of the session the indexes moved sharply higher with both the Dow Jones industrial average and the S&P 500 hitting 18 month highs.

 

Then came the results of the Treasury’s auction of seven-year notes and comments from European Central Bank President Jean-Claude Trichet on issues surrounding Greece's sovereign debt. Trichet told France's Public Senat television that if the IMF or some other body exercises the responsibility in lieu of the Eurogroup or instead of governments, "it is evidently very, very bad." Meanwhile, the session's early gains came after both Qualcomm and Best Buy gave bullish profit outlooks, an encouraging sign ahead of the upcoming earnings season.

 

Oracle saw its share price fall 0.7 percent to $25.86 in after-hours trading after reporting adjusted third-quarter earnings that exceeded the Street’s consensus expectations by a penny. The stock, which is near a nine-year high, was up 1.1 percent in regular trading to close at $26.04. Wall Street watches Oracle's results closely to determine whether corporate technology spending is on the mend. Oracle, one of the world's largest software makers, bought Sun Microsystems for $7.5 billion as a way to get into the hardware business for the first time.

 

During the regular session, Bank of America Corp closed up 1 percent at $17.74 while Citigroup, the most active stock on the New York Stock Exchange, ended up 2.9 percent at $4.27. Earlier, Bloomberg News reported that the Treasury Department might unveil a plan next month for the sale of its stake in the bank. Banks are among the best performers this year and were one of the few sectors to rise on Wednesday when markets fell on fears related to global sovereign debt.

 

Qualcomm gained 5 percent to $42.19 after raising its second-quarter earnings outlook while Best Buy advanced 3.6 percent to $42.66 on news of a better-than-expected outlook and results.

 

Finally, the days economic data indicated that the number of workers filing new applications for unemployment insurance fell sharply last week.

 

Unemployment Claims Fall

 

The number of new claims for unemployment insurance fell sharply last week and a gauge of underlying labor market trends hit a 1-1/2 year low, thereby adding to the expectation that the economy is finally about to once again create new jobs. Despite pointing to improvement in the battered labor market, the long hoped for recovery will be too slow to have a major effect on the country's 9.7 percent unemployment rate and will keep pressure on President Barack Obama for solutions.

 

Initial claims for assistance fell by 14,000 claims to a seasonally adjusted 442,000 claims, the Labor Department reported on Thursday. The report included annual revisions to the weekly unemployment claims seasonal factors going back to 2005. Using the old seasonal factors, claims would have dropped only to 453,000. The prior week's data were revised to show a 5,000 rise instead of a drop.

 

The labor market has lagged the economy's recovery from its worst downturn since the 1930s and Obama has made putting Americans back to work a key priority. Public disenchantment over high unemployment has eroded Obama's popularity and is a threat to the Democratic Party's control of the House of Representatives and the Senate in the November elections.

 

With economic conditions gradually improving, consumers are starting to increase spending on discretionary items and boosting company profits. As a result, payrolls are expected to grow this month as the government steps up hiring for the 2010 census. About 8.4 million jobs have been lost since the recession started in December 2007.

 

Last week, the four-week moving average of new claims fell to its lowest level since September 2008. While claims last week fell into a range point to labor market stability, applications for benefits would have to drop even further to be consistent with sustainable private job growth. The number of people still receiving benefits after an initial week of aid in the week ended March 13 fell to its lowest since December 2008.

 

We Are Not Out Of the Woods Yet

 

The still weak economic recovery continues to warrant the Federal Reserve's ultra-low interest rate policy, but the central bank stands ready to remove stimulus once the expansion looks solid, Chairman Ben Bernanke told Congress on Thursday. Testifying before the U.S. House of Representatives Financial Services Committee, Bernanke offered a brief overview of the tools the Fed intends to use to reverse the emergency measures taken to grapple with the worst financial crisis since the Great Depression.

 

"The economy continues to require the support of accommodative monetary policies," Bernanke told lawmakers. "However, we have been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus."

 

In response to the crisis, the Fed slashed interest rates effectively to zero. It also embarked on an unprecedented asset purchase program totaling over $1.7 trillion -- buying mortgage debt and Treasury bonds in an effort to push borrowing costs down even further.

 

Bernanke argued these programs had helped to improve conditions in mortgage markets, which were at the epicenter of a financial meltdown that began when falling home prices spurred a wave of defaults.

 

He also maintained these purchases did not expose taxpayers to any additional credit risk because the mortgage debt purchased originated with agencies like Fannie Mae and Freddie Mac, which have always had the U.S. government's implicit guarantee.

 

The Fed chairman emphasized the importance of the central bank's authority, granted by Congress after the crisis was already under way, to pay interest to banks for their excess reserves.

 

Bernanke said, once economic activity and financial markets were healed, the Fed would like to get outstanding credit to the banking system back to pre-crisis levels, beneath $1 trillion. Total bank credit, sometimes referred to as the Fed's balance sheet, currently stands at $2.3 trillion.

 

He also cited reserve-draining operations, such as reverse repurchase agreements and a "term deposit facility," that would again provide financial institutions with a monetary incentive not to lend when the Fed decides there is a risk of inflation.

 

"The use of reverse repos and the term deposit facility would together allow the Federal Reserve to drain hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so," Bernanke said.

 

Euro Zone Agrees To Help Greece with IMF Assistance

 

Euro zone leaders agreed on Thursday to create a joint financial safety net with the IMF to help debt-ridden Greece and to try to restore confidence in their common currency. Under the accord, Athens would receive coordinated bilateral loans from other countries that use the euro and money from the International Monetary Fund if it faced severe difficulties.

 

"Europe has taken a big step in the face of a big challenge," Greek Prime Minister George Papandreou told reporters after talks in Brussels, declaring himself satisfied.

 

Nonetheless, the euro fell to a 10-month low against the dollar because IMF involvement suggests that the 16-country euro zone was unable to handle its problems alone.

 

French President Nicolas Sarkozy said the euro zone would put up two-thirds of the money, and the IMF the rest. Tough terms imposed by German Chancellor Angela Merkel mean the mechanism could be activated only under strict conditions and would require the unanimous approval of the euro zone, giving Berlin a veto.

 

Greek Finance Minister George Papaconstantinou said the deal removed the risk of default by his country, but he and German officials said no aid was being given to Greece now.

 

"We don't view this as a miracle cure. It is an important part of the cure, no more," said EU President Herman Van Rompuy.

 

Merkel had long resisted offered aid to Greece because of public opposition in Germany and concerns that any deal could face a legal challenge at home. However, she let parliament know that she would accept a contingency plan provided the IMF was involved and EU partners agreed to toughen the bloc's budget deficit rules.

 

"A good European is not necessarily one who offers help quickly. A good European is one that respects the European treaties and national rights so that the stability of the euro zone is not damaged," she said.

 

At Berlin's insistence, euro zone leaders also called for proposals by the end of the year to tighten the bloc's budget discipline rules, which failed to prevent Greece running up huge deficits and public debt.

 

The differences over Greece have widened divisions in the EU. European Commission President Jose Manuel Barroso, head of the EU executive, said involving the IMF had been the only way to reach a consensus. "We have solved this in the European family," he said. "I think this is the right decision at this time to face what is an exceptional problem."

 

The cost of insuring Greek debt against default fell on news of the agreement, clinched first by the leaders of Germany and France, and the premium investors charge for holding Greek bonds rather than benchmark German bunds narrowed. However, it remained more than double the spread charged on fellow euro zone weaklings Ireland and Portugal, and four times that of Spain.

 

The European Central Bank also took a step to support Greece by extending softer rules on collateral so that Athens does not risk a guillotine on its debt at the end of this year. Under the arrangement, euro zone countries would provide funding for Greece on rigorous conditions recommended by the European Commission and the ECB.

 

Some euro zone states, notably France, and ECB policymakers have previously opposed IMF involvement, saying such a move would underscore the single currency area's inability to solve the deepest crisis in its 11-year existence on its own.

 

"If the IMF or some other body exercises the responsibility in lieu of the Eurogroup or instead of governments, it is evidently very, very bad," ECB President Jean-Claude Trichet told France's Public Senat television in an interview. Trichet had earlier given Athens some good news, announcing that the central bank would extend looser collateral rules, due to expire at the end of this year, into 2011.

 

Greece was at risk of having its bonds rejected as collateral for refinancing with the expiry of the relaxed rules, potentially triggering an even deeper liquidity crunch.

 

Greece is still saddled with borrowing costs more than double those of Germany and must borrow some 16 billion euros between April 20 and May 23 alone to refinance maturing debt. Greece says a standby aid package from the EU will reassure credit markets and avert the need for it to request aid. Without a fallback mechanism, EU leaders fear Greece's debt problems could spread to other countries in the euro zone including Portugal, Spain or Italy.