MarketView for March 4

 

Summary 

 

Wall Street erased most of its weekly gains on Friday as fears of more geopolitical turmoil and higher oil prices threaten to stifle rallies in coming weeks and send economies just emerging from the Great Recession into a tailspin. The worries overshadowed strong labor market news. U.S. unemployment fell below 9 percent for the first time in nearly two years. Nonetheless, that did not stop investors from focusing almost exclusively on the intensified fighting in Libya and simmering unrest throughout the region. As a result, Brent crude prices rose above $116 a barrel and the CBOE Volatility Index VIX .VIX, Wall Street's so-called fear gauge, rose 2.7 percent to 19.11.

 

Data earlier in the week had raised expectations about Friday's employment report, lifting stocks to their largest gains in three months on Thursday. However, bank shares fell after Bank of America Merrill Lynch said first-quarter earnings could be hurt by rising oil prices as well as by reduced client activity. The brokerage downgraded shares of Citigroup and Goldman Sachs) to "neutral" from "buy." Goldman fell 2.1 percent to $161.00 and Citi dropped 3 percent to $4.54.

 

For the week, the Dow rose 0.3 percent and the S&P and the Nasdaq each gained 0.1 percent. About 7.73 billion shares traded on the three major exchanges, well below last year's daily average of 8.47 billion.

 

The Labor Department reported Friday morning that payrolls rose by 192,000 in February, slightly above the expected 185,000, and the unemployment rate unexpectedly dipped to 8.9 percent from 9 percent.

 

Among consumer-related shares, the homebuilding sector was hurt the most with Weyerhaeuser down 2.2 percent to close at $23.57, KB Home down 2.6 percent at $13.08 and MDC Holdings down 2.6 percent at $24.99.

 

Oil Center of Worry

 

Brent oil prices pushed above $116 per barrel, while U.S. oil rose more than $3 to its highest level since September 2008 on Friday, as fighting in Libya worsened and protests in the Middle East intensified. One key reason for the substantial price increases was the rapidly increased speculation in the futures markets as Investors in fearing extended supply disruptions in Libya as rebels fought security forces in Ras Lanuf, a major oil terminal. And growing unrest in Bahrain and Yemen ratcheted up anxiety over Saudi Arabia, where Saudi Shi'ites staged protests on Thursday.

 

Prices closed out a second big weekly gain with news that hedge funds and big speculators had increased their bullish bets on U.S. oil prices by over 30 percent in the week to March 1, taking their net long position to a record high as they braced for further turbulence in the region.

 

Brent crude futures for April delivery rose $1.18 to settle at $115.97 a barrel, having reached a high of $116.49. Brent posted a 3.4-percent gain for the week, after rising 9.4 percent last week. U.S. crude for April delivery rose $2.51 to settle at $104.42 a barrel, the highest close since September 2008. West Texas Intermediate crude outpaced Brent for a third day, thanks to an upbeat U.S. jobs report and as traders took profits on short positions in the Brent/WTI spread after it hit a record $16.91 last week.

 

Brent's premium to its U.S. counterpart fell $1.33 to $11.55 a barrel, based on settlement prices, continuing to retreat from last week's record $16.91. U.S. crude late reached a high of $105.17 in after-hours trade.

 

The U.S. move was aided by data showing U.S. nonfarm payrolls rose more than forecast in February, hitting a nine-month high, and the jobless rate slipped to a nearly two-year low of 8.9 percent. News of refinery maintenance in Europe that will help offset the loss of Libyan crude also weighed on Brent.

 

Libyan leader Muammar Gaddafi's forces battled rebels on several fronts as the country's crisis worsened and unrest erupted in the capital. Rebels drove Gaddafi's forces from Ras Lanuf and have taken the eastern oil town, two rebel soldiers told Reuters by telephone.

 

Al Jazeera television reported that an oil facility at Zueitina, south of Benghazi was damaged and on fire. Estimates of how much Libyan oil output is shut continued to creep higher, with the International Energy Agency revising up its estimate to 1 million barrels per day (bpd).

 

The unrest that has catapulted oil prices to well over $100 a barrel, threatening to stoke inflation and endanger global growth, appeared to gather pace in countries adjacent to Saudi Arabia, the world's biggest exporter. Demonstrations swelled into hundreds of thousands in Yemen, where President Ali Abdullah Saleh rejected an opposition plan for him to transfer power this year.

 

Fighting between Sunni and majority Shi'ite Muslims in central Bahrain injured several people overnight in the first sectarian violence since protests erupted in the Sunni-ruled kingdom two weeks ago. There is a growing risk that such strife could spill across the border, and oil markets were unsettled by news a day ago of small crowds of Saudi Shi'ites staging protests in two towns in Saudi Arabia's oil-producing Eastern Province.

 

Hundreds of Omanis demanding jobs and political reforms demonstrated across the Gulf Arab sultanate, a small oil producer.

 

And the Battle Is On

 

Long outgunned by Wall Street's big brains and big budgets, financial regulators are hoping to close the gap -- if they get the money to do it. Bestowed with new powers from the Dodd-Frank reform law, the regulators are trying to attract people with Wall Street experience and retool antiquated surveillance systems.

 

"The SEC had fallen pretty far behind, and so we've been catching up," Mary Schapiro, chairman of the Securities and Exchange Commission, said at the Reuters Future Face of Finance Summit this week. "If we can bring those people on, can we keep up with Wall Street?" she said. "I think we have a fighting chance."

 

That's a pretty big "if" with a congressional budget standoff depriving promised funding increases to the SEC and Commodity Futures Trading Commission, which is becoming the country's top derivatives regulator.

 

"The major victim of this funding will be an effort to regulate derivatives," Democratic Representative Barney Frank told the summit. Frank is the co-author of the broad Dodd-Frank bill that dictates new rules for the $600 trillion over-the-counter derivatives market, among a huge list of other reforms.

 

The previously unregulated derivatives unsettled the global financial system in 2008 when insurer American International Group found itself on the wrong side of its stockpile of credit default swap contracts.

 

The CFTC is racing to get a handle on the derivatives market while trying to acquire better technology to catch bad traders. The agency is pushing for a basic market surveillance system and wants an automated program to flag unusual market conditions and trader activity, such as around scheduled economic data releases.

 

The CFTC also wants to develop an algorithm to find the potential for trading in concert, as well as automated systems for identifying speculative position limit violations. "We're far smaller than the industry we regulate," CFTC Chairman Gary Gensler said. "It's important to fund the agency so there is an effective cop on the beat."

 

An intellectual showdown between Wall Street and Washington heavyweights does not worry Frank, who threw out the names of Federal Reserve Chairman Ben Bernanke and JPMorgan Chase & Co Chief Executive Jamie Dimon as examples.

 

"Do I think that Jamie Dimon is smarter than Ben Bernanke?" Frank said. "No. I think they are both very smart."

 

But Frank and others said they were worried about the agencies being starved of money.

 

Democratic Senator Jack Reed, who chairs a panel that oversees the SEC, said the country needed "well-resourced" regulators, not just in terms of dollars but in terms of personnel.

 

"The analogy is that, I have a 1991 Ford Escort which is a good city car," Reed told the Reuters summit. "I couldn't catch a Ferrari. So if I've gotten a 1991 SEC-CFTC to catch high-frequency traders, it is never going to happen. "So we've got to get them maybe not up to the Ferrari level, but at least up to a Fusion, a hybrid."

 

Flaws in the country's market structure and decades-old technology came to light after the May 6, 2010, flash crash sent the Dow down nearly 700 points before recovering in minutes. Hindered by their inability to easily see orders across all markets, regulators took five months to piece together events that led to the crash.

 

"I think we need to do some fairly basic things to be a much stronger, more capable, and more technologically-enabled regulator, and I think it will make a huge difference," said the SEC's Schapiro.

 

Regulators also say they could use a few less roadblocks from Congress.

Bernanke, Treasury secretaries under both the Bush and Obama administrations, and other top banking and market regulators have been pilloried for not doing enough to prevent the 2007-09 financial crisis.

 

Regulators should be able to take hard questioning, Federal Deposit Insurance Corp Chairman Sheila Bair said, but an atmosphere of mutual respect between Congress and regulators is critical, especially for keeping up morale among agency staff racing to get reforms in place.

 

"Congress should be doing oversight of the regulatory process," Bair said. "I welcome that... On the other hand, the tone and attitude and demeanor shown regulators can be very difficult."