MarketView for March 7

Summary 

It was a tough day for tech stocks on Tuesday as the tech sector hit the skids leaving the Nasdaq teetering on a key technical support level. At the same time, uncertainty over higher oil prices looks set to drive volatility in the days ahead. The Nasdaq composite index fell 1.4 percent and closed just above its 50-day moving average, a widely followed technical level that if breached could signal more declines in the sector that has helped lead the market rally.

Wells Fargo downgraded the semiconductor sector, noting its strong upward moves. Wells Fargo said downgrading the semiconductor sector to "market weight" from "overweight" was "an indication of a moderate though still optimistic view." Meanwhile, the PHLX semiconductor index .SOX is up 130 percent since March 2009 and is up 45 percent since the start of September. At the same time, the S&P 500 index was up about 25 percent during that period.

Also weighing on Nasdaq was Ciena, which forecast weaker-than-expected sales, thereby sending its shares down 9.2 percent to $25.98.

Brent crude has been on Wall Street’s radar as the Street tries to gauge how bad an effect higher oil prices will have in the long run. Meanwhile, crude edged lower on Monday after hitting its highest since September 2008 on conflict in the Middle East. Brent crude fell 0.8 percent to $115.20 a barrel.

Even though gains in semis have outpaced the broader market, the S&P 500 and the semiconductor index have been moving in the same direction, which could mean further declines in the sector and spell more of the same for the overall market. A 20-day correlation between the S&P 500 and the semiconductor index .SOX was at 0.92, with a reading of 1 suggesting a perfect correlation.

The CBOE volatility index .VIX rose 8.2 percent to 20.63.

Worries about the effects of recent higher oil prices on the economy have been a negative for stocks, but analysts recommend buying the energy sector.

Copper suffered its largest one-day decline in nearly four months as rising oil prices and geopolitical instability fanned recovery doubts. That weighed on the materials sector. Freeport McMoRan Copper and Gold fell 3 percent to close at $50.14.

Western Digital was up 15.6 percent to $34.68 after the company agreed to buy Hitachi 's hard disk drive operation for about $4.3 billion in cash and stock. Also, TomoTherapy rose 24.5 percent to $4.57 after Accuray said it will acquire the smaller rival in the radiation oncology field.

Volume was about 7.92 billion shares on the three major exchanges, well below the daily average of 8.47 billion for last year.

Moody’s Downgrades Greece

Moody's reduced Greece's credit rating by three notches to B1 from Ba1, lower than Egypt, and said it may cut further, due to an increased default risk. The move raised the specter that Greece may have to restructure its debt, perhaps before 2013. The move also increased pressure on euro zone leaders to ease repayment terms on bailout loans to Athens, just as Germany and its allies seem to have turned their backs on more radical steps to help it reduce its debt through bond purchases or buy-backs.

"The likelihood of a default or distressed exchange has risen since its last downgrade of the Greek government debt rating in June 2010," Moody's said in a statement. The downgrade sent a ripple of anxiety around credit markets, raising the price of insuring Greek, Portuguese and Spanish debt against default and the risk premium on holding Greek bonds rather than benchmark German bunds. Portuguese government bond yields hit a euro lifetime high of 7.65 percent, heightening pressure on Lisbon to seek an EU/IMF bailout in the wake of Greece and Ireland.

Moody's cited risks to Greece's fiscal consolidation program from a revenue shortfall, along with difficulties in reforming healthcare and state-owned companies. Greece signed a 110 billion euros ($154 billion) rescue package with the EU and IMF last May to avoid default in exchange for draconian austerity measures which it has begun to implement. But many see the repayment terms as too onerous. Even if it fulfills the entire three-year adjustment program, its debt is projected to reach 158 percent of gross domestic product in 2013, a level widely seen as unsustainable.

The European Central Bank, which has intervened repeatedly since last May to calm bond markets by buying euro zone peripheral sovereign debt, said it made no purchases last week in the run up to Friday's euro zone summit.

Moody's was the first of the three major ratings agencies to classify Greek debt as "highly speculative." The Greek Finance Ministry said it had ignored progress in implementing its fiscal consolidation plan, including an improvement in revenue collection. "Decisions such as Moody's today can initiate damaging self-fulfilling prophecies," it said. However, the bond market was already pricing in a managed Greek default.

On Friday, euro zone leaders will discuss measures to enforce stricter budget discipline, boost economic competitiveness and strengthen the bloc's financial rescue fund in an attempt to draw a line under the debt crisis.

Germany, the EU's reluctant paymaster, has hinted it may agree to extending the maturity of Greek loans to seven years, like Ireland's, and possibly ease the interest rate slightly.

However, Berlin's ruling center-right coalition parties and the Bundesbank have strongly opposed any purchase of distressed sovereign bonds by the euro zone rescue fund and any lending to Greece to buy back its own debt on the market at a discount.

Moody's said it was concerned by the lack of certainty about the nature of financial support that will be available to Greece after 2013, and its implications for bondholders, although its central scenario remains that bondholders will not bear losses.

The spread on 10-year Greek debt against benchmark Bunds widened by 8 basis points following the Moody's downgrade, which came amid intense negotiations among euro zone countries on a package of measures intended to overcome the sovereign debt crisis that has shaken the currency bloc since November 2009.

Center-right leaders meeting in Helsinki last Friday agreed in principle to increase the effective lending capacity of the temporary European Financial Stability Facility and review the loan conditions to Greece and Ireland. At the same time, Germany, Finland and the Netherlands opposed allowing the rescue fund to buy bonds or to lend distressed countries money to buy their own bonds, participants said.

Some EU officials see the hard-line stance as pushing Greece toward restructuring, but only after west European banks have had time to raise their capital base to cope with the fallout from potential Greek losses.