MarketView for March 10

 

Summary 

 

Fears about the economy and unrest in Saudi Arabia where authorities opened fire on demonstrators sent the major equity indexes below key technical levels as the Dow Jones industrial average posted its worst day in more than seven months. All three major indexes fell below their 50-day moving averages, a sign of deteriorating market strength.

 

The benchmark S&P 500 and the Nasdaq closed below their 50-day moving average for the first time since September. The Dow closed below the level for the first time since November. The impact of the selling was evident given the day’s volume at 9.07 billion shares traded, a number that was well above last year's daily average of 8.47 billion shares.

 

Energy stocks were the largest drag after recent gains. Exxon ended the day down 3.6 percent, even as crude oil rallied off its lows of the day. Brent crude futures ended lower, but settled nearly $2 above their session low after news about protests in Saudi Arabia. Brent slipped 51 cents to settle at $115.43 per barrel.

 

The CBOE Volatility Index or VIX .VIX, Wall Street's favorite gauge of investor fear, jumped 8.2 percent to 21.88. However, many investors have been using dips to increase exposure to stocks in the belief that longer-term economic fundamentals point to a slow steady recovery.

 

China swung to an unexpected trade deficit in February of $7.3 billion that country’s largest in seven years, but economists said the drop was likely temporary.

 

A report from the Labor Department indicated that initial claims for state unemployment benefits increased by 26,000 claims to a seasonally adjusted 397,000 claims and the trade deficit widened much more than expected in January to $46.3 billion.

 

Moody's one-notch downgrade of Spain, based on the costs of restructuring its banks, came with a warning that further cuts were possible. The agency downgraded Greece's debt earlier this week.

 

Rating on Spain Cut

 

Moody’s Investors Service cut Spain's debt rating on Thursday, pushing the euro lower in what could be the precursor to a rising crisis in the 17-nation currency bloc on the eve of a crucial summit. The cut sent Spain's sovereign debt rating down one notch to Aa2 as the rating agency warned of further downgrades, estimating the capital shortfall at the country's banks at 40-50 billion euros, or as much as 110-120 billion euros under a more severe stress scenario. That clashed starkly with a new 15 billion euro shortfall estimate from the Bank of Spain, which raised questions about the credibility of official forecasts.

 

“There is a meaningful risk that the eventual cost of the recapitalization effort could considerably exceed the government's current projections," Moody’s said in statement.

 

Meanwhile, German Chancellor Angela Merkel signaled to lawmakers in a closed-door meeting that she was prepared to agree an increase in Europe's rescue fund later this month, participants said, but only under conditions that other states may find difficult to accept.

 

European leaders are expected to back a watered-down version of a German-French plan to boost economic competitiveness at Friday's Brussels summit but are unlikely to overcome sharp differences over whether the rescue fund should be given new powers that would help it ease the burden on highly-indebted euro states. A German official lowered any expectation of a breakthrough, saying no decisions would be taken on strengthening the European Financial Stability Facility (EFSF) on Friday.

 

The question of raising the fund's lending capacity would be decided in a package at the end of March, he said, and Berlin opposed giving the EFSF or its successor any direct or indirect role in buying troubled states' bonds on the secondary market.

 

Merkel told members of the Bundestag's European affairs committee, according to the participants, that boosting the fund would depend on countries that do not have a triple-A rating injecting capital, a step some of them have already signaled they will resist.

 

EU diplomats said France and several other countries want at least an outline agreement on Friday on the remit of a planned permanent financial rescue mechanism for the euro zone.

 

As a result, the euro fell to a one-week low of under $1.38, the risk premium on Spanish bonds widened and the cost of insuring Spanish, Greek and Portuguese debt against default rose as a fresh wave of euro zone jitters hit financial markets. Look for the euro to fall further due to market concerns if Friday's 17-nation meeting and a summit of the full 27-nation European Union on March 24-25 fail to agree on decisive action to tackle the debt crisis.

 

Bond market pressure on Portugal to become the third euro zone state to seek an EU/IMF rescue after Greece and Ireland rose this week with 10-year bond yields at euro lifetime highs above 7.5 percent, a level Lisbon says is unsustainable.

 

Portuguese Prime Minister Jose Socrates is under intense pressure from his peers and the European Central Bank to announce additional austerity measures and accelerate economic reforms. The sources said he would make a statement to the leaders at the start of a summit on Friday on his commitment to deeper reforms, including to the labor market. Socrates reiterated in parliament on Thursday that Portugal could solve its financial problems without outside help.

 

The ECB said debt-strained euro zone governments have yet to demonstrate convincingly the strength of their deficit-cutting efforts and may be weakening their commitments. "Overall, current (consolidation) policies and plans give rise to concern for a number of reasons," the ECB said in its monthly bulletin, without singling out individual countries.

 

After supporting Portuguese government bonds several times this year, the ECB appears to have refrained from intervening in recent days, traders say, in a pattern reminiscent of the run-up to Ireland's bailout request last November.

 

Financial markets are also concerned about the growing risk that Greece and Ireland may have to restructure their debts despite EU/IMF bailouts which have only bought time.

 

Moody's slashed Greece's credit rating by three notches on Monday, citing an increased risk of default or restructuring, possibly before 2013. Greek 10-year bond yields rose to a post-crisis high above 12.8 percent and two-year yields have risen sharply.

 

"There appears to be a growing risk that Greece could struggle to meet its financing needs before too long," Capital Economics said in a research note. "We think that the markets' increasingly gloomy stance is justified."

 

Greek Prime Minister George Papandreou told French daily Le Monde that lowering interest rates and extending the maturity of rescue loans "would be decisive factors to guarantee that we continue to meet our long-term objectives."

 

Merkel said Greece should be given longer to repay euro zone loans, telling Bild newspaper that insisting Athens solve its fiscal problems in three years would only cause fresh turbulence.

 

Apparently Merkel is of the opinion that steps to ease the burden of both Greece and Ireland would be conditioned on new pledges by those countries, citing movement from Athens on privatizations and compromises from Dublin on corporate tax base issues.

 

Germany and its northern allies remain reluctant, however, to accept a significant reduction in the punitive interest rates charged to Athens and Dublin, which compound their debt woes.

 

Spain has escaped the bond market firing line this year by announcing budget cuts, a bold pension reform, privatization measures and a plan to recapitalize the regional public savings banks hard hit by the collapse of a real estate bubble. However, the prospect of higher interest rates, raising mortgage costs to stretched Spanish households and increasing the risk of more loans to property developers turning sour, has raised market estimates of the cost of restructuring the banks.

 

Monthly Deficit at Record $222.5 Billion in February

 

According to a Treasury report released today, the government posted a record monthly budget deficit of $222.5 billion in February, typically a large deficit month, as spending growth outstripped revenue gains crimped by tax cuts enacted late last year.

 

The Treasury reported that the cumulative deficit through the first five months of fiscal 2011 was $641.26 billion, down from $651.6 billion in the same period a year earlier. Outlays for February rose about $4.8 billion from a year ago to $333.16 billion, also a record for any month. February receipts rose $3.1 billion from a year earlier to $110.66 billion.

 

The government in December extended unemployment insurance benefits and cut payroll and some business taxes, which is taking a toll on revenue this year. Companies claiming tax credits and refunds caused net corporate receipts to turn negative by about $1 billion during February, compared to net receipts of about $8 billion during the same period last year.

 

Contributions to social insurance trust funds supported by payroll taxes also are starting to show a slowdown from lower payroll tax rates.

 

February usually results in the fiscal year's largest deficits because there are fewer working days to withhold income taxes while monthly benefit payments remain steady. Tax refunds to individuals and companies also tend to gain momentum during the month.

 

The February deficit was the 29th consecutive monthly deficit posted by the United States, extending the longest stretch of deficits in its history.