MarketView for March 11

 

Summary 

 

Wall Street ended the day on Friday on a positive note and more than a little sigh of relief that the unrest seen throughout the Middle East of late did not flare up to any real extent in Saudi Arabia as the major equity indexes erased losses chalked up earlier in the week even as other markets were hit hard by a devastating earthquake in Japan, the country's strongest on record. Oil refiners and industrial-related shares led the parade upward on Wall Street.

For the week, the Dow fell 1 percent, while the broader S&P index lost 1.3 percent and the Nasdaq was down 2.6 percent.

 The Street had been concerned that "Day of Rage" protests in Saudi Arabia could lead to further instability in the Middle East and North Africa. Those fears had intensified after police used force to disperse demonstrators in Riyadh on Thursday.

 

Shares initially fell as investors reeled from images of mass destruction after the Japanese earthquake and tsunami left at least 1,000 dead. But the market reversed losses and notched solid gains as investors shook off fears of the quake's impact on Japan, the world's third largest economy. Japan's major cities and manufacturing facilities were not affected by the quake.

 

Valero Energy rose 6.3 percent, while Tesoro rose 8.4 percent after Japan's oil refining capacity was hit by the earthquake and tsunami. ort sellers were quick to react to the quake. The ProShares UltraShort MSCI Japan exchange traded fund, which amplifies the reverse of the underlying MSCI Japan index by a factor of two, rose 3.2 percent on over 100 times its usual volume.

 

Japanese shares traded in New York fell sharply. The Bank of New York Mellon's index of Japanese ADR's lost 2.1 percent. Toyota Motor ended the day down 2.1 percent to $85.65. While a small number of shares might benefit in the rebuilding operation, information on the extent of damage was still scarce.

 

Among insurance stocks, there was a degree of concern over the potential claims for damages. Some of the insurers that have exposure in Japan, Aflac fell 0.3 percent to $55.55 and Berkshire Hathaway rose 0.4 percent to $85.26.

 

Dollar denominated-Nikkei stock futures fell 2.8 percent, yet the Japanese market may not suffer too deep a slide going forward because of the lack of impact on major cities and manufacturing facilities.

 

Brent crude futures fell 1.4 percent to below $114, while domestic crude was off 1.6 percent at about $101.

 

A survey released on Friday showed U.S. consumer sentiment fell to its lowest level in five months in early March as gas prices rose. The data raised questions about the resilience of consumers after the Commerce Department separately reported that retail sales rose 1.0 percent in February, the largest gain since October.

 

Surprise from the EU

 

The leaders of the 17-country Eurozone agreed to a strategy on how to deal with the debt crisis that has crippled the EU over the past year and has already pushed two of its members into multibillion euro bailouts. "The fundamental path was hacked open," German Chancellor Angela Merkel told journalists early Saturday morning.

 

Merkel and her counterparts agreed to boost the region's bailout fund, the European Financial Stability Facility, so it can lend the full euro440 billion that it initially promised. Until now, the EFSF could only lend about 250 billion euro because of several buffers required to get a good credit rating, raising fears that it would not be big enough to save a large country like Spain. The fund will also be allowed to buy the bonds of governments in financial difficulties on the open market, but only if the respective country is locked into a national bailout program based on strict conditions.

 

That step marks an important expansion in the fund's powers, since buying bonds can help stabilize their prices and a country's funding costs. However, it falls short of demands made by the EU's executive Commission as well as the European Central Bank, which wanted to see the fund take an even broader role, buying bonds to calm financial markets like the ECB has been doing for much of the past year. ECB President Jean Claude Trichet nevertheless viewed the announcement as a partial success. "It goes in the right direction," he said.

 

The leaders also agreed to give Greece more time to repay its euro110 billion bailout, extending its loans to 7 1/2 years. On top of that, the country, which was the first victim of the crisis, will have to pay less interest. Eurozone leaders decided to lower the rate by 1 percentage point, which should take it down to an average of about 4.2 percent.

 

Ireland, the crisis' second victim, did not get the same leniency from the heads of state and government. It will have to wait until another summit on March 24-25 for a decision on the interest rate for its 67.5 billion euro bailout, currently at about 5.8 percent. The reason for the holdout was Ireland's refusal to make concessions on its corporate tax rate, long a sore point for France and Germany.

 

"Ireland was asked to make a gesture, but we didn't get satisfaction. So the renegotiation of loans that Greece has was not done for Ireland," French President Nicolas Sarkozy told journalists. "It's difficult to ask others to help finance a plan but not concern themselves with the tax side," Sarkozy said.

 

The timing of Saturday's agreement came as a surprise, since policymakers had insisted the big decisions would have to wait until the next summit at the end of the month. But rising tension on financial markets, following painful downgrades of Greece and Spain's credit ratings earlier in the week, had added more urgency to Friday's meeting.

 

At the same time, the Eurozone’s weakest members also made concessions that made it easier for fiscally stronger countries like Germany, Finland and the Netherlands to agree to more help. Earlier in the day, Portugal announced further tax increases and spending cuts, which were lauded not only by Germany but also the ECB and the European Commission.

 

The entire Eurozone also agreed to a so-called "pact for the euro," which will see governments coordinate their economies more closely to boost competitiveness -- a German pet project. In the pact, Eurozone leaders commit themselves to hit annual benchmarks on economic competitiveness, boosting employment and making their budgets sustainable in the long term.

 

Sanctions are not foreseen in the pact, but officials stressed that the leaders would make concrete commitments to each other, which would be enforced not only by peer pressure but also by negative reaction on financial markets.

 

Retail Sales Rise

 

According to a report released on Friday by the Commerce Department, retail sales posted their largest gain in four months in February as shoppers stepped up purchases of autos, clothes and other goods even as they spent more for gasoline. The report pointed to strong consumer spending and acceleration in economic growth in the first quarter.

 

Total retail sales rose 1.0 percent, the Commerce Department said, the largest gain since October and the eighth straight monthly advance. The rise was in line with economists' expectations. Meanwhile, January sales were revised up to a 0.7 percent increase from a previously reported 0.3 percent gain. Excluding autos, sales rose 0.7 percent last month after gaining 0.6 percent in January.

 

Consumers last month overcame a 3.7 percent increase in gasoline prices to spend on a range of goods, including autos, whose sales rose 2.3 percent after rising 1.2 percent in January. Receipts at gasoline stations increased 1.4 percent after rising 1.3 percent in January. Excluding gasoline, sales rose 0.9 percent after rising 0.6 percent in January.

 

Unrest in the Middle East and North Africa has pushed Brent crude oil prices above $100 a barrel, raising concerns that high gasoline prices could eat into consumer pocketbooks already strained by high unemployment. The Energy Information Administration said this week households would pay an average of $700 more for gasoline this year than in 2010.

 

Outside autos and gasoline, consumers also spent on clothing, lifting sales 0.8 percent. Receipts at sporting goods, hobby, book and music stores increased 1.3 percent, while sales at building materials and garden equipment suppliers were up 0.6 percent.

 

So-called core retail sales -- which exclude autos, gasoline and building materials -- rose 0.6 percent after a 0.7 percent gain in January. Core sales correspond most closely with the consumer spending component of the government's gross domestic product report. Spending, which accounts for 70 percent of U.S. economic activity, grew at a 4.1 percent annual rate in the fourth quarter, the fastest in more than four years.

 

Consumer Sentiment Falls to a Five-Month Low

 

Consumer sentiment fell to its lowest level in five months in early March as gasoline prices rose, a survey released on Friday showed. Nonetheless, buying plans were largely unchanged and although the rate of real consumer spending will diminish, the report does not indicate a renewed downturn on the horizon, the latest consumer survey from Thomson Reuters and the University of Michigan said.

 

The preliminary March reading on the overall index on consumer sentiment came in at 68.2, down from 77.5 in February. That was the lowest level since October 2010 and was well off the median forecast of 76.5 among economists polled by Reuters.

 

The numbers were in contrast to the retail sales report on Friday, which showed sales posted their largest gain in four months in February as shoppers stepped up purchases of autos, clothes and other goods.

 

The survey's barometer of current economic conditions was at 83.6, down from 86.9 the month before and below a forecast of 86.0. The survey's gauge of consumer expectations tumbled to 58.3 from 71.6, the lowest level since March 2009. Inflation concerns were still high, with the survey's one-year inflation expectation rising to 4.6 percent from 3.4 percent in February, the highest since August 2008. The survey's five- to 10-year inflation outlook rose to 3.2 percent from 2.9 percent.