MarketView for March 22

 

 

Summary

 

Wall Street ended its three-day winning streak on Tuesday, as the insecurity generated by the events in Japan, the Middle East and North Africa continued to take a toll on investor enthusiasm. At the same time, the CBOE Volatility Index .VIX fell 1.9 percent to 20.21, leaving it not far from its level before the crisis in Japan sent the VIX skyward, which suggests that while the issues disturbing the markets, such as Japan's largest-ever earthquake and the toppling of governments across the Arab world, remain a concern, Wall Street is adapting. The VIX is down 31.6 percent in the last four days.

 

More troublesome is the low trading volume, which on Tuesday was the lowest of the year as 6.52 billion shares changed hands on the three major exchanges, pointing to a lack of investor conviction. Based on what we saw in 2010, the average daily volume should be about 8.09 billion shares.

 

Fighting in Libya and unrest in Yemen has contributed to rising oil prices, which in turn has hurt equities. April U.S. crude futures settled up $1.67 per barrel at $104, while Brent added 74 cents to settle at $115.70.

 

European Central Bank President Jean-Claude Trichet and other ECB policymakers have reiterated they are ready to act quickly to guard against inflation, despite the impact of Japan's disasters.

 

Walgreen was the S&P 500's biggest percentage loser, falling 6.6 percent to $39.21 after it reported its quarterly results. One of the S&P's top percentage gainers was Netflix, which rose 4 percent to $$221.39 after Credit Suisse upgraded the stock to "outperform.

 

After the closing bell, Adobe Systems rose 1.4 percent to $33.33 and Jabil Circuit was up 10.5 percent to $20.91. Both companies reported quarterly results after the regular stock trading session ended.

 

Fed Continues To See Economic Recovery Going Forward

 

The economic recovery is gaining traction, two top Federal Reserve officials said on Tuesday, though they differed on the subject of inflation risk. Cleveland Fed President Sandra Pianalto said she expects the U.S. recovery to continue at a moderate pace, with rising commodity and energy prices only temporarily putting pressure on broader consumer prices.

 

"The recovery seems to have established a firmer footing. I am seeing clearer signs of a virtuous cycle of growth," Pianalto said in a speech at the University of Akron.

 

Dallas Fed President Richard Fisher, speaking in Frankfurt, Germany, said recovery was gathering momentum and needs no further Fed support.

 

"The Fed has done enough, if not too much, and we should do no more. In my opinion no further accommodation is necessary after June," Fisher said.

 

The Fed last week kept its easy money policy unchanged, voting unanimously to forge ahead with its $600 billion bond-buying program announced in November to support a fragile recovery. The bond purchase program is scheduled to be completed by the end of June. The Fed’s approach contrasts with a growing likelihood of rate hikes by the European Central Bank and the Bank of England.

 

Pianalto, whose views tend to be aligned with the center of the Fed's policy setting committee, said she does not see rising energy prices associated with political unrest in the Middle East and North Africa spilling over into broader inflation. But she called the oil price rise a "key risk" to the U.S. economy that bears monitoring.

 

"If the spike in oil prices is sustained, it will potentially slow the pace of GDP growth," she said. "Even if the growth consequences turn out to be relatively small, a sustained increase in the price of oil could cause some people to worry about higher inflation."

 

Pianalto said she does not think rising food and energy prices will have a sustained impact on the inflation rate. She expects inflation to rise only gradually to 2 percent by 2013.

 

"To cause a lasting rise in inflation, the increases in food or energy prices have to be large enough and persist long enough that they spill over and cause sustained increases in a wide array of other consumer prices. At this point, there is no evidence of broad spillover," she said.

 

Fisher, one of the more hawkish Fed officials on inflation, warned there were signs that the speculative style of trading that had helped fuel the financial crisis was beginning to resurface.

 

"We are seeing speculative activity that may be exacerbating (price rises in) key commodities such as oil," he said.

 

Fisher said it was too early to gauge the impact that Japan's earthquake and nuclear crisis and the rising tensions in the Middle East would have on the U.S. economy.

 

"There are different views being expressed, but we are central bankers. We have to think about the long term. ... It is way too early to tell," said Fisher, who is a voter on monetary policy this year.

 

Pianalto, who is not a voter on monetary policy this year, expects economic growth of slightly above 3 percent a year, with rising incomes and profits supporting retail sales and business demand. Housing, though, continues to be a drag on growth, she said.

 

"Many homes remain in the foreclosure pipeline, and we are looking at well over a year before the number of bank-owned properties begins to decline significantly," she said.

 

Fisher reiterated his concern about the U.S. deficit, and stressed the importance of debt-cutting measures.

 

"If we continue down on the path on which the fiscal authorities put us, we will become insolvent. The question is when," he said. "The short-term negotiations are very important. I look at this as a tipping point."

 

Shutdowns in Japan Take Their Toll

 

Sony cut output at five more plants and Toyota delayed restarting assembly lines, as the global supply of parts and products began to feel the full impact of Japan's catastrophic earthquake.

 

Global electronics and autos companies have been hardest hit by the turmoil, but in an illustration of how the ripples are spreading, Rio Tinto, the world's second largest iron ore miner behind Brazil's Vale, warned the disruptions posed a threat to its expansion plans. Miners are already facing longer waits for key equipment exploration increases, making shutdowns at plants manufacturing heavy earth-moving equipment and electronics more likely to create additional pressures.

 

Everyone from General Motors to Nokia is feeling the impact. Toyota said all 12 Japanese assembly plants would remain closed until at least Saturday and it was not sure when they would reopen. Production lost between March 14 and 26 would be about 140,000 units.

 

Sony said five more of its plants, mostly in central and southern Japan and producing digital and video cameras, televisions and microphones, were hit by parts shortages and would close or cut output until the end of March.

 

"If the shortage of parts and materials supplied to these plants continues, we will consider necessary measures, including a temporary shift of production overseas," the maker of PlayStation games consoles said in a statement on Tuesday.

 

A sixth plant north of Tokyo was set to resume production on Tuesday, but it could be interrupted by rolling blackouts affecting some areas supplied by Tokyo Electric Power, which operates the stricken Fukushima nuclear plant. Including two factories only partially restarted last week, 15 of Sony's 25 Japanese plants are affected. It has a total of 54 plants worldwide.

 

Japan's grip on the global electronics supply chain is causing particular concern. It produces around a fifth of the world's microchips and exported 7.2 trillion yen ($91.3 billion) worth of electronic parts last year.

 

Following speculation it could face logistics problems getting key parts from Japanese suppliers, Apple said it would roll out its newest iPad to 25 more markets this week, including France and the United Kingdom. Apple launched the iPad 2 in the United States earlier this month and the recent wait time for one ordered online was four to five weeks.

 

Dell, which makes most of its revenue selling personal computers, said so far it sees no disruption to its supply chain but will look to additional component suppliers if necessary. Hewlett-Packard said it was still assessing the disaster's impact on its business.

 

Fujifilm Holdings, the largest producer of triacetyl cellulose film used in making LCD panels, said its main factories are all west of Tokyo and were not directly affected. It has other facilities in northeast Japan, but said any disruptions were unlikely to damage its earnings.

 

Konica Minolta, the second-largest maker of the LCD film, said its three factories in the Tokyo region had been affected by the rolling power cuts. Canon, which has suspended all its domestic camera production until at least Thursday, said a lack of gasoline was affecting distribution and stopping staff getting to work in areas such as the island of Kyushu, where train services are minimal.

 

Nikon, which makes cameras and precision equipment, said it expected to resume production at all its north Japan plants by the end of March, but warned power cuts and shortages of parts could make a return to full production difficult.

 

Hitachi Construction, Japan's No. 2 maker of earth-moving equipment, said five plants in Ibaraki prefecture, north of Tokyo, closed after the quake. Three have partially reopened, but there is no timetable for re-opening the others.

 

Tsunami damage to the nearest port means Hitachi is shipping some products from Yokohama, near Tokyo.

 

Carmakers are also struggling to get production lines restarted, with Honda Motor extending its production suspension until Sunday from Thursday. A fifth of the company's leading Japan-based suppliers affected by the earthquake have said it will take "more than a week" to recover, Honda said late on Monday.

 

In a sign of some return to normality, Japan's top three steelmakers saw some progress in restoring production.

 

Nippon Steel said output at the three blast furnaces at its mainstay plant in eastern Japan had recovered to pre-quake levels, while JFE Steel said two blast furnaces at its 10 million tons-a-year plant near Tokyo were now operating normally.