MarketView for March 21

Summary

The major equity indexes tumbled on Thursday as Oracle's revenue fell far short of expectations and worries intensified about the effect of Cyprus' troubles on the euro zone. Oracle ended the day down 9.7 percent to $32.30, a day after its revenue disappointment, which it blamed on sales execution. It was the stock's largest percentage drop since December 2011.

Stock losses accelerated late in the session as anxiety about Cypriot finances increased. Just before the market's close, Standard & Poor's cut Cyprus' sovereign credit rating deeper into junk status. At the same time, the European Union gave Cyprus until Monday to raise the billions of euros it needs to get an international bailout - or face the collapse of its financial system and a likely exit from the euro bloc.

The latest euro-zone concerns hit the market after weeks of gains that drove the Dow up to break record highs and lifted the S&P 500 to within striking distance of its all-time record close of 1,565. Investors fear a collapse of the banking system in Cyprus will tighten credit across Europe and become yet another hurdle on the region's bumpy road out of economic crisis. Adding to those fears, data showed the region's economy contracted more than expected in March. As a result, the CBOE Volatility Index was up 10.4 percent to 13.99.

After the bell, shares of Nike rose 8.3 percent to $58.05. The company posted earnings that exceeded analyst expectations. In the regular trading session, the shares closed at $53.60.

During regular trading, Cisco was the Dow's largest percentage loser. Cisco fell 3.8 percent to $20.84 after brokerage FBR downgraded its rating on the network equipment maker's stock and cut its price target. Among other tech shares, IBM fell 1.3 percent to $212.26. Among the day's other falling shares, Guess slid after it forecast first-quarter results significantly below analysts' estimates, ending the day down 7.2 percent, closing at $25.01.

The benchmark S&P 500 index is on track to post only its second weekly percentage drop so far this year, a testament to its impressive 2013 run.

The euro-zone concerns overshadowed a batch of reports suggesting our economic recovery was on the right track and solid first-quarter growth in China. A downward trend in jobless claims, an increase in factory activity and a rise in sales of existing homes pointed to growing momentum in the U.S. economy during the first quarter of the year. Initial claims for unemployment benefits inched higher in the latest week, but the four-week average of new claims - a measure of labor market trends - fell to its lowest level in five years. Approximately 5.9 billion shares changed hands on the three major equity exchanges, as compared with the 2012 average daily closing volume of about 6.45 billion shares.

The Economic Momentum Continues

The day’s economic data pointed to growing momentum in the economy during the first quarter, with jobless claims trending lower and factory activity and homes sales both on the rise. The economic reports on Thursday, relating to hiring and consumer spending, point to a sharp rebound in economic growth despite the onset of increased fiscal austerity. In particular, the claims data suggested March could be another month of solid job gains.

While the number of Americans filing new claims for jobless benefits edged higher last week to 336,000, a trend reading dropped to its lowest level in five years. That bodes well for job creation in March because the data covered the survey period for the government's monthly tally of nonfarm jobs. The four-week average of new claims fell last week to 339,750, down 6 percent relative to the survey week in February, when nonfarm payrolls increased by 236,000.

The federal government raised taxes on most Americans in January and a gaggle of budget cuts began this month, with the economic bite from reduced government spending expected to be concentrated in the next few months.

Separately, two surveys of industry showed an increase in activity at American factories despite weakness in overseas markets like Europe. The Philadelphia Federal Reserve Bank said manufacturing activity in the mid-Atlantic region grew in March after contracting for two months in a row.

Data on the housing sector, which was blighted by the 2007-09 recession, was also upbeat. Home re-sales hit a three-year high in February and prices jumped, adding to signs of an acceleration in the housing market recovery. The National Association of Realtors said existing home sales increased 0.8 percent to an annual rate of 4.98 million units last month, the highest level since November 2009. The January sales pace was revised up a 4.94 million units from the previously reported 4.92 million units.

Another measure of home prices by the Federal Housing Finance Agency showed a 0.6 percent gain in January. Also pointing to momentum in the economy, the Leading Indicators index rose for a third straight month in February.

The positive signs on the economy were overshadowed in financial markets by a decline in tech sector shares and by worries that a banking crisis in Cyprus could enflame the European crisis. Stocks fell, as did yields on government debt.

Cyprus Gets Ultimatum

The European Union gave Cyprus till Monday to raise the funds needed to secure an international bailout or face a collapse of its financial system that could push it out of the euro currency zone.

In a sign it was at least preparing for the worst, the Cypriot government sought powers on Thursday to impose capital controls to stem a flood of funds leaving the island if there is no deal before banks reopen following this week's shutdown. Parliament will reconvene later on Friday to debate a raft of government crisis measures after lawmakers adjourned a late-Thursday sitting saying they needed more time for consultation.

Even those measures looked likely to fall short of a promised "Plan B" to raise the 5.8 billion euros demanded by the EU in return for a 10 billion euro lifeline from the EU and IMF. The European Central Bank said it would cut off liquidity to Cypriot banks without a deal. The word on the Street is that the EU was ready to see the island banished from the euro to contain damage to the wider European economy. One key reason is that Cypriot lawmakers on Tuesday threw out a tax on deposits, calling the EU-backed proposal "bank robbery".

Trying to placate its lenders, the government proposed to parliament a "solidarity fund" that would bundle state assets, including future gas revenues, as the basis for an emergency bond issue, likened by JP Morgan to "a national fire sale". It also sought the power to impose capital controls on banks, a type of measure unseen since before the country joined the single currency bloc five years ago.

The European Central Bank, which has kept Cyprus's banks operating with a liquidity lifeline, said the government had until Monday to get a deal in place, or funds would be cut off. "Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF program is in place that would ensure the solvency of the concerned banks," the ECB said.

Cypriot banks, crippled by their exposure to Greece, the center of the euro zone debt crisis, have been closed all week and are not due to reopen until Tuesday. As a result, long queues formed on Thursday at ATMs still dispensing cash, and there were angry scenes outside parliament where several hundred protesters, many of them bank employees, rallied after rumors the second-largest lender, Cyprus Popular Bank might be no more. However, the central bank said it was readying measures to keep Popular Bank afloat. Some banking officials said it could be split between good and bad assets.

Under the levy rejected by parliament, EU lenders, notably Germany, had wanted uninsured bank depositors to bear some of the cost of recapitalizing the banks, but Cyprus feared for its future reputation as an offshore banking haven and planned to spread the burden also to small savers whose deposits under 100,000 were covered by state insurance. Lawmakers threw it out.

In Moscow since Tuesday, Cypriot Finance Minister Michael Sarris said he was discussing possible Russian investments in banks and energy resources, as well as an extension of an existing 2.5-billion-euro Russian loan. He said Cyprus had no plans to borrow more money from Russia and add to its debt mountain. The Russian Finance Ministry had said on Monday that Nicosia sought an extra 5-billion-euro loan.

The chairman of the euro group of finance ministers, Dutchman Joreon Dijsselbloem, told the European Parliament in Brussels that Moscow informed the EU it had no intention of funding Cyprus.

Senior euro zone officials acknowledged in a confidential conference call on Wednesday that they were "in a mess" and discussed imposing capital controls to insulate the currency area from a possible collapse of the small Cypriot economy. Cyprus itself refused to take part in the call,. Several participants described its absence as troubling and reflecting the wider confusion surrounding the island's predicament.