MarketView for May 21

 

 

Summary 

 

I

Investors became nervous once again over the economy and stock prices felt the brunt of those concerns as selling became the dominant theme from the opening bell. High up on the list of concerns were the budget deficit and rising unemployment on an ongoing basis.  It did not help matters that there is a real possibility that the U.K. could lose its triple-A credit rating, which in turn heightened fears that the United States, with its increasing budget deficit and weakened economy, could face a similar fate.

 

What was unusual is that the sell-off in stocks did not produce the usual flight to assets typically considered havens in a storm, specifically the dollar and Treasurys. Instead, those markets also weakened for similar reasons.

 

Shares of some of the bellwether manufacturers, such as United Technologies were lower with United Technologies falling 1.9 percent to close at $50.76, while Boeing ended the day down 2.9 percent to close at $43.29.

 

Apple also felt the pressure, becoming the Nasdaq's top drag as it closed down 1.3 percent to $124.18.

 

Meanwhile, the Labor Department released a report indicating that ongoing claims for unemployment insurance rose to a fresh record as the recession battered employment. However, the number of workers filing new claims for jobless benefits declined by 12,000 claims last week.

 

Also, the Philadelphia Fed's survey of manufacturing conditions for the mid-Atlantic region contracted in May for the eighth straight month, but the deterioration improved slightly from April.

 

More Protection for Consumers Likely

 

The Obama administration is considering establishing a new government agency whose responsibility it will be to better protect consumers that purchase financial products or take out mortgages from practices like those that led to the current financial crisis, Treasury Secretary Timothy Geithner said on Thursday.

 

Testifying before a congressional panel, Geithner said a broad set of regulatory reform proposals would be unveiled in a few weeks, and a new entity to protect consumers of financial products could be part of the administration's push.

 

"We are examining the merits of setting up a new independent commission or agency to help provide stronger rules to protect consumers and better enforcement of those rules," he told a House of Representatives Appropriations subcommittee.

 

"We are not at the point yet ... where we've made a judgment on what precise structure (or) form this should take, how broad its authority should be, how it relates to existing authorities that exist across the agencies now," he said.

 

Reckless lending by banks, including so-called "liars' loans" for under-qualified homebuyers that did not require proof of income or sometimes even employment, is widely blamed for fueling a housing boom whose collapse pushed the United States into a deep recession.

 

Geithner said government efforts to bolster the financial system were bringing "immediate stability," and it was now time to turn attention to badly needed regulatory reforms to create a system that would be less vulnerable to meltdown.

 

"This country has lived for some time with a very complicated, very segmented, archaic framework of oversight over our financial system, and that's one reason ... why this crisis was so severe, one reason why consumer protections were evaded so easily," Geithner said.

 

As part of its regulatory revamp, the Obama administration is expected to propose tighter oversight of hedge funds, streamlining bank regulation and shaking up executive pay standards. It also is expected to call for the Federal Reserve to be made a "systemic risk" regulator to monitor broad threats to the financial system.

 

Geithner faced a wide range of questions from lawmakers on Thursday, including whether the Treasury could tap its $700 billion financial bailout fund to help California, the country's largest economy, deal with a big budget shortfall.

 

Last week, California urged Geithner to extend debt guarantees through the bank bailout fund to state and local governments to help them borrow short-term funds. Geithner, however, told lawmakers that his hands were tied.

 

"We do not believe that (the fund) as currently legislated provides a viable solution to this specific challenge," he said, adding that Treasury was not legally able to guarantee new debt issues.

 

He said the country would need to swiftly ratchet down the federal budget deficit, which has ballooned with efforts to combat the U.S. recession, once growth was restored.

 

"We must get our fiscal house in order or risk having government borrowing crowd out productive private investment," Geithner said. He said the administration has to make sure its policies help retain confidence in the dollar's value.

 

"My basic obligation is to make sure we put in place policies that sustain confidence in this economy, in our currency and that we sustain a strong dollar," Geithner said.

 

Crude Stalls

 

The price of crude oil fell on Thursday, dragged down from six-month highs as signs of job market weakness stoked concerns about the economy. Sweet domestic crude settled down 99 cents per barrel at $61.05 a barrel after hitting a six-month high over $62 on Wednesday. London Brent fell 66 cents to settle at $59.93 a barrel.

 

Oil received a lift on Wednesday after weekly U.S. government inventory data showed a steep drop in crude and gasoline stockpiles ahead of the U.S. Memorial Day weekend, traditionally the start of the summer driving season.

 

Falling demand has sent the price of crude tumbling, prompting the Organization of the Petroleum Exporting Countries to agree a series of output cuts since September.

 

Nigeria's army declared a militant leader is wanted dead or alive and pressed on with an offensive in the Niger Delta which Amnesty International said may have killed hundreds in the OPEC nation.

 

Dollar Falls Sharply

 

The dollar on Thursday plunged to its lowest level this year against major currencies, and the euro approached a five-month high above $1.39 as worries about swelling U.S. deficits soured investors on U.S. assets.

 

Standard & Poor's announcement that it could downgrade Britain's triple-A credit rating initially weighed on sterling.  At the same time, the euro was up 1 percent at $1.3899. Earlier, it hit $1.3923, its highest level since early January. The dollar was down 0.6 percent at 94.25 yen, near a two-month low beneath 94 yen. An index gauging the dollar's strength against a basket of six major currencies hit its lowest level this year.

 

S&P's warning on the UK initially lifted the dollar by some 3 cents against sterling, but the pound recovered and hit a 6-1/2-month high near $1.59 before easing back to $1.5861, up 0.8 percent from late Wednesday. Asked Thursday about U.S. sovereign rating concerns, S&P cited its January affirmation of U.S. triple-A status, saying it considers fiscal deterioration temporary.

 

U.S. Treasury Secretary Timothy Geithner said Thursday he considers maintaining a strong dollar and confidence in the economy his "basic obligation." The dollar has fallen every day this week against the euro and sterling, and it marked its third straight decline against the yen on Thursday.

 

Earlier this week, analysts attributed the fall in the dollar, which has been treated as a lower risk, safe-haven investment, to growing optimism that the worst of the financial crisis has passed, causing investors to unwind positions in favor of the U.S. currency built up when fear was widespread, credit was frozen and stock markets were in free fall.

 

But with less need to buy dollars as a safe haven, investors were finding it harder to ignore the effect of the Federal Reserve's zero interest rate policy and its efforts to keep long-term rates low through direct purchases of U.S. government debt.

 

Unemployment Claims Fall

 

The number of workers filing new unemployment claims fell by 12,000 claims last week, Labor Department data showed on Thursday, while so-called continued claims rose to a fresh record as the recession battered employment.

 

Initial claims for state unemployment insurance benefits declined to a seasonally adjusted 631,000 in the week ended May 16 from a revised 643,000 the prior week, the Labor Department said. New claims have declined in three of the last four weeks.

 

The number of people staying on the benefits roll after drawing an initial week of aid increased by 75,000 to 6.662 million for the week ended May 9, the most recent week for which data is available.

 

Index of Leading Indicators Up

 

A forward-looking measure of the U.S. economy in April posted its first increase since June 2008, the Conference Board said on Thursday, suggesting a pickup in growth in the second half of 2009.

 

The index of leading indicators, which is supposed to forecast economic trends six to nine months ahead, rose 1 percent in April after a revised 0.2 percent drop the previous month. "The leading indicators suggest that while the recession will continue in the near term, the declines will be less intense," said Ken Goldstein, a Conference Board economist.

 

"If the indicators continue on the current track, that point might be reached in the second half of the year," Goldstein said.

 

The Conference Board said seven out of 10 measures of economic activity that make up the leading index rose in April. It was the first time in 1 1/2 years that measures showing strength exceeded those showing weakness. The biggest positive contribution came from stock prices, but lower real money supply put a drag on the index.

 

The coincident index fell to 0.2 percent in April from a 0.6 percent fall in March, while the lagging index fell 0.5 percent in April from a matching 0.5 percent fall the previous month, the Conference Board said.

 

The leading indicators index was the latest report to give mixed signals about the economy. It fits in with other economic reports of late reports that purport to show the recession's worst phase may be over, including moderately stronger consumer confidence, unchanged consumer prices and industrial output declining at a slower pace.