MarketView for May 4

Summary 

Stock prices were hammered on Tuesday, primarily due to concerns that the Greece contagion could spread across Europe, primarily to other weak euro zone countries. By the closing bell, the end result was that Wall Street underwent its worst session in three months. The sell-off echoed a wave of fear that gripped financial markets over fears that the crisis in Europe could derail the global economic recovery.

Those companies with a heavy dependence on exporting products to Europe, especially but not limited to technology and industrial companies, saw their shares fall sharply, as Hewlett-Packard ended the day down 3.9 percent at $50.64, while Caterpillar closed down 4.6 percent at $66.70.

Share within the basic materials sector came under pressure when the euro hit a one-year low against the dollar. Meanwhile, the CBOE Volatility Index, Wall Street's so-called fear gauge, rose 18.1 percent or 23.84 points, reaching its highest closing level in almost three months. Airline shares were also hit hard.

Despite the S&P 500's steep fall, the benchmark did not break major technical support except for a short-term bottom at 1,181 on the S&P 500, the intraday low hit last week.

Encouraging data on manufacturing and housing failed to provide support as the day wore on. Reports showed new orders received by factories in March increased as pending home sales hit to a five-month high.

On the upside, a round of better-than expected earnings from Merck and Pfizer sent those companies’ shares upward by 1.5 percent and 2 percent respectively. Wal-Mart was the only other blue-chip to gain, rising 0.5 percent to $54.02.

After the closing bell, media conglomerate News Corp posted better-than-expected quarterly earnings due to continued improvement in the advertising market, a strong performance at its cable networks and its blockbuster film "Avatar. Its share price initially rose more than 4 percent in after-hours trade following the results, and then fell back down 3.6 percent at $14.85.

Pending Home Sales Rise, Manufacturing Higher

Pending sales of previously owned homes hit a five-month high in March as buyers worked to sign contracts before a tax credit expired, while a nice increase in factory orders underscored the nation’s recovering strength in manufacturing. Furthermore, the data on Tuesday leads to the conclusion that the economic recovery is gaining strength that will likely spill over into a strong second-quarter rate of growth. The economy expanded at a 3.2 percent annual rate in the January-March period.

The National Association of Realtors said its pending home sales index, based on contracts signed in March, rose 5.3 percent to 102.9, building on the prior month's 8.3 percent rise. Markets had expected pending sales, which lead existing home sales by one to two months, to rise 4 percent in March.

While the rise in March pending home sales was a reflection of the boost from the homebuyer tax credit, it bodes well for the spring sales season. In fact, the increase in pending home sales suggests that sales of existing homes likely rose to an annual rate of between 5.6 million units and 5.8 million units last month. Sales of previously owned homes rose to rate of 5.35 million units in March.

Prospective buyers had to sign contracts by the end of April and close by the end of June to be eligible for the tax break. Until recently, buyers had been slow to respond to the tax credit, which was extended and expanded last year, causing the housing recovery to stall. Although home sales started improving in March, they are not expected to match the gains registered with the initial tax credit.

Meanwhile, the Commerce Department reported that new orders for manufactured goods rose an unexpected 1.3 percent in March, after an upwardly revised 1.3 percent gain in February. The surprise surge in factory orders confirmed that the manufacturing sector continued to lead the economic recovery.  

At the same time, the Institute for Supply Management (ISM) reported on Monday that manufacturing grew at its fastest pace in nearly six years during April. The strong increase in production comes on the heels of a prolonged period of drawdown in business inventories to exceptionally lean levels.

Excluding transportation orders, factory orders rose 3.1 percent in March, the largest gain in almost five years, the Commerce Department data showed. Non-defense capital goods orders excluding aircraft, viewed as an indicator of business confidence, was up 4.5 percent, the largest increase since December 2007.

Panic Remains in Europe

What amounted to panic selling resumed within the euro zone financial markets on Tuesday as concern mounted that the record bailout of Greece would not stop he debt crisis from spreading within the EU. Spanish Prime Minister Jose Luis Rodriguez Zapatero dismissed as "complete madness" a market rumor that his country would soon ask for 280 billion euros in aid from the euro area.

The euro sank to a one-year low of beneath $1.31 and the risk premium on Greek, Portuguese and Spanish bonds soared amid jitters about a possible Greek debt restructuring and worries over the fiscal health of other southern European countries.

In Athens, striking public workers challenged Greece's 110 billion euro ($146.5 billion) bailout-for-austerity deal, starting a 48-hour national strike that shut down ministries, tax offices, schools, hospitals and public services.

News that Greece has appointed debt restructuring specialists Lazard to provide "general financial advice" fueled speculation that some form of orderly rescheduling or payment moratorium may be likely, despite vehement official denials. Lazard recently advised countries like Argentina, Ecuador and Ivory Coast on sovereign debt restructurings.

The main Greek public sector union, ADEDY, rallied thousands of protesters outside parliament to reject planned wage and pension cuts and demand that the rich foot the bill. As a result, the cost of insuring Portuguese, Spanish and Irish debt against default rose sharply as contagion worries spread and people sought a safe haven in U.S. Treasury bonds.

Greek bond yield spreads over benchmark German Bunds spiked above 600 basis points for the first time since Sunday's euro zone rescue deal, and Greek bank shares plunged by 10 percent on the worsening economic outlook. Jitters about whether the emergency loan package would be enough to stem the euro zone's sovereign debt crisis also hammered Spanish stocks.

Worries that the aid package may be insufficient to meet Greece's borrowing needs contributed to market concerns. Economists at several European financial firms calculated those needs to the end of 2012 at 120 billion euros, based on latest IMF and Greek government figures. Germany's Bild daily cited a government estimate of 150 billion euros given to the parliamentary finance committee.

European Commission officials said they expected Athens to be able to return to markets for funding in the second half of 2011 once it had won back credibility by implementing tough reforms. But that remains a big "if," given the grim economic outlook and the scale of public opposition.

To ease fears, European policymakers kept up a barrage of soothing comment designed to calm markets and add reassurance that the bailout will work. German Finance Minister Wolfgang Schaeuble said that Greece may not have to tap the full amount of aid pledged to it because of contributions from the financial sector. However, some newspaper editorials said the bailout was more a rescue for European banks holding Greek debt than one of ordinary Greeks.