MarketView for May 7

 

 

 

Summary 

  

The major equity indexes gave up their gains for the year as fears of another credit crisis stemming from Greece's financial problems, combined with some still unanswered questions as to what caused Thursday’s dramatic decline and subsequent upswing. More importantly, what is being done to counter a resurgence of the contributing events? The decline may have been exacerbated by erroneous trades that showed some shares briefly fell to virtually no value. The Nasdaq and other exchanges said they would cancel erroneous trades.

 

Trades that took place during the worst of Thursday's drop will be canceled for more than 250 stocks, Nasdaq OMX said, adding to a long list of "busted" transactions on NYSE Euronext's Arca and other exchanges and trading venues. The uncertainty around the cancellations could have heightened the day's price swings as investors examined their holdings.

 

The SEC held urgent discussions with other regulators to try to shed light on the causes of Thursday's unusual drop. Meanwhile, the major stock indexes finished Friday's volatile session about 1 to 2 percent lower from where they were at the opening bell.

 

At the same time, the weekly declines for the Dow Jones industrial average and the S&P 500 indexes were the steepest drops since March 2009 when the market hit a 12-year low. The Nasdaq had its largest weekly drop since November 2008. Wall Street's "fear gauge" -- the CBOE volatility index .VIX -- rose 25 percent, while the volume of shares traded was the second highest this year.

 

For the week, the Dow is down 5.7 percent, the S&P 500 is down about 6.4 percent and the Nasdaq 8 percent. Over the past two weeks the Nasdaq has fallen more than 10 percent, the threshold which many traders define as a market correction. Furthermore, the Nasdaq fared the worst on Friday as technology stocks led the broad market lower. Apple ended down 4.2 percent to $235.86 and Intel closed down 0.9 percent at $21.31.

 

Governments around the world tried to calm markets after fears about Greece's debt crisis spread further. The cost of protecting European bank debt against default reached levels not seen since the height of 2009's economic crisis.

 

The volatility index ended up 24.9 percent at 40.95 after rising as high as 42.15 earlier in the day, its highest since April 2009. Stocks gained some ground after data indicated taht non-farm payrolls grew at the fastest pace in four years in April as private sector employers ramped up hiring.

 

According to a report by the Labor Department on Friday, the economy added 290,000 jobs in April, a stronger gain than expected, with revised figures making it the fourth straight month of employment growth.

 

At the same time, the unemployment figure rose to 9.9 percent, from the previous 9.7 percent, as more people returned to the job market seeking jobs.

 

The monthly job report also revised the March gain sharply upward to 230,000, from the previously reported 162,000, and revised February's figures from a loss of 14,000 to a gain of 39,000. With a January gain of 14,000, the cumulative increase came to 573,000 jobs in four months. But the job market still has a long way to go before it can be counted on to provide a base for a sustained economic recovery.

 

Four-Month Rise Strengthens U.S. Job Outlook

 

Employment grew at the fastest pace in four years in April as businesses ramped up hiring, suggesting the economic recovery was growing less dependent on government support. According to a report released on Friday by the Labor Department, employers added 290,000 jobs last month, far more than analysts had anticipated. In addition, 121,000 more jobs were created in February and March than previously estimated.

 

Private-sector job growth in April was much stronger than expected, with government hiring for the decennial U.S. census a secondary factor. The bad news was that the unemployment rate, however, rose to 9.9 percent as discouraged workers started to look for work again.

 

Stubbornly high unemployment has been a political sore spot for President Barack Obama, even though the job market is showing increased vigor after its battering during the worst recession since the 1930s.

 

"We've got to be mindful that today's jobs numbers, while welcome, leave us with a lot of work to do. It's going to take time to achieve the strong and sustained job growth that is necessary," Obama told reporters at the White House.

 

Markets had expected nonfarm payrolls to rise 200,000 last month and the jobless rate to remain unchanged at 9.7 percent.

 

The unexpectedly robust report was largely ignored by stock market investors who worried the debt crisis in Greece could spread to other euro zone nations with huge budget deficits. At the same time, the prices for Treasury debt fell, while the dollar rose versus the yen.

 

Private-sector employment increased 231,000, the largest gain since March. Census hiring contributed 66,000 jobs in April.

 

With the U.S. unemployment rate expected to remain elevated until year-end and scant wage inflation, the Federal Reserve is expected to keep benchmark rates near zero for some time to come, analysts said. More than 8 million jobs were lost during the recession and economists warn it will take years to regain them.

 

Last month, manufacturing payrolls saw their largest gain since 1998 and construction employment defied expectations of a fall. Service sector payrolls advanced for a fourth month, and temporary help hiring also rose. Also encouraging, the length of the average workweek rose to 34.1 hours from 34 hours in March.

 

The upbeat report was tempered by the rise in the number of people who had been out of work for 27 weeks or more to 6.7 million. That represented a record 45.9 percent of the total 15.3 million unemployed in April.

 

In addition, a broad measure of unemployment that includes workers who want a job but have stopped looking and those working part time for economic reasons rose to 17.1 percent from 16.9 percent in March. However, the improving labor market tone is encouraging Americans to take on some debt. Consumer credit reached $1.95 billion in March after dropping $6.21 billion in February, a Federal Reserve report showed.

 

No One Was Happy On Thursday and Now Congress Wants to Know What Happened

 

Disbelief rippled through Washington on Friday, prompting lawmakers to call for an amendment to a Wall Street reform bill that could lead to safeguards against technology glitches. Senators Ted Kaufman and Mark Warner, both Democrats, want market regulators to report on Thursday's dizzying decline and say whether new circuit breakers are needed for computer-driven trading,

The two asked Senate Banking Committee Chairman Christopher Dodd, manager of the bill, to amend it with that request.

 

The stock slump occurred during rising market concern about the Greek debt crisis and is believed to have been exacerbated by at least one large erroneous trade, labeled by some as a "fat finger," or inaccurate key stroke. However, it is likely that high-frequency and algorithmic trading magnified the wild swing.

 

The baffling episode on Thursday, when the Dow Jones industrial average fell nearly 1,000 points in just minutes, is unlikely to change the course of the Senate bill. The measure is widely expected to win Senate approval this month, then to be merged with a House bill approved in December. Final legislation could be on Obama's desk to be signed into law by mid-year.

 

Congress is essentially trying to put in place reforms that address the debt bubble-driven financial crisis of 2008-2009, aiming to prevent a repeat of the bailouts that followed. The bill does not focus closely on trading technology.

 

The seeds of a possible regulatory response have at least been planted by the SEC, which issued a white paper on "market structure" in January. It looks at "high frequency trading, order routing, market data linkages, and non-displayed, or 'dark,' liquidity."

 

The decline brought back memories of Black Monday in 1987, with one exception. While that crash occurred over several hours, driven largely by computer program trading, what happened on Thursday took place in minutes. Part of the response after Black Monday in 1987 was to adopt "circuit breakers" that impose pauses in trading during large, sudden market swings.

 

Efforts Made to Calm Markets over Greece Bailout

 

EU leaders approved emergency loans for Greece on Friday and governments around the world tried to calm financial markets hit by fears that Athens' debt crisis could cause havoc in other European economies.

 

According to reports on Friday, the 16-country common currency group had given their political stamp of approval to an EU-IMF deal to release 110 billion euros ($147 billion) to Greece over three years. However, it appears that there is some dissension over how to prevent such crises spreading to other heavily indebted countries and that all 27 EU finance ministers would hold further discussions in Brussels on Sunday.

 

Fears that the emergency loans might not be enough to prevent a Greek default and avert a broader economic crisis kept world stocks near a three-month low. The Group of Seven finance ministers discussed the situation in a conference call after U.S. Federal Reserve officials expressed concern, and agreed to keep a close eye on the markets.

 

President Obama told German Chancellor Angela Merkel by telephone that he backed efforts to rescue Greece and said regulatory agencies were investigating an "unusual" sudden drop on U.S. markets on Thursday. "We agreed on the importance of a strong policy response by the affected countries and a strong financial response from the international community," Obama said.