MarketView for May 21

 

 

Summary  

 

All the major equity indexes reversed direction on Friday and ended the day in positive territory as ground-feeders bought beaten-down shares, including banks, on bets the financial regulation bill won't be as onerous as had been feared in earlier negotiations. Nonetheless, the benchmark S&P 500 index is still down 10.6 percent from its April 23 high, in what is traditionally considered a correction, as fears that the euro zone's debt crisis will take a toll on global growth took its own toll on share prices.

 

Bank shares were up a day after the Senate approved a sweeping overhaul of regulation of Wall Street firms, capping months of wrangling over the largest changes since the 1930s. The key factor as far as Wall Street was concerned is that the Senate bill reduced uncertainty on what the final bill will look like.

 

The Senate bill must now be merged with a measure approved in December by the U.S. House of Representatives. Top Democratic lawmakers said they aim to get a bill approved by a House-Senate conference committee to President Barack Obama to sign by July 4.

 

Although the bill could still be watered down in negotiations with the House, bank shares rose after having taken a beating on expectations the bill would cut profits. JP Morgan was the Dow Jones top performer, up 5.9 percent to close at $40.05. Bank of America rose 4.7 percent to $15.99. Goldman Sachs advanced 3.3 percent to $140.62 on rumors of a possible settlement with the SEC of fraud charges, although word now is that no agreement had been reached.

 

Trading was still somewhat volatile throughout the session as May equity options and some options on stock indexes will stop trading at Friday's close and settle on Saturday. Early in the session the S&P 500 briefly fell below its lowest level of the May 6 "flash crash."

 

For the week, the S&P ended down 4.2 percent, the Dow lost 4 percent and the Nasdaq was down 5 percent.

 

Helping to ease worries about sovereign debt, Germany's parliament approved a bill to allow the country to contribute to rescue aid for Greece and other euro zone nations burdened with high debt loads.

 

In earnings news, Dell fell 6.8 percent to $13.35 a day after reporting a gross margin that fell short of expectations.

 

At Thursday's closing level, the S&P 500's 14-day Relative Strength Index had fallen below 30 for the first time since the benchmark hit 12-year lows in March 2009, indicating the index was oversold.

 

Unemployment Down From March

 

According to a Labor Department reported released on Friday, April unemployment rates were higher than a year ago in most states but fell from March 2010 levels in dozens of states, as recession-fueled joblessness eased. Seasonally adjusted rates topped April 2009 levels in 38 states and the District of Columbia, but rates were lower than in March in 34, with 12 states and the District of Columbia recording statistically significant improvements, according to the report. Jobless rates in 11 states topped the U.S. rate of 9.9 percent for April.

 

Michigan, where the unemployment rate dipped to 14 percent in April from 14.1 percent in March, continued to have the highest jobless rate among states. The state, which has been hard hit by automotive-related job losses, reported its labor force increased by 27,000 last month.

 

Other states with high rates were Nevada, where the jobless rate rose to 13.7 percent in April from 13.4 percent in March and California, where the rate was unchanged at 12.6 percent. For both states, their April rates were at historical highs, Labor Department statistics showed.

 

North Dakota's already low rate dipped to 3.8 percent in April from 4 percent in March, and South Dakota, the state with the second lowest rate, saw that rate fall to 4.7 percent last month from 4.8 percent in March.

 

On a regional basis, Western states reported the highest April rate at 10.9 percent, while Northeast states had the lowest at 8.9 percent, the Labor Department said.

 

As for April non-farm payroll employment, 18 states had statistically significant increases, while four had decreases. Ohio gained 37,300 jobs, followed by Pennsylvania with 34,000, New York with 32,700 and Texas with 32,500. States shedding the most jobs were Maine at 6,500 and Rhode Island at 4,400, the report said.

 

German Parliament Agrees to Financial Aid

 

Germany's parliament approved a $1 trillion safety net to stabilize the euro. European Union finance ministers, meeting in Brussels, backed a German call for tougher sanctions in future against states that flout the bloc's budget rules, to prevent any repeat of Greece's debt crisis, which required a euro zone/IMF bailout.

 

Both chambers of parliament approved Berlin's contribution of up to 148 billion euros ($183.8 billion) in loan guarantees, deeply unpopular with voters, on top of an equally divisive 22.4 billion euros in bilateral loans for debt-ridden Greece.

 

The bill passed the lower house by 319 votes to 73 with 195 abstentions after the opposition Social Democrats and Greens abstained and 10 members of Chancellor Angela Merkel's center-right coalition rebelled, highlighting the domestic pressure she faces.

 

Nonetheless, there were continuing concerns on the Street that Greece's debt troubles would spread to other indebted nations, dragging down Europe's economy and curtailing trade to the United States and Asia.

 

At the same time, European officials were eager to show they were committed to bringing down deficits without smothering a still-fragile recovery. European Central Bank President Jean-Claude Trichet sought to calm nervous markets by declaring the euro was not in danger.

 

The vote was not enough to stop the fall in European shares, which lost a further 0.5 percent on the day after Asian stock markets slid again. Japan's Nikkei average closed 2.5 percent down for a loss of 6.5 percent on the week, mostly due to worries about the euro zone.

 

Chancellor Merkel said the parliamentary vote was a clear German message of support for Europe. But she failed to secure the broad backing she sought to ease public hostility to bailing out weaker euro zone states, despite unilaterally banning speculative trade in some financial instruments on Wednesday.

 

The surprise German ban on naked short-selling of sovereign euro bonds and some financial shares sent stocks and the euro plunging this week and drew sharp criticism from EU partners, including close ally France, which were not consulted.

 

In Brussels, EU finance ministers debated how to tighten the bloc's tattered budget discipline rules and improve economic policy coordination in the 16-nation euro zone, drawing lessons from the Greek crisis.

 

As expected, they reached no immediate decision, but European Council president Herman van Rompuy, who chaired the task force meeting, said there was broad support for Berlin's demand for harsher sanctions on deficit laggards.

 

"One of the conclusions of our debate is that it is very clear that there is a broad consensus on the business of having financial sanctions and non-financial sanctions," he told reporters. However, he indicated that only Germany was pressing for a longer-term insolvency procedure for states crippled by debt.

 

German Finance Minister Wolfgang Schaeuble and his French counterpart, Christine Lagarde, told a joint news conference the EU should focus on strengthening fiscal discipline in the short term before looking at possible changes of the EU treaty, which would be harder and slower to agree and ratify.

 

Several euro zone governments have followed Athens in announcing or planning austerity measures to shore up their credit ratings and avoid having to seek a Greek-style bailout.

 

But doubts remain about their ability to push through savage spending cuts in the teeth of public opposition. The head of Spain's largest union, Comisiones Obreras, said it could call a general strike to protest against planned austerity measures, probably for one day, although Greek-style unrest as unlikely.

 

Efforts by France and Germany, the euro's founders, to patch up differences on the debt crisis helped to push up the euro up as high as $1.26 on Friday from a four-year low of $1.2143 on Wednesday.

 

Euro zone policymakers brushed aside any talk of intervention to steady the single currency, which has lost 12 percent against the dollar this year. ECB President Trichet told the Frankfurter Allgemeine Zeitung: "Let us be clear, it is not the euro that is in danger, but the fiscal policy of some countries that has to be, and is being, addressed.

 

Luxembourg Prime Minister Jean-Claude Juncker, chairman of the Euro group of euro area finance ministers, and Ewald Nowotny, a member of the European Central Bank's governing council, both dismissed worries about the euro's level.

 

With the United States increasingly involved in trying to contain the euro zone crisis, Treasury Secretary Timothy Geithner will visit Europe next week, on his way back from a trip to China, and will meet the head of the European Central Bank and Germany's finance minister. Beijing also warned the crisis was creating global uncertainty.