MarketView for May 5

 

 

Summary 

 

The major equity indexes were down for the fourth consecutive day on Thursday as a massive sell-off in commodities spilled over into other markets, rattling the Wall Street ahead of Friday’s payroll data. Oil suffered the largest one-day price drop ever for the Brent futures contract, which settled down 8.6 percent at $110.80 per barrel. That drove oil shares lower, making the energy sector the worst performer within the S&P 500 index.

 

The CBOE volatility index moved above its 50-day moving average before closing up 6.6 percent at 18.20, its highest closing level since March 28. The move indicates a willingness to pay more for protection of an equities portfolio.

 

A key factor on Thursday was the weekly applications for unemployment insurance, which rose to an eight-month high a day before the April unemployment report.

 

Silver prices chalked up their deepest weekly decline in nearly 30 years. The iShares Silver Trust exchange-traded fund (SLV.P) fell 11.9 percent on its highest volume ever, near 295 million shares. Its 50-day volume average stands below 60 million shares.

 

Meanwhile, the S&P 500 index fell through its 14-day average, but still closed above 1,333, a resistance point that could become an important market support level, limiting future losses.

 

About 9.26 billion shares changed hands on the major equity exchanges, in a third consecutive trading day with volume above the year's average, indicating investors are selling with conviction.

 

Consumer-related shares were lower but were the best performers nonetheless as the drop in crude was seen lessening the financial burden of high gasoline prices. Retailers earlier warned of rising costs and cautious consumers even as a late Easter boosted sales of clothing and other holiday-related items in April, helping many beat sales expectations. Ross Stores gained 6.9 percent to close at $78.55 after its sales exceeded forecasts.

 

Helping out the Nasdaq was Electronic Arts, which closed at its highest point since August 4 2009, up 8.8 percent at $21.68 a day after posting strong earnings.

 

Financial Overhaul Necessary

 

Regulators must better understand threats to the financial system to be able to prevent another crisis, Federal Reserve Chairman Ben Bernanke said on Thursday.

 

"These are difficult challenges, but if we are to avoid a repeat of the crisis and its economic consequences, these challenges must be met," Bernanke said in a speech.

 

Bernanke said they are making progress implementing the financial overhaul law passed last year. It directed the Federal Reserve and other regulators to improve oversight of banks and Wall Street firms, with the goal of averting another crisis like the 2008 financial meltdown. He also said that increased coordination among regulators should reduce duplicative or conflicting regulations.

 

But regulators face a delicate balancing act, he said. They must improve oversight of financial companies, while also not stifling innovation that can support economic growth and job creation.

 

"No one's interests are served by the imposition of ineffective or burdensome rules that lead to excessive increases in costs or unnecessary restrictions in the supply of credit," Bernanke said.

 

Still, Bernanke was confident that the new law will help the financial system better withstand any new threats.

 

"So that no matter where the next shock may come from, I think there's a reasonable expectation that our system will be stronger and more resilient in the face of that shock," he said fielding questions after his speech.

 

Republicans, who solidly opposed the financial overhaul legislation, have said the law goes too far and could make it harder for U.S banks to compete globally. Some are seeking to reduce funding for agencies set up under the law and limit the scope of new rules. The General Accounting Office says the law will cost nearly $1 billion to implement this year.

 

Democrats say the law is needed to help ward off future economic meltdowns.

 

Bernanke also said the Fed is wrestling with how much information it should release when it conducts annual stress tests on the biggest banks. The stress tests are designed to determine if banks can withstand a recession.

 

The Fed released detailed information on individual banks when the first stress tests were conducted in 2009 during the financial crisis. Bernanke said releasing such information at that time helped boost confidence in the banking system. However, this year the Fed kept such information confidential. It did provide general information about banks' overall performance.

 

Bernanke did not discuss the economy or economic aid efforts in his speech or in a brief question-and-answer session afterward.

 

Unemployment Claims Rise

 

The number of Americans filing for unemployment insurance rose to an eight-month high last week and productivity growth slowed in the first quarter, clouding the outlook for an economy that is struggling to regain some of its old momentum. While the surprise jump in initial claims for unemployment benefits was blamed on factors ranging from spring break layoffs to the introduction of an emergency benefits program, the report unfortunately corroborated reports this week indicating a loss of momentum in job creation.

 

According to Thursday report by the Labor Department, new claims for state jobless benefits rose by 43,000 claims to 474,000 new claims, the highest since mid-August. One factor that likely helped push claims up and that could prove lingering were auto layoffs brought about by supply disruptions from Japan's earthquake and tsunami.

 

A second report showed nonfarm productivity increased at a 1.6 percent annual rate in the first three months of the year, braking from a 2.9 percent pace in the fourth quarter. The data, a day before the comprehensive employment report for April, was the latest to suggest a softening in the jobs market. Other reports this week showed weaker employment growth in the manufacturing and services sectors in April and a step back in private hiring, suggesting Friday's closely watched data could prove weaker than expected.

 

An industry survey released on Thursday found hiring by U.S. small businesses almost ground to a halt in April. Increasing employment is critical to reinvigorating a recovery weighed down by high food and energy prices. Growth slowed to a 1.8 percent annual rate in the first quarter after a 3.1 percent expansion in the final three months of 2010.

 

The jobless claims data fell outside the survey period for the April employment report, which is expected to show the jobless rate holding at a two-year low of 8.8 percent.

 

A Labor Department official said spring break layoffs in New York added about 25,000 to the jobless benefit rolls last week. He said the start of an emergency benefits program in Oregon also helped lift the number of claims.

 

Many states in the Northeast allow for non-teaching staff to file for unemployment benefits when schools close for spring and summer breaks. The department tries to adjust its figures to take into account these seasonal fluctuations but New York's spring break occurred at an unusual time this year.

 

Tornadoes that struck parts of the country could also have accounted for a small number of claims. The slowdown in productivity in the first quarter reflected the softening in growth, but also suggested businesses may soon need to step up hiring.

 

The data showed a slight gain in wage-related price pressures, which nevertheless were muted. Unit labor costs, which gauge the cost of labor for any given unit of output, rose at a 1 percent rate after dropping 1 percent in the fourth quarter.