MarketView for May 6

 

 

Summary 

 

A better than expected jobs report helped equities bounce back on Friday from four days of losses, as stocks held strong gains for most of the session but ended the week down more than one percent. The data showed an increase of 244,000 jobs, the most in 11 months.

 

Speculation that Greece might leave the euro zone was a damper on the rally as the afternoon wore on. The German magazine Spiegel carried a report, later denied, that Greece had raised the possibility of leaving the euro zone. Nonetheless, the S&P 500 index managed to hold above key support levels, indicating the week's retreat could set the stage for further gains in contrast to the tumultuous declines in silver and oil markets.

 

The three major stock indexes were up more than 1 percent through most of the session. Despite Friday's gains, the S&P posted its largest weekly percentage drop since mid-March. The industrial sector of the S&P 500, which could benefit from a slide in commodity prices, was the session's best performer with a 0.77 percent advance.

 

A massive selloff in materials and oil on Thursday forced investors out of high-risk assets. The iShares Silver Trust suffered its worst week of outflows ever after heavy losses in the metal.

 

Fluor, the largest publicly traded U.S. engineering company, was the top percentage gainer on the S&P 500 after it posted a small increase in quarterly profit that beat analysts' estimates. Its shares ended the day up 7.9 percent to close at $70.87.

 

For the week the Dow lost 1.3 percent, the S&P fell 1.7 percent and the Nasdaq Composite was down 1.6 percent. The S&P 500 held above important technical levels with the week's low just below 1,330 and Friday's close above 1,340.

 

The CBOE volatility index rose 1.1 percent to 18.40, its highest closing level since March 28. The gauge rose 24.7 percent this week, its biggest weekly percentage gain in almost a year. A rise in the VIX means investors will pay more for protection against their equities exposure.

 

Friday marked the one-year anniversary of Wall Street's "flash crash" when nearly $1 billion was wiped out in a matter of minutes before the market bounced back. The crash diminished many investors' confidence in the market.

 

On Friday about 8.24 billion shares traded on the major exchanges, below last year's estimated daily average of 8.47 billion but still above the year –to-date daily average.

 

Crude Continues to Fall

 

Oil fell on Friday to cap a frenzied trading week that sliced prices by a record of more than $16 a barrel on demand worries and a move by investors to slash commodities exposures. The price of crude rose early in the trading day then began to erase gains as the dollar rose. Crude turned negative late, extending Thursday's shock-inducing collapse, when Brent fell by as much as $12, a record, in a furious, high-volume session that saw wave after wave of selling as key technical levels were broken.

 

Selling pressure on oil and other commodities came on several fronts throughout the week. Investors weighed factors from the death of Osama bin Laden to the impact of higher fuel and commodity costs on consumer nation economies to the monetary policy in major economies.

 

Brent crude fell $1.67 to settle at $109.13 a barrel, with volumes twice the 30-day moving average. The contract fell $16.76 a barrel for the week, marking the largest weekly decline ever in dollar terms.

 

Domestic sweet crude futures settled down $2.62 at $97.18 a barrel, after trading as high as $102.38 following the jobs data. Volumes were 70 percent over the 30-day moving average ending down $16.75 for the week, the largest weekly drop since the contract began trading in 1983.

 

Investors were watching moves by other big oil consumers. India's central bank raised interest rates by more than expected on Tuesday, and expectations No. 2 oil consumer China could take similar action hit crude on Wednesday. Thursday's sell-off saw U.S. oil futures set a record high for open interest, which could suggest even more downside pressure is mounting on crude.

 

Oil volatility measured by the Chicago Board Options Exchange's index initially cooled a day after the greatest one-day rise since it began in 2009. However, the index closed only slightly lower at 41 percent. It was trading at around 30 percent just a week ago.

 

As oil fell this week, money managers cut their net long position in crude. Data from the U.S. Commodity Futures Trading Commission showed the speculator group reduced its net-long U.S. crude futures and options positions by 7,294 to 293,823 for the week to May 3.

 

Oil prices hit levels not seen since a record spike in 2008, driven by supply disruptions in Libya and loose monetary policy. Brent hit a high of $127 a barrel and U.S. crude surged over $114.

 

Goldman Sachs, which in April predicted a major correction in oil prices, on Friday said oil could surpass its recent highs by 2012 as global oil supplies keep tightening.

 

"It is important to emphasize that even as oil prices are pulling back from their recent highs, we expect them to return to or surpass the recent highs by next year," Goldman Sachs analysts said in a research note.

 

"We continue to believe that the oil supply-demand fundamentals will tighten further over the course of this year, and likely reach critically tight levels by early next year should Libyan oil supplies remain off the market."

 

Deficit at $871 Billion So Far

 

The budget deficit totaled $871 billion for the first seven months of this fiscal year, significantly above the previous year's pace, the Congressional Budget Office said on Friday.

 

The $871 billion deficit through April was about $70 billion more than the deficit the government incurred during the same period of fiscal 2010, highlighting the severe fiscal stress President Barack Obama and Congress confront.

 

Earlier this year, CBO forecast a $1.4 trillion budget deficit for the entire fiscal year that ends on September 30. In one bit of good news, CBO, the nonpartisan budget analyst for Congress, estimated in its monthly budget review that the deficit just for April will be around $41 billion -- down from the April 2010 deficit of $83 billion. That is due to stronger government receipts during the spring tax-filing season, according to CBO.

 

"Receipts of individual income taxes have been significantly greater than CBO anticipated," the agency said, which could be an indication of a strengthening economy.

 

High Frequency Anniversary

 

Regulators are moving to lift a veil of secrecy over a key constituency on Wall Street a year after the "flash crash," but how much disclosure should be required of high-frequency traders remains an open question.

 

One proposal to boost market transparency, rooted in the Black Monday crash of 1987 when the Dow plunged more than 22 percent in the largest, single-day drop in U.S. history, is pending and would be a key tool for regulators.

 

But the creation of a large trader reporting system still has not passed a year after the idea got preliminary, unanimous approval by the Securities and Exchange Commission, which was supposed to vote again after 60 days and public comment.

 

A precipitous drop briefly wiped out almost $1 trillion in stock value on May 6, 2010, an unprecedented fall that was exacerbated by high-frequency traders unloading their inventory of securities at the depth of the plunge. While those tactics did not spark the flash crash, investors and academics have warned a similar crash may occur.

 

Although comments have been supportive, the proposal is likely opposed by many high-frequency traders who fear workers at the SEC, despite confidentiality agreements, could reveal their trading strategies, the lifeblood of their operations.

 

These strategies are at the center of a new order in markets in which anonymity is king and abusive activity can fester for a long time. That's unsettling for regulators who must monitor systemic risk, such as the unprecedented plunge last year on May 6.

 

Fears the market is flawed and that the fast traders thrive on improper activities remains a concern among institutional investors, perhaps their leading critics. The proposed rule would tag large traders with unique IDs, a move that would greatly facilitate the audit trail and give the SEC access to information on their trades.

 

A decade in the making, the flash crash marked the dawn of a high-frequency world that regulators and many institutional investors were slow to recognize. A technological shift has taken place, akin to the move to digital from analog, and many in the market are still scrambling to comprehend the change.

 

Regulators have long expressed a need to identify key market participants so they can analyze their trading activity as part of the SEC's mission to protect investors and to maintain fair, orderly and efficient markets.

 

Although the new environment requires regulators to dissect trading as it unfolds, the SEC and the Commodity Futures Trading Commission needed almost five months to gather enough data to issue a report on what provoked the flash crash.

 

Minor glitches that spark price spikes and busted trades occur frequently, while there are those who believe a liquidity episode similar to last May will provoke another crash. However, the SEC's plans have dragged for more than two decades even after Congress authorized a so-called large trader rule and President H. W. Bush signed into law the Market Reform Act of 1990 almost three years to the day after Black Monday.

 

SEC Chairman Mary Schapiro said on Wednesday that she expected to move forward soon on the large trader rule and the consolidated audit trail, another key proposal.

 

"My hope is in the next few months we will have the breathing room to go ahead and finalize those proposals as well," Schapiro told reporters in response to questions about what the commission has accomplished since the flash crash.

 

Schapiro also said questions remain about algorithmic trading, the controls needed to monitor it and the impact of high-frequency trading on liquidity in stressed markets. The long delay is understandable considering financial markets work on the premise that if a strategy is advantageous, that information should be kept closely held.