MarketView for May 7

Summary

 

After an early in the day bout of concern, Wall Street decided to pay little attention to Europe's election results, as the S&P 500 rebounded from early losses to end nearly unchanged on Monday, despite the uncertainty surrounding the euro zone's ability to tackle its debt crisis.

 

Financial stocks, normally highly sensitive to events with the European Union that could in turn undermine its fiscal stability, were not only the day’s largest gainers, but could also claim to have the day’s heaviest volume.

 

As a result, Bank of America ended the day up 2.8 percent to close at $7.96, while Goldman Sachs closed up 1 percent to at $110.04. At the same time, a potential government bailout for troubled Spanish bank Bankia helped to add momentum to the sector.

 

The election results from Europe initially roiled futures markets on Sunday night, but markets were able to rebound. Greeks voted to cast out ruling parties in elections on Sunday, dealing a blow to the fragile political consensus that has kept Europe's currency bloc intact through more than two years of crisis.

 

In France, Socialist Francois Hollande won the presidency over incumbent Nicolas Sarkozy, raising pressure on Germany to pursue a more growth-oriented approach to the regional crisis.

 

In the biotech sector, Vertex Pharmaceuticals was up 55.4 percent to $58.12 after data from a mid-stage study showed the company's cystic fibrosis drug Kalydeco, when combined with its experimental treatment for the disease, led to significant improvement in lung function.

 

The shares of homebuilders also advanced on Monday.

 

As the earnings season draws to a close, 420 S&P 500 companies have reported results as of Monday morning, with 67.6 percent exceeding estimates, according to Thomson Reuters data. In contrast, more than 80 percent had beaten expectations at the start of the season.

 

Cognizant Technologies Solutions fell 19.2 percent to $56.30, making it the largest drag on the S&P 500, after the company cut its profit and revenue outlooks.

 

PepsiCo rose 1.1 percent to $66.62 after Morgan Stanley upgraded its outlook on the stock to an "attractive" and raised its suggested weight in a portfolio to "overweight" from "equal weight.

 

Approximately 6.28 billion shares changed hands on the three major equity exchanges, a number that was below the daily average of around 6.76 billion shares.

 

Highe Higher Food Prices Risk Social Unrest

 

Food prices may stabilize at high levels and keep government import bills near a record, increasing the risk of social unrest in the world's least developed countries, the United Nations said.

 

The UN Food & Agriculture Organization is asking international lenders to accelerate the release of funds to help poor countries cope with high food costs through subsidies and avert riots, Hiroyuki Konuma, assistant director general at the FAO, was quoted as saying by Bloomberg.

 

Global food costs are about 40 percent above the average in the past 10 years, according to a UN gauge, which tracks 55 commodities. Drought in South America, the biggest soybean- growing region, has wilted harvests, helping the organization's measure of cooking-oil prices advance to the highest level in nine months in April, even as bigger supplies of corn, rice and wheat pushed cereal prices lower.

 

"This is the danger that we're looking at," Konuma said on May 3. When governments are unable to subsidize food and are forced to pass on higher costs, "then you see the youth riot and you have social unrest," he said.

 

High food prices contributed to riots across northern Africa and the Middle East that toppled leaders from Tunisia to Egypt in 2011. They also triggered more than 60 riots worldwide from 2007 to 2009, according to the State Department.

 

Soybean futures surged to $15.125 a bushel on May 2, the highest level since July 2008, on concern global stockpiles of the oilseed crushed to make cooking oil and animal feed, will drop as production trails behind demand. July-delivery soybeans traded at $14.6525 at 9:49 a.m. Singapore time today.

 

"This trend may continue the rest of this year and early next year," Konuma said in Manila where he attended the Asian Development Bank annual meeting. "With the level of subsidies remaining high along with world prices, these countries would be facing greater deficits and hence would need to raise revenues, which in effect would put more distress on the poor."

 

Government food import bills may total $1.24 trillion this year, 5 percent below the record last year, even as farmers boost planting of grains and dairy prices decline, Konuma said. The cost was $1.04 trillion in 2010, the FAO said last year.

 

Gold Falls Along with Euro

 

Gold eased on Monday after election results in France and Greece that reflected strong anti-austerity feeling raised concerns over the euro zone's ability to battle its debt crisis, knocking the euro to a three-month low against the dollar.

 

Greek voters in particular rejected the austerity-for-aid policies that have shielded the country from bankruptcy and a euro exit, dealing a serious blow to the euro zone's fragile political consensus on debt. Assets seen as higher risk, such as stocks and commodities, came under pressure along with the euro.

 

Spot gold was down 0.2 percent at $1,638.11 an ounce, while U.S. gold futures for June delivery were down $5.90 an ounce at $1,639.30. However, some demand was arresting further losses in gold as some physical buyers came back into the market.

 

Concern over the outlook for the euro zone was a key factor driving gold prices to record highs last year. But as the dollar, Bunds and U.S. treasuries took over as investors' havens of choice, gold has come under pressure along with the euro. If the situation in the euro zone worsens significantly, it could once again become a positive driver of gold, as Europeans scramble to diversify away from the euro.

 

Greek voters enraged by economic hardship caused by the terms of an international bailout turned on ruling parties in their election, putting the country's future in the euro zone at risk and threatening to revive Europe's debt crisis.

 

In France, Socialist Francois Hollande won Sunday's presidential polls as expected. Markets are as yet uncertain about his agenda, and anxious to see how hard he will push to dilute a German-led European austerity drive.

 

Physical gold demand in Asian markets was lackluster, with buyers returning to the sidelines after picking up bargains when prices dropped below $1,630 last week. However, gold imports to India, the world's largest buyer of bullion, could rise on pent-up demand from jewelers after the federal government decided to scrap an excise duty on jewelry it imposed in March.

 

The federal government will withdraw the excise duty on all jewelry effective March 17 - the date it was introduced - Finance Minister Pranab Mukherjee told parliament.

 

Buying picked up slightly in the United States. Data from the U.S. Mint showed sales of American Eagle gold coins have reached 20,000 ounces this month, the same amount in volume terms as was sold in the whole of April.

 

From a technical perspective, gold remains in limbo, analysts who study past price moves to determine the future direction of trade said on Monday.

 

"Gold remains locked in a range," Barclays Capital wrote in a report, adding it expects buying to pick up as prices ease towards $1,600 an ounce. "A move above the 1,690 area would confirm our bullish view toward the range highs near 1,800," it added. "Seasonality leads us to expect a mid-year sideways chop before we become more bullish in the second half of the year."

 

Money managers, including hedge funds and other large speculators, increased their net length in gold in the week ended May 1 by 8,462 contracts to 116,061 contracts, the highest level since the week of April 8, data from the Commodity Futures Trading Commission showed on Friday.

 

But they reduced their silver length by 191 contracts to 10,565 contracts, the lowest level since early January.

 

Spot silver was down 0.7 percent at $30.12 an ounce, while spot platinum added 0.3 percent to $1,524.24 an ounce, and spot palladium gained 0.5 percent to $649.21 an ounce.

 

Crude Prices Continue to Slide

 

The prices of crude oil continued a three-day slide and fell below $98 a barrel on Monday as election results in Europe dimmed expectations of stronger economic growth. By early afternoon in Europe on Monday, benchmark oil for June delivery was down 75 cents to $97.74 a barrel in electronic trading on the New York Mercantile Exchange.

 

Earlier in the session, the contract fell to a low of $95.34 before paring losses. In London, Brent crude was down 20 cents at $112.98 per barrel on the ICE Futures exchange. Crude is down from $110 in February amid signs oil demand may be weaker than previously expected.

 

The Energy Department said last week that U.S. crude inventories have risen to the highest since 1990. That was followed by the Labor Department on Friday announcing the economy added 115,000 jobs in April, far fewer than the 165,000 analysts were expecting.

 

Financial markets are concerned over the political upheaval in Europe that could derail government austerity measures and worsen the region's debt problems. French Socialist Francois Hollande, who promised during the presidential election campaign to boost spending, defeated President Nicolas Sarkozy. In Greece, the pro-austerity coalition parties suffered a sharp decline in support, which might undermine efforts to keep Greece in the euro currency bloc.

 

"Lackluster macroeconomic conditions, easing global tensions and bearish fundamentals have started to weigh on oil prices," Morgan Stanley wrote in a report to clients.

 

Oil traders often look to global equities as a measure of overall investor sentiment, and stock markets in Asia and Europe were down Monday.

 

One determination of crude prices this week will be a series of periodic reports on oil markets from the International Energy Agency, OPEC and others, all of which are expected to show rising stockpiles of crude.

 

In other energy trading, heating oil was down 0.46 cent at $3.0042 per gallon and gasoline futures added 1.02 cents to $2.9860 per gallon. Natural gas was up 6.1 cents at $2.34 per 1,000 cubic feet.