MarketView for May 24

Summary 

 

The major equity indexes ended the day slightly better in a third session marked by late-day swings, but the Nasdaq fell after NetApp gave a weak revenue forecast, casting doubt on the outlook for tech spending. Underscoring the vulnerability of companies to events in the euro zone, NetApp, a data storage company, forecast revenue below expectations, citing uncertainty in Europe. NetApp’s shares fell12 percent to close at $28.82.

 

Nonetheless, the major indexes were lower for much of the session, as investors found little reason to buy following three days of gains. In addition, economic figures suggested slowing demand in both Europe and the United States. Yet, Wall Street did reverse course late in the session and the S&P extended its gains to a fourth straight day.

 

Hewlett-Packard rose 3.3 percent to $21.77. The company said on Wednesday it would lay off about 8 percent of its workforce in the next couple of years.

 

Greece's future in the euro zone remains a primary risk for stocks. At least half of euro zone governments, as well as banks and large companies, are making contingency plans in case Greece decides to leave.

 

The S&P is up 2 percent on the week, though the market has lately undergone late-day shifts that have erased losses and gains, a sign of the markets' skittishness.

 

Durable good demand rose less than expected in April while weekly jobless claims dipped modestly for the week ended May 19, government data showed. The transportation sector edged up despite a rebound in oil prices. The rise was led by airlines after JPMorgan raised its price target on several carriers.

 

U.S. Airways closed up 10.5 percent at $12.16, its highest point since November 2010. U.S. Airways shares have more than doubled in 2012, rising about 140 percent.

 

After the closing bell on Wednesday, electronic trader Knight Capital said it suffered a pre-tax loss of $30 to $35 million on the botched Nasdaq trading debut of social media giant Facebook and is demanding the exchange compensate Knight for that amount. Knight Capital shares fell 0.5 percent to close at $12.38 and Facebook shares were up 2.3 percent to $32.72.

 

United Technologies ended the day 0.8 percent lower at $73.50 after the Dow component launched a $9.8 billion corporate bond sale.

 

Volume was light, with about 6.55 billion shares changing hands on the three major equity exchanges, a number that was well below last year's daily average of 7.84 billion shares.

 

Economic Data Shows Slow Improvement

 

According to a report released by the Labor Department Thursday morning, new claims for unemployment benefits fell slightly last week, Initial claims for state unemployment benefits fell by 2,000 claims to a seasonally adjusted 370,000. The four-week moving average, considered a better measure of labor market trends, dropped 5,500 to 370,000.

 

Claims have barely budged in the past four weeks, indicating a marginal improvement in the pace of job creation after April's disappointing 115,000 gain in nonfarm payrolls. Financial information services firm Markit said its "flash" manufacturing Purchasing Managers Index fell to 53.9, a three-month low, from 56.0 in April. A reading above 50 indicates expansion.

 

Separately, new orders for durable goods in April rose 0.2 percent after dropping 3.7 percent in March, the Commerce Department said. Orders for durable goods, which vary from toasters to aircraft, were lifted by demand for transportation equipment.

 

Excluding transportation, orders fell 0.6 percent. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, fell 1.9 percent in April after dropping 2.2 percent in March.

 

Although jobless claims have been little changed for much of May, there are no signs of deterioration in the labor market. The number of people still receiving benefits under regular state programs after an initial week of aid fell 29,000 to 3.26 million in the week ended May 12.

 

The so-called continuing claims data covered the week used by the household survey to derive the unemployment rate. The jobless rate dropped to 8.1 percent in April from 8.2 percent the prior month, mostly because more people gave up the hunt for work.

 

While more states are losing eligibility for extended benefits for the long-term unemployed, that is not yet being fully captured in the claims data as the figures are reported with a time lag.

 

Economists expect that as more people fall off the unemployment benefit rolls that will artificially push down the jobless rate. Out-of-work people not receiving benefits are not obliged to be actively looking for work, a key criteria to be counted as unemployed.

 

The number of people on extended benefits dipped 4,800 to 299,955 in the week ended May 5, the latest week for which data is available. Only 15 states and the District of Columbia were offering extended benefits during that period.

 

There were 2.63 million Americans receiving emergency unemployment checks during that period, down 35,500 from the prior week. A total of 6.17 million people were claiming unemployment benefits during the week ending May 5 under all programs, down 105,004 from the previous week.

 

Europe Continues Economic Slump

 

The global economy continued its decline this month as the euro zone's private sector contracted and China's once-booming factories faltered, surveys showed on Thursday.

 

In Europe, a downturn that started in smaller states on the euro zone's periphery is now taking root in the core countries of Germany and France, where tepid growth had been the main ballast of support for the euro area economy.

 

The euro zone composite PMI, comprising the services and manufacturing sectors, fell to 45.9 from April's 46.7, its lowest reading since June 2009 and its ninth month below the 50-mark that divides growth from contraction. The data sent German Bund futures to a record high as investors sought relative safety, and the euro neared a two-year low against the dollar.

 

Wednesday's news that European Union leaders have been advised by senior officials to prepare contingency plans in case Greece quits the single currency also hurt the euro.

 

Europe's woes were felt across the Atlantic. Financial information firm Markit's "flash" U.S. manufacturing Purchasing Managers Index slipped to 53.9 in May from 56.0, with slower export sales sapping momentum. Markit, which also compiles the euro zone PMIs, released its U.S. index for the first time on Thursday but has been tracking data in the entire sector since late 2009.

 

"The cause seems to lie largely with weak export sales, which likely reflects the deteriorating economic situation in Europe as well as slower growth in China," said Markit chief economist Chris Williamson.

 

HSBC's Flash China PMI, the earliest indicator of China's industrial sector, retreated to 48.7 in May from a final reading of 49.3 in April. It marked the seventh straight month that the index has been below 50.

 

The figures signal that the sluggish economic conditions of the first quarter are set to continue throughout the first half of the year in China's longest slowdown since the global financial crisis.

 

The HSBC PMI has provided a contrast to the Chinese government's official PMI, which includes more state-owned firms with better access to credit. The government PMI hit a 13-month high of 53.3 in April as exports ticked higher although domestic orders showed signs of weakness.

 

Manufacturing has been a bright spot for the U.S. economy, with the Markit index showing the sector has expanded for 32 straight months. The U.S. PMI index's average reading in 2011 was 54.3.

 

But as the pace of hiring across the economy has slowed in recent months, economists worry about whether demand will hold up this summer.

 

Separate data showed orders for long-lasting U.S. durable goods rose less than expected as firms scaled back plans to add machinery and the military ordered fewer aircraft.

 

Meanwhile, first-time applications for U.S. jobless benefits fell slightly in the latest week, the Labor Department said on Thursday, though data earlier this month showed employers in April added the fewest new jobs to their payrolls since October.

 

In Europe, even the core countries are running into trouble. The manufacturing sector in Germany, Europe's largest economy, contracted at a far greater pace than was expected, and its service sector saw minimal growth. In France, both sectors contracted faster than predicted by most economists.

 

German business sentiment also dropped for the first time in seven months in May, the Ifo think tank said, missing even the most conservative forecasts. Across the channel, Britain's economy shrank by more than initially thought between January and March, hit by the deepest fall in construction output in three years.

 

For the euro zone, Markit said the composite reading was consistent with gross domestic product, which stagnated in the first quarter, falling by at least 0.5 percent across the region in the current quarter.

 

"The flash PMI figures for May look horrible and provide a clear warning that euro zone GDP will almost certainly show a contraction in Q2 after stagnating in Q1," said Martin van Vliet at ING.

 

Commerzbank's Dixon said, "It clearly indicates that the evaporating sentiment seen in recent weeks as the Greece crisis has intensified is having a big impact on the economy."

 

The prospect of a Greek exit from the euro zone is now being openly discussed as the country battles political and economic upheaval and faces an election on June 17.

 

Greek Exit Contingency

 

At least half of euro zone governments as well as banks and large companies are making contingency plans in case Greece decides to leave the single currency area, even though the preferred option is still for Athens to keep the euro.

 

Italy's Deputy Economy Minister Vittorio Grilli said his country was ready for such a possibility, if Greek voters on June 17 give power to parties that reject reforms agreed with the EU and IMF in exchange for emergency loans.

 

Greece's deficit means that without the EU/IMF money, which would stop flowing if Athens were to tear up the agreement on reforms, it would not be able to pay salaries and would have to leave the euro zone and start printing its own currency.

 

"We always have to be ready in any case," Grilli said, when asked by reporters if Italy was preparing for a Greek exit. "All options are possible, though our objective is to avoid that happening."

 

Senior European Union officials have told member states to prepare contingency plans in case Greece quits the euro zone, sources told Reuters on Thursday.

 

European Union leaders have urged Greece to stay the course on austerity and complete the reforms demanded under its bailout program.

 

But there was no contingency planning at a European Union, or political level yet, a senior official said, even though it was natural for individual governments to prepare for scenarios.

 

"Given the present situation and even before this, you can't imagine that nobody was thinking of all kinds of scenarios. That would not be responsible behavior," the official said.

 

Finland too was considering the implications of such an unwelcome possibility, which European Central Bank policymaker Ewald Nowotny said would create a huge disruption, with unforeseeable consequences.

 

"Throughout different turns in the crisis, Finland has been evaluating different paths and plans," Finance Minister Jutta Urpilainen told reporters, adding that the Helsinki government wants Greece to stay in the currency bloc.

 

Officials said that in addition to Italy and Finland, Germany, the Netherlands, Luxembourg, Belgium, Austria and Slovakia have also either already started, or would soon start, drawing up contingency plans.

 

Outside the euro zone, Sweden said it was ready.

 

"The fortresses are manned and we are meeting frequently with the Riksbank and the FSA (the Financial Supervisory Authority). We are well prepared," Swedish Financial Markets Minister Peter Norman was quoted by Reuters as saying.

 

Among the corporations to be alert to the implications of any Greek euro exit are International Airlines Group, which is the parent company of British Airways, and German carmaker BMW.

 

"We're absolutely sure that the euro has a long future ahead of it," BMW global sales chief Ian Robertson said at a showroom opening in Paris. "That doesn't necessarily mean that it remains in its current structure."

 

European financial institutions have also been making their own plans for any such eventuality, though they might not have been shouting this out.