MarketView for May 30

Summary

 

The major equity indexes took a dive on Wednesday as surging bond yields in Spain and Italy ratcheted up tensions in financial markets about Europe's ability to solve its growing debt crisis.

Angst over Europe drove many away from risky assets and into safe havens. Treasury benchmark yields fell to their lowest in at least 60 years, prices for crude fell more than 3 percent and the euro dropped below $1.24 to a 23-month low.

 

The S&P 500 has fallen nearly 6 percent in May, heading for its worst monthly performance since September as traders focused on Europe. However, data later in the week, including first-quarter gross domestic product and monthly payrolls, could delink Wall Street from overseas headlines.

 

Yields rose sharply at an Italian sale of five- and 10-year debt, and investors worried about Spain's plans to raise new funds to shore up its banks even as borrowing costs rose there.

 

Adding to worries was Greece's upcoming election, which could determine if the country will stay or not in the euro zone.

 

Facebook shares briefly fell below $28 to trade more than $10 below their initial public offering price. The shares closed down 2.3 percent at $28.19, their sixth decline in eight days of trading.

 

Energy was the worst performing of the top 10 S&P sectors, down 3 percent, while domestic crude futures fell 3.5 percent. The shares of oil field service company Halliburton were down 5.2 percent to close at $30.36.

 

Home re-sales unexpectedly fell in April to a four-month low, dealing a blow to optimism the housing sector may have hit a bottom.

 

Research In Motion fell 7.8 percent to $10.35 after the BlackBerry maker warned it would likely report a quarterly operating loss. Analysts cut their price targets on RIM shares and said the odds of a turnaround at the company are fading.

 

Shares of Booz Allen Hamilton were up 13.3 percent to close at $16.86 after the government consulting firm reported a stronger-than-expected quarterly profit.

 

Pep Boys Manny, Moe & Jack lost a fifth of its market value after private equity firm Gores Group walked away from a $791 million deal to buy the auto parts retailer. Shares closed down 19.8 percent at $8.89.

 

About 6.3 billion shares changed hands on the three major equity exchanges, a number that was below the year-to-date average of about 6.81 billion shares.

 

Crude Oil Falls Below $90

 

The price of crude oil fell more than 3 percent on Wednesday to the lowest level in nearly six months as fears about the euro zone crisis sparked erosion in risk appetite across markets. Prices for Brent and West Texas Intermediate crude futures headed toward their biggest monthly drop since the financial crisis of 2008, with U.S. oil breaking below a key technical level as investors headed to perceived safe havens.

 

Worries about Europe mounted as borrowing costs rose for Spain and Italy and the latest poll showed a lead for Greece's left-leaning, anti-austerity parties ahead of next month's election.

 

The crisis, which could dent fuel demand, has helped knock Brent prices down to nearly $100 per barrel, far off 2012 peaks over $128 hit in early March.

 

Brent July crude fell $3.21 to $103.47 a barrel, the lowest settlement since December 16. Brent prices are down more than $15 a barrel so far in May, heading for the biggest monthly decline since October 2008, a month after the collapse of Lehman Brothers.

 

West Texas July crude was down $2.94 per barrel to $87.82 a barrel, the lowest settlement since October 21, 2011. Front-month crude prices were headed for a loss of more than 17 percent for May, marking the biggest monthly drop since October 2008.

 

Wednesday's price slide took U.S. crude below the 61.8 percent Fibonacci retracement of the October to March rally at $88.55 a barrel, a key level of support for technical traders that can intensify selling by triggering stop loss selling.

 

Gasoline and heating oil fell ahead of front-month June contract expirations on Thursday, with gasoline, which had been trading around the 200-day moving average for the past eight sessions, breaking firmly below that level.

 

U.S. crude inventories fell by 353,000 barrels last week, according to industry group the American Petroleum Institute's weekly report, against expectations stocks had risen.

 

Stocks at the Cushing, Oklahoma, delivery point for the U.S. crude contract, fell 557,000 barrels in the first data after the Seaway pipeline reversal to take crude from the Midwest to the U.S. Gulf Coast. Gasoline stocks rose 2.1 million barrels and distillate stocks fell 1.3 million barrels, the API said.

 

Crude prices found some short-lived support intraday on news that the European Commission had called for the euro zone to move to a banking union and consider directly recapitalizing banks from its bailout fund.

 

Hopes that China would act to counter slowing growth were dimmed after influential academics said Beijing should shun aggressive fiscal stimulus, in remarks published in leading state-backed newspapers on Wednesday. Those views joined a chorus of commentary countering market expectations that China might unveil a stimulus package similar to the 4 trillion yuan ($630 billion) in spending unleashed during the global financial crisis.

 

The West's objections to Iran's nuclear program lurked as a potentially supportive factor for oil prices, along with the 14-month-old uprising in Syria. U.N. nuclear inspectors showed new satellite imagery indicating that Iran may be conducting clean-up work at the Parchin military site where inspectors suspect tests relevant to developing nuclear weapons have been carried out, according to Western diplomats.

 

Iranian President Mahmoud Ahmadinejad said he did not expect talks with six world powers in Moscow next month to yield any major breakthroughs. Iran faces a European Union embargo on its crude oil in July and tightening U.S.-led sanctions have sent many of Tehran's other oil customers scrambling for alternatives.

 

Previously Owned Homes Decline Unexpectedly

 

Contracts to purchase previously owned homes hit an unexpected decline during the month of April, to a four-month low, undermining some of the recent optimism that the housing sector was touching bottom.

 

The National Association of Realtors said on Wednesday its Pending Home Sales Index, based on contracts signed last month, fell 5.5 percent to 95.5, its lowest level since December, after a downwardly revised 3.8 percent increase in March. The series still remained sharply higher from a year earlier, and economists said the data did not change the view that the U.S. economy remains in recovery mode.

 

The housing market has been one of the economy's weakest links as it recovers from the recession, but many economists think the sector will actually add to economic growth in 2012 for the first time in seven years.

 

The report on pending contracts in April could temper some of that optimism.

 

Also casting a shadow, applications for home mortgages fell last week as refinance demand faltered, even as mortgage rates hit another record low. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, decreased 1.3 percent in the week ended May 25.

 

Wednesday's report showed contracts fell 12 percent in the western United States and 6.8 percent in the South. They edged lower in the Midwest and rose slightly in the Northeast.

 

Millions of Americans owe more on their homes than they are worth, making them more cautious about spending and holding back the economic recovery.

 

After a debt-fueled housing bubble, prices have fallen about a third since 2006, according to some measures, and the housing market continues to be saddled with an oversupply of unsold properties.

 

The National Association of Realtors downplayed the declines in pending sales. "All of the major housing market indicators are expected to trend gradually up," said Lawrence Yun, chief NAR economist. Signed contracts were up 14.4 percent in the 12 months to April.