MarketView for November 29

Summary 

Wall Street came off the Thanksgiving holiday in no mood to give thanks or to be impressed by what happened over the long weekend. As a result, share prices fell sharply in early trading, and while managing to recover somewhat in afternoon trading, it was still not a pretty picture as the closing bell rang. Nonetheless, the dollar gained as the day wore on, as did both energy and financial stocks, as crude oil futures rose 2.3 percent. Bank of America ended the day up 1.5 percent to $11.31, while Exxon Mobil reversed earlier losses to close up 0.3 percent at $69.45.

Much of the concern lay with Europe's credit crisis as the Street mulled over the possibility that the contagion will spread despite a much publicized bail out of Ireland. Although share prices did track the euro’s activity to some degree, a strong jobs report on Friday could bring the focus back to the economy and break the strong tie between equities and the euro as the correlation between the euro and stocks has become more pronounced in recent weeks.

The day’s light volume added to volatility, and technical markers took over in absence of more fundamental news. The S&P 500 bounced off its 50-day moving average, preserving the lower end of its recent trading range.

The CBOE Volatility index .VIX, known as Wall Street's fear gauge, rose 3 percent to hit its highest level since early October, indicating anxiety among investors was increasing.

The 22-day correlation coefficient between the euro and the popularly traded E-Mini S&P futures is up to 0.54, which shows a meaningful relationship between the two assets compared with an insignificant 0.06 correlation two weeks ago.

The problems in Europe overshadowed signs of improving sentiment among consumers heading into the high-spend holiday season. Those shopping  over the holiday weekend rose 8.7 percent compared with 2009, according to a private survey.

Amazon.com rose 1.3 percent to end the day at $179.49 after hitting a record high $181.84 on expectations of solid sales on "Cyber Monday," a day of steep discounts for online shoppers. FedEx saw its share price gain 4.7 percent to close at $91.59 after Credit Suisse raised its rating on the company.

Wall Street Is Not Buying EU Story

Germany and France announced that Europe had acted decisively to save the euro by rescuing Ireland and agreeing to a permanent debt resolution system. Interestingly, Wall Street was not buying any of it. As a result, the euro's respite rally was brief in the early hours of Monday's trading and European shares closed at a seven-week low, with banks chief among the losers as optimism faded quickly over Ireland's debt bailout.

Yields on Irish government bonds were higher than Friday's close and off their lows seen in early trade after the agreement was sealed on Sunday. The spreads between Spanish and Italian bonds versus their German equivalent widened to euro-lifetime highs as optimism for the Irish deal waned.

Credit default swap costs for Portugal and Spain both hit record highs on Monday on fears they may be next in line to struggle with their debt.

To prevent the contagion from spreading to Portugal and Spain, the EU on Sunday agreed to an 85 billion-euro ($115 billion) package to help Dublin cover bad bank debts and bridge a huge budget deficit. The EU also gave a nod of approved to the straw man of a long-term European Stability Mechanism (ESM), based on a Franco-German proposal, that will create a permanent bailout facility and make the private sector gradually share the burden of any future default.

Portugal is widely seen as the next euro zone "domino" at risk as Labor Minister Helena Andre said the government was preparing to start talks with firms and unions on reforming the labor market to increase competitiveness. Troubles in Portugal could spread quickly to Spain because of their close economic ties, and the Spanish government is seen as having to pay more to lure investors to Thursday's three-year bond offering.

Under its bailout, Ireland was given an extra year, until 2015, to get its budget deficit down below the EU limit of 3 percent of gross domestic product, an acknowledgment that austerity measures will hit growth in the next four years. At the same time, Greece was been given a six-year extension to 2021 on loan repayments linked to its rescue.

The new European Stability Mechanism could make private bondholders share the cost of restructuring a euro zone country's debt issued after mid-2013 on a case-by-case basis. Germany, in comments aimed at calming markets, indicated that it will take about five years from 2013 before a majority of outstanding euro zone bonds carry clauses to include private sector liability in future bailouts.

Black Friday Fails To Impress the Street

Retailers saw a strong start to the holiday shopping season, but Wall Street was not impressed due to the very real possibility of that the sale peak will shortly fail as consumers remain pressed for funds with which to shop.

Those being hurt the most in terms of falling share prices included Nordstrom, down 2.8 percent, Best Buy Cos down 2.9 percent, while Ross Stores and TJX were off by nearly 3 percent. Amazon.com and other online commerce sites were among the few companies whose shares rose.

Amazon shares hit an all-time high during the session. Macy's fell 2.7 percent, while J.C. Penney fell 0.7 percent. Wal-Mart was down 0.5 percent.

Keep in mind that while consumers did shop and even purchased highly discretionary items like jewelry, they did not spend as profusely as before the recession. In a survey of shoppers over the weekend, 16.3 percent said that they paid for their purchases with credit cards, down from 30.9 percent a year earlier, according to consumer research firm America's Research Group.

The bulk of those sales reports are due out on Thursday. As of last Friday, analysts on average forecast a 3.5 percent increase in November same-store sales, according to Thomson Reuters

The National Retail Federation said that shopper traffic to stores and websites was up 8.7 percent between Thanksgiving Day on Thursday and Sunday, compared with the same period in 2009, and spending per person rose to $365.34 from $343.31 a year earlier.

The NRF data contrasts with that of Shoppertrak, which said that traffic to stores on Friday alone rose 2.2 percent and sales rose a mere 0.3 percent, which shows that where shoppers made purchases, it was often on discounted items. While Black Friday weekend attracts a lot of public attention, it does not necessarily make a great predictor for the entire holiday season.