MarketView for November 2

 

 

Summary

 

The major equity indexes rebounded from two days of sharp losses on Wednesday after the Federal Reserve said it is prepared to do more for the economy if conditions warrant, helping to stanch the panicky reaction to Europe's debt crisis.

 

Trading volume was light, however, possibly signaling that worries about Greece hold greater sway than the Fed at this time. Approximately 7.5 billion shares changed hands on the major equity exchanges, which was nearly 10 percent below the 20-day moving average and well below Tuesday's high volume selloff when the volume exceeded 10 billion shares.

 

Much of the selloff this week was the result of the uncertainty over Greece’s statement that it planned to hold a referendum on an EU bailout crucial to stabilizing the euro zone's financial system.

 

Federal Reserve Chairman Ben Bernanke said the central bank was closely monitoring developments in Europe, including the possibility that the Fed could expand its holdings of mortgage debt if U.S. economic conditions worsened.

 

The energy and financial sectors were among the strongest performers on Wednesday after having led the market lower the previous two sessions. Also helping Wednesday's market gains, was the release of data indicating that private employers added more jobs than expected last month.

 

Among the day’s advancing stocks, Citigroup closed up 2.3 percent at $29.83 and JPMorgan Chase gained 2.8 percent to close at $33.64. MasterCard saw its share price move up 7 percent to $357.66 after the credit card processor reported its quarterly profit easily beat estimates on double-digit increases in volumes.

 

The CBOE volatility index eased after gaining more than 40 percent over the past two sessions to hit its highest in a month. On Wednesday it fell 5.8 percent to 32.74. Despite a decline in the VIX index, often called Wall Street's fear gauge, it is still about 16 percent above fair value and is likely to remain elevated as traders struggle to price Greek referendum risk, Credit Suisse wrote in a research note.

 

"The furious VIX perturbation and gyrations observed over the last two days can basically be distilled down to the following takeaway: equity investors don't know how to price referendum risk," Credit Suisse wrote. 

 

Jobs Picture Improves

 

The nation's struggling jobs picture continued to improve in October, despite ongoing concern about the anemic economic recovery, two reports indicated Wednesday. Private employers added 110,000 jobs last month, according to the ADP National Employment Report.

 

Furthermore, the ADP report also indicated that job creation was better in September than first reported. ADP said private employers added 116,000 new jobs in September, up from a previously reported 91,000.

 

A second report showed planned layoffs in October fell to their lowest levels since June. After reaching a 28-month high in September, the number of planned job cuts announced fell 63 percent in October to 42,759, according to employment-services firm Challenger, Gray & Christmas.

 

In September, employers announced 115,730 job cuts, the highest total since 132,590 in April 2009, Challenger noted. The Challenger report also showed that managers announced plans last month to boost their staffs by 160,000, helped in part by seasonal hiring ahead of the upcoming holiday season.

 

The biggest declines in planned job cuts were in the financial and government sectors, the report said. After announcing 54,182 cuts to personnel levels in September, the government announced just 2,785 job cuts in October, and a drop of 95 percent.

 

The financial sector, meanwhile, reported planned cuts of 497 jobs last month, a 98 percent decline from the more than 31,000 announced in September. Despite the dramatic declines, Challenger CEO John Challenger said neither sector is "out of the woods" yet, nor the potential for more mass layoffs remains.

 

Most cuts in government jobs have been at the state level, Challenger said in a statement. "We have yet to see the full impact of mandated federal spending cuts," he said, noting that the U.S. Postal Service alone is expected to cut 200,000 jobs.

 

The Challenger report also revealed other areas of continued weakness in the labor market. Although the number was lower than in September, planned layoffs last month were up nearly 13 percent compared to a year ago, and employers so far this year have announced more than 520,000 job cuts. That compares with about 450,000 during the same 10-month period last year.

 

Still, Challenger noted, job cuts so far this year remain "well below" levels two years ago. By this point in 2009, the reports said, planned layoffs totaled nearly 1.2 million. Both reports were released in advance of the Labor Department's monthly employment report, due out Friday.

 

Fed Remains Pat

 

The Federal Reserve on Wednesday reduced its forecast for economic growth, raised its unemployment projection, and suggested Europe's debt crisis posed a large downside risk to the economy. However, at the same time, the Fed also took note of a strengthening of the economy in the third quarter, while keeping its monetary policy unchanged. The Fed made no attempt to say whether or not it was considering additional actions to help stimulate the economy.

 

According to the wording in its statement, "Economic growth strengthened somewhat in the third quarter," the central bank said in a post-meeting statement. "Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated."

 

"There are significant downside risks to the economic outlook, including strains in global financial markets," it warned.

 

In its latest projections, the Fed lowered forecasts for growth and raised forecasts for unemployment for this year, 2012 and 2013. It said it did not see the jobless rate falling to a level they consider consistent with full employment even at the outer edge of their forecasting horizon, the final quarter of 2014.

 

The Fed now expects the economy to expand at a 2.5 percent to 2.9 percent next year, down from its previous estimate of 3.3 to 3.7 percent. Its forecast for unemployment is 8.5 to 8.7 percent by the end of 2012. That number is up from 7.8 percent to 8.2 percent it has previously forecast.

 

Although Fed officials believe the economy will have reached full employment when the jobless rate drops to between 5.2 percent and 6 percent, they currently believe that the rate will be at a 6.8 to 7.7 percent by the close of 2014.

 

Fed Chairman Ben Bernanke has called the lofty levels of U.S. unemployment a national crisis, and some officials at the central bank have urged new steps to foster stronger growth.

 

Charles Evans, president of the Chicago Federal Reserve Bank, dissented on Wednesday because he wanted the central bank to ease policy at this meeting, while three officials who had voted against an easing in September supported the consensus.

 

The Fed was silent on whether it was considering the possibility of further bond purchases and provided no insight into the status of discussions on overhauling its communications policies. Officials had been debating both courses of action in the lead up to the meeting. The Fed simply kept its options open, reiterating that it was prepared to adjust its balance sheet as needed to foster recovery. Some Fed officials have raised the possibility of expanding the central bank's presence in the mortgage market. It has already bought some $1.25 trillion in mortgage backed securities.

 

Europe Frustrated with Greece

 

Germany and France told Greece on Wednesday it should make up its mind by mid-December whether it wants to stay in the euro zone when Greeks vote on a 130-billion-euro ($178 billion) bailout.

 

French President Nicolas Sarkozy and Germany's Angela Merkel summoned George Papandreou for crisis talks in Cannes, before a G20 summit of major world economies, to push for rapid implementation of measures to tackle the euro zone debt crisis, which Athens has thrown into doubt.

 

Sarkozy said Papandreou's announcement of a referendum "took the whole of Europe by surprise" and his prime minister, Francois Fillon, told parliament: "Europe cannot be kept waiting for weeks for the outcome of the referendum.

 

"The Greeks must say quickly and without ambiguity whether they choose to keep their place in the euro zone or not."

 

Opinion polls suggest most Greeks think the deal thrashed out by euro zone leaders last week is a bad one, but much will depend on how Papandreou frames the debate, either on the bailout -- and the painful cuts it demands -- or membership of the euro, which remains popular.

Greece's European partners will press for the latter.

 

German Chancellor Merkel struck the same tone of exasperation and impatience

 

"We agreed a plan for Greece last week. We want to put this plan into practice, but for this we need clarity and the meeting tonight should help with precisely this," she told a news conference.

 

Germany's finance ministry hinted that European partners and the International Monetary Fund may withhold the next 8 billion euro aid installment to Athens, due this month, until after the referendum. EU leaders endorsed the disbursement of the money last week, but the IMF board has yet to set a date for a decision. An IMF source said the way forward would depend on the outcome of Wednesday's EU talks with Papandreou, which IMF Managing Director Christine Lagarde will join.

 

French officials said Papandreou would be pressed to put the bailout deal to parliament first in hopes of reassuring financial markets which panicked when he called the plebiscite. Win or lose, his gamble guarantees weeks of uncertainty just as the 17-nation European currency area is desperate for a period of calm to implement the remedies agreed to corral its sovereign debt crisis.

 

Some in Papandreou's party called for him to quit, accusing him of endangering euro membership with his shock decision to call a popular vote, a move that pummeled the euro and stocks. The Socialist prime minister battled late into the night to win cabinet support, giving him at least a stay of execution before a confidence vote in parliament on Friday.

 

"The referendum will be a clear mandate and a clear message inside and outside Greece on our European course and participation in the euro," Papandreou told a cabinet meeting that lasted seven hours.

 

European Commission chief Jose Manuel Barroso urged Greeks to unite in support of the bailout plan, warning that the alternative would be too ghastly to predict.

 

"Without the agreement of Greece to the EU/IMF program, the conditions for Greek citizens would become much more painful, in particular for the most vulnerable. The consequences would be impossible to foresee," he said.

 

If Papandreou wins the confidence vote, the euro zone faces a period of policy vacuum in which markets can create havoc. If he loses, Greece faces a disorderly default which would hammer Europe's banks and threaten the much larger economies of Italy and Spain, which the bloc may not have the means to bail out.

 

As a result, the Greek premier's move has aroused anger and surprise in equal measure around the world. The chairman of euro zone finance ministers, Jean-Claude Juncker, said Greece could go bankrupt if voters rejected the bailout package and Japanese Finance Minister Jun Azumi said:

 

"Everyone is bewildered."

 

Doubt about Europe's ability to contain the debt crisis has once more sent markets into a spin and put Italy firmly in the firing line. The risk premium on Italian bonds over safe-haven German Bunds hit a euro-lifetime high on Tuesday, despite European Central Bank buying of its bonds.

 

Until the Greek situation is clearer, last week's package of measures is likely to be in limbo, leaving the ECB as the only bulwark against market attacks.

 

Meanwhile, another premier under fire, Italy's Silvio Berlusconi scrambled to come up with measures to placate markets, seeing senior aides and ministers ahead of an expected meeting of the cabinet later.

 

Greek government spokesman Ilias Mosialos said the referendum would take place "as soon as possible, right after the basics of the bailout deal are formulated." Greek officials had suggested it would probably be held in mid-January but the interior minister said it could happen as early as December.

 

The Greek press, including dailies traditionally friendly to the government, almost unanimously condemned Papandreou.

 

Center-left newspaper Eleftherotypia described the prime minister on its front page as "The Lord of Chaos." Ethnos, another pro-government paper, called the referendum "suicidal."