MarketView for November 3

 

 

Summary

 

The major equity indexes moved sharply higher for a second day on Thursday as Greece backed away from a proposed referendum that threatened its membership in the euro, which could destabilize global markets.

 

News out of Europe has kept investors on pins and needles for months. Investors are worried a possible default by Greece could trigger another financial crisis that could spread beyond Europe. The European Central Bank provided a happy surprise early to investors with an interest rate cut, a sign of a more aggressive approach to confront weak growth in the region.

 

Greek Prime Minister George Papandreou backed away from his referendum proposal that could have derailed last week's long-awaited agreement to cut Greek debt and shore up European banks.

 

Stocks associated with growth led, with energy the best-performing sector on Thursday. Equity performance has been highly correlated with the euro, which gathered steam throughout the day on supportive headlines from Europe.

 

Shares of mobile phone chip maker Qualcomm, up 7.5 percent to close at $56.11, helped support the Nasdaq a day after the company forecast sales above forecasts.

 

After the close, shares of Starbucks rose 2.4 percent to $42.40 after the company reported quarterly results.

 

About 8.38 billion shares changed hands on the three major equity exchanges, a number that was in line with last year's daily average of 8.47 billion shares.

 

Unemployment Claims Lead the Parade of Positive Economic Data

 

The Labor Department reported on Thursday that new unemployment claims fell below 400,000 last week for the first time in five weeks, suggesting a modest improvement in the still-moribund labor market. Initial claims for state unemployment benefits fell by 9,000 claims during the week ending October 29, to a seasonally adjusted 397,000 claims.

 

Nonetheless, the level of weekly claims still remains well above pre-recession levels and has dipped below 400,000 only on brief occasions this year, suggesting no fast turnaround is imminent for the jobs market. The four-week moving average of claims, considered a better measure of labor market trends, fell 2,000 to 404,500.

 

In a separate report, the Labor Department said nonfarm productivity increased during the third quarter while growth in wages and benefits slowed sharply, showing that some inflation pressures were easing even as the economy picked up pace. Productivity rose at a 3.1 percent annual rate, the biggest increase since the first quarter of 2010.

 

Unit labor costs fell 2.4 percent, a much larger decline than the 0.8 percent rate forecast by analysts. Compensation per hour rose 0.6 percent during the period, down from growth of 2.7 percent during the previous quarter and 5.6 percent in the first three months of the year.

 

Productivity, which measures hourly output per worker, fell during the first two quarters of this year.

 

Meanwhile, the service sector saw growth ease in October to its slowest level in three months, but new orders for factory goods increased, although somewhat unexpectedly. The Institute for Supply Management said its services index eased to 52.9 last month from 53.0 the month before.

 

A reading above 50 indicates expansion in the sector. A gauge of new orders fell to 52.4 from 56.5, but the employment component improved to its highest level since June at 53.3 from 48.7.

 

New factory orders rose in September and capital spending plans by businesses surged, according to a report released by the Commerce Department on Thursday, indicating an underlying strength in manufacturing. The Commerce Department said orders for manufactured goods increased 0.3 percent after a revised 0.1 percent gain in August, previously reported as a 0.2 percent fall. Orders excluding transportation rose 1.3 percent in September after edging down 0.1 percent the prior month.

 

Orders for non-defense capital goods excluding aircraft -- seen as a measure of business confidence and spending plans - jumped 2.9 percent in September after advancing 0.9 percent the prior month. The increase in this category was the largest in six months.

 

Many of the larger retail chains reported disappointing October sales on Thursday. Major retailers ranging from Macy's and Saks, to those catering to more frugal shoppers like Target and J.C. Penney, reported lower-than-expected sales at stores open at least a year.

 

Yet, 23 major retailers are expected to post a composite same-store sales gain of 4.5 percent.

 

Greek Government on Brink of Collapse

 

With information changing on almost an hourly basis, the Greek government teetered on the brink of collapse Thursday, with the opposition and some government lawmakers demanding a caretaker administration to force through approval of a euro zone bailout, the nation's only financial lifeline.

 

Intense European pressure forced debt-stricken Greece to seek political consensus on a new bailout plan instead of holding a referendum after EU leaders raised the prospect of a Greek exit from the euro to preserve the single currency.

 

Greek Prime Minister George Papandreou bowed to cabinet rebels and agreed to step down and make way for a negotiated coalition government if his Socialists back him in a confidence vote on Friday, government sources told Reuters.

 

Meanwhile, the G20 leaders meeting in Cannes discussed increasing the International Monetary Fund's resources and building a financial firewall to protect vulnerable euro zone economies Italy and Spain from a possible Greek default.

 

Papandreou said his call this week for a referendum, which sparked panic on global financial markets and infuriated European partners, "was never a purpose in itself", and he would be happy if the vote were not held.

 

At a bruising meeting in Cannes on Wednesday night, French President Nicolas Sarkozy and German Chancellor Angela Merkel warned Papandreou that Athens would not receive a cent more in aid until it met its commitments to the euro zone. Greece was due to get a vital 8 billion euro installment this month and says it will run out of money in mid-December if it does not get the loan.

 

In Athens, Finance Minister Evangelos Venizelos led the revolt against Papandreou, saying Greece's euro membership was a historic achievement and "cannot depend on a referendum".

 

Signaling for the first time a will to compromise, opposition leader Antonis Samaras called for a transitional government to lead Greece to early elections within weeks and said parliament should first ratify last week's 130 billion euro ($178 billion) bailout deal.

 

Sarkozy told a news conference the tough message delivered by France and Germany to Greece's political class was starting to bear fruit. "Things are progressing," he said, welcoming Samaras' support for the bailout plan.

 

Euro area leaders talked openly of a possible Greek exit from the 17-nation currency area, seeking to maximize pressure on Athens and preserve the euro in case of a "no" vote.

 

Merkel repeated that the stability of the euro had priority for Germany over Greece's euro membership, touching a popular nerve at home.

 

Germany's best selling Bild newspaper railed against Greece and demanded it be ejected from the euro. A telephone poll found 86 percent of Germans want Greece out of the currency.

 

The chairman of euro zone finance ministers, Luxembourg Prime Minister Jean-Claude Juncker, said policymakers were working on possible scenarios for a Greek exit.

 

The specter of a possible hard Greek default and euro exit hung over the G20 summit, highlighting Europe's frailty and divisions just when Sarkozy had hoped to showcase his leadership of the world's major economies.

 

The summit had been meant to focus on reforms of the global monetary system and steps to rein in speculative capital flows and regulate commodities markets, but the shockwaves from Greece upended the talks.

 

Next Up Is Italy

 

Italy was next in the euro zone firing line, facing fierce pressure to make good on long delayed economic reforms. European G20 leaders along with U.S. President Barack Obama, IMF Managing Director Christine Lagarde and new ECB President Mario Draghi met on the sidelines to press Italian Prime Minister Silvio Berlusconi for a timetable for key labor market, pension and privatization measures.

 

A draft plan agreed with the G20 on Thursday includes a commitment by Italy to get its budget deficit "near balance" by 2013 and to rapidly reduce its debt-to-GDP ratio, sources told Reuters. That is less ambitious than Italy's promise only last month to balance its budget in 2013.

 

EU leaders are concerned that if Italy cannot get its finances in order, the economy -- the Eurozone’s third largest -- could go the way of Greece, Ireland and Portugal in needing a bailout from the EU.

 

A disorderly Greek default would reverberate across the euro zone, engulfing big economies like Italy and Spain, and potentially plunging the global economy into a recession. Euro zone finance ministers are working to accelerate implementation of an anti-crisis package agreed on October 27.

 

That plan, which includes debt relief for Greece, a recapitalization of European banks and a leveraging of the bloc's rescue fund, was meant to stem the two-year old crisis before Papandreou's referendum call cast the bloc into turmoil.

 

Officials said the meeting focused on speeding up the creation of a firewall to protect other vulnerable euro zone states from the fallout from Greece.

 

The risk premium on Italian bonds over safe-haven German Bunds has hit euro-lifetime highs this week, despite European Central Bank buying of its bonds. Spain had to pay its highest yield since 2008 at a bond auction on Thursday.

 

The G20 is considering an IMF proposal to create a new short-term line of credit to help countries that are facing economic shocks beyond their control. British finance minister George Osborne said leaders discussed increasing the global lender's resources, which China strongly backed, and he had heard no dissenting voices.