MarketView for November 11

 

 

Summary

 

Share prices rose sharply on Friday, ending higher for the week after the Italian Senate's approval of economic reforms gave investors some relief from worries about the euro zone's debt crisis. After another week of volatility driven by news on the crisis, the S&P 500 index managed to end 0.8 percent higher for the week. However, investors remain skittish and are taking out insurance in the options market against future losses.

 

Banks were among the leaders on a day when growth-oriented stocks turned in the strongest performance. Sentiment received a big boost from falling Italian bond yields, which earlier this week hit the highest level since the euro was introduced in 1999.

 

Stock market volatility has been closely tied to European credit markets in recent days. A package of austerity measures demanded by the European Union was passed by the Senate and now goes to Italy's lower house, which is expected to approve it on Saturday.

 

Passage would trigger the resignation of Prime Minister Silvio Berlusconi. Former European Commissioner Mario Monti is widely expected to take over as head of a broadly based national unity government.

 

In debt-strapped Greece, the prime minister-designate, Lucas Papademos, a former vice president of the European Central Bank, will name a new crisis cabinet to roll out austerity plans.

 

For the week, the Dow Jones industrial average was up 1.4 percent, the S&P 500 chalked up a gain of 0.8 percent, while the Nasdaq closed out the week down 0.3 percent.

 

Financial shares, seen as vulnerable because of their exposure to European debt, ranked among the best performers. Bank of America rose 3 percent to $6.21, while JPMorgan Chase gained 1.7 percent to $33.28.

 

Among other advancers for the day, shares of Walt Disney rose 6 percent to close at $36.70 after the company reported a 7 percent gain in revenues and a 30 percent rise in earnings, exceeding expectations.

 

Consumer Sentiment Improves

 

Americans became more hopeful about the economic outlook in November, pushing consumer sentiment to a five-month high, though they still have a gloomy view of personal finances, a survey released on Friday showed.

 

It was the third monthly gain in a row for the index, an encouraging sign for an economy where consumer spending accounts for 70 percent of activity. Even so, sentiment is still at historically low levels, with the index down more than 13 points from a peak in February.

 

The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment rose to 64.2 from 60.9 the month before, topping the median forecast of 61.5 among economists polled by Reuters.

 

The survey's gauge of consumer expectations climbed to 56.2 from 51.8. While respondents were no more positive about the current state of the economy, they were less likely to expect it to worsen in the year ahead, the survey said.

 

The lackluster levels underscored the recent disparity between weak sentiment data and stronger spending reports, suggesting dismal consumer attitudes may not reflect their purchases.

 

The survey's barometer of current economic conditions nudged up to 76.6 from 75.1 and all three main indexes rose to their highest levels since June.

 

Consumers remained gloomy about their own finances with more respondents reporting their finances had worsened than improved. Just one in five consumers expected improvement in the year ahead.

 

Worries the United States could be in for another recession pummeled confidence in recent months, as did political wrangling over raising the debt ceiling in the summer. Confidence in policy has yet to recover, with 58 percent of respondents rating economic policies unfavorably.

 

The data was overshadowed in financial markets by progress in the euro zone debt crisis as Italy moved to implement tough austerity measures.

 

The survey's one-year inflation expectation held steady at 3.2 percent, while the survey's five-to-10-year inflation outlook eased to 2.6 percent from 2.7 percent, its lowest since March 2009.

 

Data next week will provide a look at how spending fared in October with retail sales expected to rise 0.3 percent after a strong 1.1 percent gain the month before.

 

Progress in Europe

 

Italy's parliament on Friday began rushing through austerity measures demanded by the European Union to avert a euro zone meltdown and Washington ratcheted up pressure for more dramatic action from the currency bloc.

 

The Italian Senate approved a new budget law, clearing the way for approval of the package in the lower house on Saturday and the formation of an emergency government to replace that of Prime Minister Silvio Berlusconi.

 

In Athens, former European Central Bank policymaker Lucas Papademos was sworn in as Greek prime minister after days of political wrangling, tasked with meeting the terms of a bailout plan to avert bankruptcy.

 

After President Barack Obama spoke with German Chancellor Angela Merkel and France's Nicolas Sarkozy late on Thursday and called Italian President Giorgio Napolitano, U.S. Treasury Secretary Timothy Geithner demanded fast action from Europe.

 

"The crisis in Europe remains the central challenge to global growth. It is crucial that Europe move quickly to put in place a strong plan to restore financial stability," Geithner said in a statement.

 

After months of dither and delay, Rome appears to have got the message as bond markets pushed it to the brink of needing a bailout that the euro zone cannot afford to give.

 

If the votes pass smoothly, Napolitano will accept Berlusconi's resignation over the weekend and ask veteran former European commissioner Mario Monti, a technocrat like Papademos, to form a government.

 

Berlusconi has promised to resign after the financial stability law is passed by both houses of parliament. He is no longer insisting on early elections and markets were calmed by the prospect of an interim government, rather than a three-month vacuum before a elections are held.

 

Sarkozy told Napolitano by phone he believed a government able to solve the crisis could be formed soon.

 

The euro made its strongest gains against the dollar in two weeks and Italian bond yields, which had raced above sustainable levels this week, fell in relief at the prospect of a new government. But some investors doubted the recovery would last, as even a technocrat government might struggle for progress on fiscal reforms Italy has long promised but never delivered.

 

Spain, the euro zone's fourth largest economy and due to hold elections in nine days, stopped growing in the third quarter, putting its deficit-reduction goals in doubt.

 

With European leaders dithering over how to tackle the deepening crisis, pressure has mounted on the European Central Bank to act more forcefully by becoming a full lender of last resort like the U.S. Federal Reserve and the Bank of England.

 

"There is real turbulence in the markets, real question marks over whether countries can deal with their debts and a big question mark over the future of the euro zone," British Prime Minister David Cameron said.

 

Meanwhile, the head of the 440 billion-euro European Financial Stability Facility (EFSF) was quoted saying market turmoil had made it more difficult to boost the bailout fund, Russian President Putin said the Europe Union -- which accounts for half his country's trade -- badly needed more emergency funding.

 

"The EFSF, alone or cooperating with the IMF, does not have the necessary resources. I believe that the resources needed to overcome the crisis are about 1.5 trillion euros," said Putin.

 

EFSF chief Klaus Regling told the Financial Times it would now be a challenge to boost the fund to 1 trillion euros as euro zone leaders proposed in a late-October summit, hoping to lure bond investors by offering to insure any eventual losses.

 

"The political turmoil that we saw in the last 10 days probably reduces the potential for leverage," said Regling.

 

But ECB policymaker Juergen Stark from Germany reiterated his view that it is up to politicians and not central bankers to solve the problems in the euro zone.

 

"I personally doubt very much that adding two or three zeros to the bailout volume can solve the structural and political problems," Stark, who opposes the ECB's strategy of buying the bonds of problem states like Greece to prop them up and will quit the bank early this year, told a Swiss paper.

 

Senior ECB policymakers have rebuffed arm-twisting from investors and world leaders to intervene massively on bond markets to shield Italy and Spain from financial contagion. Germany, Europe's biggest economy, strongly opposes the ECB taking on a broader crisis-fighting role, arguing that this would compromise the central bank's independence.

 

In Athens, Papademos, a former ECB vice president, faces major challenges at the helm of a unity government forged after a chaotic power struggle between the two main political forces. "With the unity of all people, we will succeed," Greece's new technocrat premier told George Papandreou, who led the previous Socialist administration that fell apart last week.

 

Papademos has about 100 days to start fulfilling the terms of a 130 billion euro bailout plan to keep Greece solvent while placating warring political factions. Socialist party big-hitter Evangelos Venizelos will remain finance minister in a new cabinet that includes many of the same politicians who led the nation into crisis.

 

Automotive giant Daimler, a leading German exporter, spoke out against keeping Greece in the euro zone at all costs and said the euro could survive without it.