MarketView for November 23

 

 

Summary 

 

The major equity indexes chalked up their sixth consecutive day of losses on Wednesday as frustration over the euro zone's debt crisis, coupled with weak Chinese factory data sent the markets into a tailspin once again. A weak German bond sale sparked fears the debt crisis was even beginning to threaten Berlin, with the leaders of France and Germany still at odds over a longer-term structural solution.

 

The poor demand for German government bonds showed that investors viewed investing in the euro zone as being too risky. Debt problems plaguing Europe and the United States have pressured markets, knocking the S&P 500 down more than 7 percent over the last six sessions. World stocks hit their lowest in six weeks on Wednesday.

 

All 10 S&P 500 sectors were negative, with financials among the biggest decliners over concerns about exposure to European debt. JPMorgan Chase fell 3.5 percent to $28.38 and was down 3.9 percent to close at $23.51. Economically sensitive stocks such as energy and commodity-related issues also slid. Schlumberger lost 3.6 percent to close at $66.50, while DuPont ended the day with a loss of 2.9 percent to close at $44.08.

 

The S&P 500's six-day decline is the longest such streak since a seven-day slide that ended August 2. Reflecting heightened fears in the market, the CBOE Volatility Index, or VIX, Wall Street's so-called fear gauge, rose 6.3 percent.

 

Volume was light ahead of the Thanksgiving holiday, when markets are closed. About 6.9 billion shares changed hands on the major equity exchanges, a number that was well below the current daily average of 8 billion shares.

 

One of the few bright spots was Deere, which rose 3.9 percent to $74.72 after quarterly earnings beat expectations and sales rose 20 percent.

 

Adding to market worries, data showed Chinese manufacturing shrank the most in 32 months in November, intensifying concerns about a global economic slowdown. Crude oil fell 1.8 percent on fears of reduced demand from China.

 

Within the United States, jobless claims were up slightly last week and consumer spending barely increased in October, while another report showed new orders for durable goods, which include long-lasting manufactured items such as refrigerators moved higher.

 

Unemployment Claims Remain Under 400,000

 

According to a report from the Labor Department Wednesday morning, initial claims for state unemployment benefits climbed to a seasonally adjusted 393,000 from an upwardly revised 391,000 in the prior week. A Labor Department official described the jobless claims report as straightforward, with no states estimating their level of claims.

 

Initial claims below the 400,000 mark are normally seen as pointing to some healing in the jobs market. The four-week moving average of claims, considered a better measure of labor market trends, fell 3,250 to 394,250, the lowest since April. The number of people still receiving benefits under regular state programs after an initial week of aid rose 68,000 to 3.69 million in the week that ended November 12.

 

A total of 6.73 million people claimed unemployment benefits under all programs during the week ending Nov 5, down 44,608 from the prior week.

 

Consumer Spending Virtually Unchanged

 

Consumer spending was virtually unchanged for the month of October as households took advantage of the largest increase in income in seven months to rebuild their savings, a government report showed on Wednesday. According to a report released on Wednesday by the Commerce Department, consumer spending edged up 0.1 percent, slowing sharply from a revised 0.7 percent increase in September.

 

When adjusted for inflation, spending nudged up 0.1 percent last month, pointing to a loss of momentum after a relatively strong third quarter, when it grew at an annual rate of 2.3 percent. Still, that was unlikely to change perceptions of solid economic growth in the current quarter.

 

Income rose 0.4 percent last month, the largest gain since March. That was a touch above economists' expectations for a 0.3 percent increase and followed a 0.1 percent gain in September. Taking inflation into account, disposable income rose 0.3 percent, the largest increase since October 2010. It had declined 0.1 percent in September.

 

A government report on Tuesday showed adjusted for inflation disposable income dropped at an annual rate of 2.1 percent in the third quarter, marking a second straight quarter of declines.

 

With incomes failing to keep up with inflation amid a 9 percent unemployment rate, households had been saving less in recent months to fund spending. The saving rate increased to 3.5 percent last month from 3.3 percent in September. Savings rose to annual rate of $400.2 billion from $376.9 billion in September.

 

But subsiding inflation pressures should ease some of the pressure on incomes. A price index for personal spending fell 0.1 percent rate last month after rising 0.2 percent in September. In the 12 months through October, the PCE index was up 2.7 percent. That was the smallest rise since June and followed a 2.9 percent increase in September.

 

A core inflation measure, which strips out food and energy costs, nudged up 0.1 percent last month after being flat in September. In the 12 months through October, core PCE rose 1.7 percent after increasing 1.6 in September.

 

Durable Goods Orders Down

 

According to a report by the Commerce Department, durable goods orders fell for a second straight month in October. While much of the weakness in durable goods orders came from a big drop in demand for commercial aircraft, orders for core capital goods a critical category that tracks business investment spending fell by the largest amount since January.

 

The overall decline in orders for durable goods was 0.7 percent, following a September decline of 1.5 percent. Orders for core capital goods, considered a good proxy for business investment spending, dropped 1.8 percent, the largest decline since a 4.8 percent fall in January.

 

Manufacturing has been one of the strongest sectors in the economy in this subpar recovery, but the sector slowed this year as consumer demand faltered and auto factories had trouble getting parts following the March natural disasters in Japan.

 

The October drop in core capital goods — non-defense products excluding aircraft — was expected to be a temporary setback. This category has been surging this year, spurred by tax breaks that are allowing companies to write-off their investments all in one year as long as the purchases are made before the end of 2011. That has provoked a rush by companies to take advantage of this tax break which Congress passed in an effort to spur the sluggish economy.

 

For October, orders for transportation products fell 4.8 percent, reflecting a 16.4 percent drop in demand for commercial planes. Orders for autos showed a solid 6.2 percent increase, reflecting solid sales gains in recent months.

 

Excluding transportation, durable goods orders posted a 0.7 percent increase. This gain reflected increases in such areas as primary metals such as steel and heavy machinery.

 

Crude Prices Fall

 

Crude oil futures fell 2 percent on Wednesday as weak economic data from Europe, China and the United States painted a somber outlook for global oil demand. An unexpected heavy drawdown in U.S. crude stockpiles failed to staunch the day's decline that was touched off by weak demand in a German bond auction, stirring concerns the euro zone debt crisis would worsen.

 

Brent futures traded in London was down $1.97, at $107.06 a barrel, having fallen to a session low of $106.82.  January crude dropped $1.39 to $96.62, after skidding to a session low of $95.35. According to data from the Energy Information Agency, crude inventories fell by 6.22 million barrels last week, while gasoline stocks rose much more than expected, by 4.5 million barrels.

 

Oil is priced in dollars and tends to weaken when the currency strengthens becoming less affordable to holders of other currencies, thus prompting investor risk aversion. In China, the No. 2 oil consumer, its once-booming factories shrank at the fastest pace in 32 months on signs of domestic weakness.

 

Role of the ECB in Dispute

 

Germany and France clashed on Wednesday over whether the ECB should take bolder steps to stem the euro zone debt crisis, with Chancellor Angela Merkel issuing one of her starkest warnings yet against fiddling with the central bank's strict inflation-fighting mandate.

 

In a forceful speech to the Bundestag lower house of parliament, Merkel also hit back at proposals from the European Commission on joint euro zone bond issuance, calling them "extraordinarily inappropriate."

 

One of Germany's worst bond sales since the launch of the euro on Wednesday hinted that the two-year old crisis was beginning to threaten the bloc's paymaster, with the Bundesbank having to buy almost half of the 10-year bonds on offer.

 

But the public jousting underscores just how divided European leaders are on how to resolve turmoil which has accelerated to engulf big countries like Italy and Spain, and pushed out leaders in Rome and Athens.

 

"The European currency union is based, and this was a precondition for the creation of the union, on a central bank that has sole responsibility for monetary policy. This is its mandate. It is pursuing this. And we all need to be very careful about criticizing the European Central Bank," Merkel said.

 

"I am firmly convinced that the mandate of the European Central Bank cannot -- absolutely cannot be changed."

 

Shortly before she began speaking, French Finance Minister Francois Baroin offered a polar opposite view on the ECB's role, telling a conference in Paris that it was the central bank's responsibility to sustain activity in the currency bloc.

 

"The best response to avoid contagion in countries like Spain and Italy is, from the French viewpoint, an intervention (or) the possibility of intervention or announcement of intervention by a lender of last resort, which would be the European Central Bank," Baroin said.

 

Baroin pointed to market intervention by the U.S. Federal Reserve, Swiss National Bank and Bank of England as a model for the ECB. But Merkel said it was impossible to compare the role of the ECB, which sets monetary policy for 17 countries, with those of national central banks.

 

The poor auction -- 3.9 billion in bids versus an offered 6 billion -- meanwhile helped prod market interest rates for Germany's 10-year bonds above those for U.S. Treasuries for the first time since October.

 

Bund rates have reached record lows by investors who view them as the only safe place to keep their money in a volatile euro zone, but there is concern in the background that it is Germany who will cover the cost of any solution to the crisis. The euro fell in response to the results and European shares hit a 7-week low.

 

With time running out for Europe's politicians to forge a crisis plan that is seen as credible by the markets, the European Commission will present a study on Wednesday of joint euro zone bonds as a way to stabilize debt markets.

 

Some leading European politicians, including Luxembourg Prime Minister Jean-Claude Juncker, support the bonds. But Berlin has rejected them outright as a near-term solution to the crisis, saying they would raise Germany's borrowing costs and reduce incentives for other euro zone countries to bring their fiscal houses in order.

 

In her speech, Merkel pointed to repeated violations of the EU's Stability and Growth Pact in the currency area's first decade, saying they had damaged market faith in the bloc's ability and willingness to crack down on fiscal rule-breakers.

 

"And this is why I find it extraordinarily inappropriate that the European Commission is suggesting various options for euro bonds today -- as if they were saying we can overcome the shortcomings of the currency union's structure by collectivizing debt. This is precisely what will not work," Merkel said.

 

The German leader also sent a clear warning to Antonis Samaras, the leader of conservative New Democracy in Greece, who has resisted pressure to join other parties and make a written commitment to painful austerity measures.

 

Merkel said Greece would not receive an 8 billion euro aid tranche it needs to avert a default next month unless Samaras signed the pledge.

 

Merkel raised pressure on the bloc to finalize plans for a "leveraging" of its rescue fund and a recapitalization of vulnerable banks, saying guidelines were needed by the time European finance ministers meet on November 29-30.

 

"The fact that we have been talking about (bank recapitalisations) for weeks but still have no clarity is not very reassuring, and yesterday we saw with the example of one German bank how fragile the banks themselves are," Merkel said.