MarketView for October 4

Summary

Share prices were lower in light trading on Monday, the result of profit-taking based on both lukewarm economic data and concerns over debt in the euro zone. Commodities stocks led the decliners in reaction to the rising dollar. Pushing the dollar higher was a decline in the euro, which fell about 0.8 percent versus the dollar in late trading, on renewed concerns about euro-zone public debt. The rising dollar pressured commodity-related stocks. As a result, U.S. Steel Corp closed down 2.7 percent at $42.42, while Alcoa ended the day down 2.5 percent at $11.92.

The Irish central bank said on Monday Ireland's economy will crawl to a virtual halt this year, while Greece forecast the economy will contract 2.6 percent next year after a 4.0 percent slump in 2010. Portuguese officials urged unity on austerity measures in the face of opposition.

Volume was very light, with the combined daily volume on the NYSE, Amex, and Nasdaq at about 6.84 billion shares, which was below its 20-day moving average of 7.23 billion shares.

Pending sales of previously owned U.S. homes indicated the housing market was stabilizing at a very low level in August, while new factory orders fell 0.5 percent in the same month, slightly more than forecast.

Microsoft fell 1.9 percent to $23.91 after Goldman Sachs downgraded the software maker, citing a slow recovery in PC sales and competition from tablet computers, which do not include Windows software. The decline affected both the Dow Jones industrial average and the Nasdaq 100 indexes in a negative manner.

The Justice Department sued American Express on Monday for allegedly violating antitrust law over credit card acceptance rules. American Express shares closed down 6.5 percent at $39.05.

In other corporate news, Sara Lee saw its share price close up 7.2 percent at $14.40 after the New York Post reported that the company received an unsolicited offer from private equity firm KKR and aroused the interest of Unilever.

The third-quarter earnings season will begin this week when Alcoa reports results on Thursday. PepsiCo and Monsanto are also expected to report this week.

S&P 500 short-term technical indicators showed sell signals during the day. The benchmark index's 10-day momentum closed below zero, indicating a short-term trend reversal. The trend lines of the moving average convergence-divergence (MACD) indicator crossed at oversold levels on an intraday basis but retreated at the close.

Economic Data Mediocre At Best

Pending sales of previously owned homes hit a four-month high in August, a sign the housing market was stabilizing at very low levels following its sharp drop after the home-buyer tax credit expired. At the same time, new factory orders were down 0.5 percent in August, although they were up 0.9 percent if you exclude the volatile transportation sector.

The Fed indicated last month that it was ready to inject more money into the economy if needed to shore up a sluggish recovery from the worst downturn since the 1930s and prevent a damaging bout of deflation.

Whether the Federal Reserve will embark on a new round of monetary policy easing remains to be seen. However, the financial markets are bracing for the Fed to begin another round of bond buying as early as next month. The Fed’s decision as to whether it will actually go through another round of bond buying will hinge on inflation and labor market developments, and a government report on employment this coming Friday.

However, on Monday, Fed Chairman Ben Bernanke said that the first round of asset purchases, which ended in March this year, had helped to lower interest rates and support the economy.

"I don't have a number to give you, but I do think that the additional purchases, although we don't have precise numbers, have the ability to ease financial conditions," Bernanke said.

The Fed, which has already injected $1.7 trillion into the economy by purchasing mortgage-related and government bonds, next meets on November 2-3.

Although housing was the main trigger of the recession, housing is unlikely to weigh heavily on the Fed’s decision.

The National Association of Realtors said its Pending Home Sales Index, based on contracts signed in August, increased 4.3 percent from July. Markets had expected the index, which leads existing home sales by a month or two, to rise 3 percent.

Home sales and building activity are stabilizing after a downward spiral following the end in April of a popular tax credit for home buyers. The rise in pending home contracts suggested a modest gain in September existing home sales. However, high unemployment and a glut of homes on the market indicate recovery will be very weak.

Although businesses have been lukewarm to hiring, they are stepping up spending on capital goods. A key measure of business spending in the factory orders report rose 5.1 percent in August, almost reversing a 5.3 percent decline in July. Orders for machinery rose 5.2 percent, while orders for computers and electronic products gained 3.7 percent.

Obama Says Fiscal Situation “Untenable”

President Barack Obama said on Monday that the United States was facing an "untenable fiscal situation" and would have to get serious about tackling its federal deficit. The budget deficit is forecast at a record $1.47 trillion in the fiscal year that ended on September 30, 2010.

Obama said that emergency government spending measures he took to support growth and hiring when he took office last year had temporarily added to the funding gap, but the deficit had to be tackled going forward.

"I realize that we are facing an untenable fiscal situation," he told a meeting of his economic recovery advisory board to discuss strengthening the partnership between community colleges and the private sector. "What I won't do is cut back on investments like education."