MarketView for October 15

 

 

Summary 

 

A solid earnings report from Google sent the Nasdaq up over 1 percent on Friday, while uncertainty surrounding the exposure faced by the major banks with regard to foreclosure losses sent the Dow Jones industrial average into negative territory. With several major banks due to report earnings next week, the Street is watching closely to see how deeply the foreclosure crisis has affected their stability. Among the banks that saw the biggest reductions in earnings estimates for the quarter during the latest week are Goldman Sachs, PNC Financial Services and Citigroup. Citigroup, which reports earnings on Monday, lost 2.7 percent to $3.95, while Bank of America fell 4.9 percent to $11.98.

 

Google's 11.2 percent share price increase - on the largest volume in two years – resulted in the Nasdaq chalking up the best performance among the three major equity indexes on Friday.

 

Also sending the Dow into negative territory was General Electric's poor quarterly revenues that underscored the economy's soft spots. GE was the Dow's largest percentage loser, closing at $16.30, down 5.1 percent, after revenues came in below estimates, even as profits from continuing operations increased for the second straight quarter and its GE Capital unit recorded a stronger performance.

 

The S&P 500 hit a session high around 1,180 for a third straight day, a level that could become technical resistance moving forward.

 

For the week, the Dow rose 0.5 percent; the S&P 500 added 0.9 percent and the Nasdaq Composite gained 2.8 percent. Apple led gains in the Nasdaq 100 and rose 4.4 percent to a new record high intraday at $315. At the close, Apple was up 4.1 percent at $314.74.

 

Earlier on Friday, Federal Reserve Chairman Ben Bernanke helped put a bid on equities after he said high unemployment and low inflation pointed to a need for further monetary easing.

 

A flood of data, including a smaller-than-expected rise in consumer prices in September and a weaker-than-forecast reading of consumer sentiment in October, supported the Street’s belief that the Fed will print more money.

 

The S&P 500 is up 12.1 percent since September 1, partly on the expectation of further accommodative policies from the U.S. central bank.

Declining stocks outnumbered advancing ones on the NYSE by a ratio of about 3 to 2. On the Nasdaq, the balance was just slightly tilted to the negative side despite the index's 1 percent gain for the day, with 1,340 issues falling and 1,253 shares rising.

 

Washington Gets A Bit Wimpy Over China

 

The Obama administration backed away from a showdown with Beijing over the value of China's currency that would have caused new frictions between the world's only superpower and its largest creditor. In particular, the Treasury Department delayed a much-anticipated decision on whether to label China as a currency manipulator until after the elections on November 2 and a Group of 20 leaders’ summit in South Korea on November 11.

 

Washington and the European Union accuse China -- set to become the world's second-largest economy after the United States this year -- of keeping the yuan artificially low to boost exports, undermining jobs and competitiveness in Western economies.

 

Fears are growing of a global "currency war" as major trading powers, such as the United States and Japan, seek to weaken their currencies while emerging economies such as Brazil and South Korea raise or threaten tougher controls to limit capital flows.

 

The decision to delay the Treasury's semi-annual currency report reflects a desire by the Obama administration to pursue diplomacy to resolve the dispute with China rather than provoke a confrontation that could potentially lead to a trade war and affect long-term interest rates. In July, China held $847 billion in U.S. government debt.

 

In its statement, the Treasury seemed to be encouraged by China's recent action to allow its currency to rise by roughly 3 percent against the dollar since June 19. "Since September 2, 2010, the pace of appreciation has accelerated to a rate of more than 1 percent per month," it said. "If sustained over time, this would help correct what the International Monetary Fund has concluded is a significantly undervalued currency."

 

China argues that moving too quickly with currency reforms could devastate its export-driven economy. It blames the United States for sluggish growth, high debts and an easy monetary policy that has flooded the market with newly printed dollars, weakening the U.S. currency and putting pressure on emerging countries to keep their currencies low. However, Washington argues that Beijing could relieve that pressure by letting the yuan strengthen.

 

The Treasury said the G20 gathering in Seoul would give world leaders an opportunity to look at how best to rebalance the global economy. This was not just the responsibility of China and the United States, it stressed.

 

In another important summit, leaders of the Asia Pacific Economic Cooperation forum will meet on November 13-14.

 

"The Treasury will delay the publication of the report on international economic and exchange rate policies in order to take advantage of the opportunity provided by these important meetings," it said.

 

China left little doubt about the rancor that would ensue if it is branded as a currency manipulator -- a largely symbolic move by the United States that would mandate more consultations with Beijing but no immediate penalties. "The Chinese yuan should not be a scapegoat for the United States' domestic economic problems," Commerce Ministry spokesman Yao Jian said on Friday.

 

The decision to delay the Treasury report appears to have been taken at the last minute. Industry sources had been primed to expect it by 1 p.m. EDT (1700 GMT) on Friday.

 

The Obama administration, seeming to anticipate criticism from U.S. lawmakers who are pushing for stronger action against China, brought forward an announcement of an investigation into whether Chinese support for its clean energy sector violates international trade rules. However, that was not enough to appease Democratic Senator Charles Schumer, who has sponsored legislation to get tough with China over its currency practices.

 

"The Obama administration is treating the symptom but not the disease," he said. "An investigation into China's illegal subsidies for its clean energy industry is overdue but it's no substitute for dealing with China's currency manipulation."

 

The Treasury's decision may raise pressure on the Senate to approve a bill passed by the House of Representatives that would allow the United States to slap duties on imports from countries with fundamentally undervalued currencies.

 

"Democrats and Republicans alike in Congress are prepared to move legislation confronting China's currency manipulation this year," Schumer said. "We hope to have the administration's support but will go forward without it if necessary."

 

There had been speculation Obama might be tempted to label China as a currency manipulator for the first time in 16 years to look tough before the elections in which his Democrats risk big losses over discontent with his handling of the economy.

 

But there are concerns about angering China, whose support is needed on issues such as rebalancing the global economy, climate change and the nuclear programs of Iran and North Korea. In an article published on Friday, Chinese central bank governor Zhou Xiaochuan pledged a continuation of yuan reform but only on Beijing's gradual terms. "The yuan exchange rate will be basically stable at a reasonable and balanced level," he wrote in China Finance, a magazine published by the central bank.

 

The Treasury Department is mandated by law to issue a report every six months on whether any country is manipulating its currency for an unfair trade advantage. Yet the last time any administration -- Republican or Democrat -- has cited a country under the 1988 currency law was in July 1994, when China was put in the spotlight.

 

Economic Data is Mixed

 

Federal Reserve Chairman Ben Bernanke indicated more monetary stimulus was on the way, which sent Treasury prices falling as yields rose on the view that Bernanke aims to increase asset prices by creating inflation through a second round of so-called quantitative easing.

 

Bernanke said there was a case for further monetary easing, given high unemployment and low inflation. But despite his most explicit signal yet, he offered no details on the Fed's next move.

 

The dollar rose from more than an eight-month low versus the euro as traders said the currency's recent declines went too far, too fast even as a sustained rebound seems unlikely. The euro traded at $1.3968 after earlier climbing as high as $1.4161, its strongest level since January 26.

 

The dollar is likely to stay on the defensive until the end of a two-day Fed meeting on November 3. The dollar's downside may be limited because much of the impact from any Fed easing has been priced in and bearish sentiment is too strong, analysts said.

 

Sales at U.S. retailers rose a stronger-than-expected 0.6 percent in September, lifted by big-ticket items. According to the New York Fed's "Empire State" business index, manufacturing activity in New York state increased during the month of October.

 

At the same time, inflation unexpectedly slowed in September as a 0.8 percent rise in the core Consumer Price Index, which excludes volatile food and energy prices, through the 12 months ended in September marked the smallest increase since 1961. The slowing pace of inflation forebodes potential deflation, which is a major cause of concern for Bernanke and the Fed.

 

Oil prices slid almost 2 percent and gold snapped a two-day rally, both in volatile trading, after bullion earlier jumped to within a few dollars of the previous day's record high. Crude for November delivery settled $1.44 lower, or 1.74 percent, at $81.25 a barrel. Gold futures for December delivery settled down $5.60 at $1,372 an ounce. Spot gold prices fell $11.80 to $1,368.50.

 

A stronger dollar makes commodities, like oil, more expensive for buyers holding alternative currencies. The dollar was up against a basket of major currencies, with the Dollar Index .DXY up 0.45 percent at 76.99. Against the Japanese yen, the dollar was down 0.02 percent at 81.440. The benchmark 10-year U.S. Treasury note was down 19/32 in price to yield 2.57 percent.