MarketView for October 18

 

 

Summary 

 

Share prices were higher on Monday as better-than-expected earnings from Citigroup helped financial shares shake off the foreclosure mess that could threaten the stability of the housing market.

 

Apple, which hit an all-time high during the regular session, disappointed investors after reporting gross margins and iPad shipments. Its shares skidded 5 percent in after-hours trading while stock index futures fell, suggesting a weak market opening on Tuesday. Apple shares hit a life high at $319 during the day as the Street went on the expectation that Apple’s fourth-quarter earnings would showcase Apple's powerful one-two punch of the iPhone and the iPad. Apple's shares closed up 0.4 percent to $315.79 then fell in extended-hours trading to $301.79.

 

IBM also fell after hours trading, losing 3.5 percent to $137.84. The stock had reached a 52-week high during the regular session. IBM reported a higher-than-expected profit and raised its outlook for the full year, but the shares fell on sluggish sales of technology services. Shares of IBM rose 1.3 percent to $142.83 in regular trading and were the top boost to the Dow industrials before the company's earnings report.

 

In regular trading, Citigroup was up 5.6 percent to $4.17 after it reported its third consecutive quarterly profit. Citigroup said it is looking at the home loans it bundled into bonds and sold to investors. So far, it has not found any problems.

 

Bank of America reports earnings on Tuesday. Bank of America's shares rose 3 percent to $12.40.

 

Before the close on Monday, around 10 percent of S&P 500 companies had reported earnings, with 84 percent of those beating expectations, according to data compiled by Thomson Reuters.

 

Northeast Utilities said it will acquire NSTAR in a $4.2 billion all-stock deal to create one of the largest domestic utilities, the companies said. Shares in both companies fell, with Northeast down 0.9 percent to $30.42 and NSTAR off 0.6 percent to $39.30.

 

Industrial Output Declines

 

Industrial output fell 0.2 percent in September, the first decline since June 2009, according ot he Federal Reserve. It was an indication that the economy is in a slow growth pattern that will likely result in the Fed increasing the economy’s monetary base. In the third quarter, production at the nation's mines, factories and refineries rose at an annual rate of 4.8 percent, slowing from a pace of about 7 percent in the second quarter.

 

Mining output rose 0.7 percent last month, while utilities' production dropped 1.9 percent. Capacity utilization, a measure of slack in the economy, edged down to 74.7 percent, 4.2 percentage points above the year-ago level but still 5.9 points below the 1972-to-2009 average.

 

Output in September was pulled down by a 0.2 percent decline in manufacturing production, which confirmed other recent signs of a slowdown in factory activity as the stimulus from the rebuilding of inventories fades. Manufacturing of consumer goods declined for a second straight month.

 

The probability of the Fed acting increased further as a result of another report on Monday indicating that home-builder sentiment rose this month but remained at depressed levels. The National Association of Home Builders/Wells Fargo Housing Market Index rose three points to 16 in October. A reading below 50 indicates that more builders view sales conditions as poor than good. The index has not been above 50 since April 2006.

 

Although home-builder sentiment rose, the housing market remains weak and an investigation into improper processing of foreclosures carries the potential to slow its recovery as banks hold back on planned foreclosures

 

The recovery from the worst recession in 70 years has slowed markedly, leaving unemployment uncomfortably high and inflation too low for the Fed's liking. The Fed has already pumped $1.7 trillion into the economy by buying mortgage-related and government bonds. It now appears on the verge of launching another round of bond buying. On Friday, Fed Chairman Ben Bernanke offered a strong signal that more monetary policy easing was imminent, but offered few clues on the size of the asset purchase program.

 

Financial markets, which have largely priced in a second round of quantitative easing, were little moved by the economic data. Meanwhile, the dollar fell against a basket of currencies.

 

CME Clearing Interest Rate Swaps

 

CME Group, the world's leading and most diverse derivatives marketplace for futures and options products, said on Monday that it had begun providing clearing to the $400 trillion interest-rate swaps market, the largest of the opaque markets that lawmakers are forcing onto more transparent venues.

 

Fannie Mae and Freddie Mac, whose $3 trillion in rate swaps make them the biggest potential user of such services, have signed on with CME.  PIMCO. Goldman Sachs and JPMorgan Chase are among 10 dealers who will also use the service, CME said.

 

Sweeping Wall Street reform passed over the summer will force most of the $615 trillion derivatives market onto exchanges and into clearinghouses by next summer, a requirement lawmakers hope will protect the financial system from a repeat of the 2008 crisis. The rules have created a lucrative opening for clearinghouse operators like CME, which also is the biggest U.S. futures exchange operator. A clearinghouse stands between buyer and seller in a market, guaranteeing they meet all obligations even in the case of a default.

 

CME Clearing will provide an "open access" and "futures-style central counterparty clearing" service, Chicago-based CME Group said, meaning that it will allow multiple trading platforms to hook up to its clearing services.

 

BlackRock and Citadel are the other two buy side participants in CME Group's long-awaited launch.

 

CME will compete with London-based LCH.Clearnet, which already does a brisk business in dealer-to-dealer rate swaps, as well as NASDAQ OMX Group’s majority-owned International Derivatives Clearing Group, which as the first swaps clearer has $400 million in open interest on its books to date.

 

However, CME, as the biggest global clearer of interest-rate futures, has a potential leg-up on its rivals because it can offer clients discounts on the amount of money they must put up to back their swaps, as long as they have offsetting futures positions.

 

CME said it is working with its regulator, the Commodity Futures Trading Commission, to obtain permission to offer margin reductions.

 

As swaps users begin to shift their business onto clearinghouses, CME and others may capture some of the revenue that until now has been controlled by the banks that control the swaps market.

 

Crude above $83 per Barrel

 

The price of crude oil rose above $83 per barrel on Monday, the largest percentage gain in two weeks, as a strike in France tightened fuel supplies and the dollar pulled back from early gains. The dollar's early strength had pressured oil, but the dollar later gave up gains against the euro and a basket of currencies adding rise in crude prices.

 

Domestic sweet Texas crude for November delivery settled up $1.83 per barrel, or 2.25 percent, at $83.08. In London, ICE Brent December crude settled up $1.92 per barrel, or 2.33 percent, at $84.37.

 

Nationwide strikes over pension reforms in France have spread to the country's 12 oil refineries over the past seven days, adding to the impact of a three-week strike at France's largest oil port, Fos-Lavera. France began to tap emergency fuel reserves as strikes by refinery and port workers continued and a growing number of fuel stations began to run dry.

 

Domestic gasoline and heating oil futures, the distillate benchmark, also rose 2 percent as the French strikes continued to hit fuel production in the region.

 

Oil prices have moved back above $80 this month on optimism that an increase in economic activity would improve weak fuel demand but the rally lost steam at the end of last week and oil finished lower on a weekly basis.

 

Concerns about high U.S. oil inventories and tepid demand have also kept oil prices in check. Weekly oil inventory data from the Energy Information Administration is set for a Wednesday morning release.