MarketView for October 20

 

 

Summary 

 

Investors cannot seem to make up their minds as to whether times are good or bad as share prices rebounded on Wednesday after a precipitous decline on Tuesday. A lower dollar spurred buying in industrial and commodity-linked shares, while another batch of strong corporate earnings added to the day’s overall accretion in share prices. Equities and the dollar have had an inverse relationship lately because the Federal Reserve's ultra-low interest rate policy, which in turn has led investors to buy riskier assets like stocks and commodities.

 

The euro and the popularly traded S&P E-mini futures contract have tracked each other closely in the last month. In the last 22 sessions, they have had a positive correlation coefficient of 0.8, implying a very strong relationship between the two. The day’s trading volume was in line with the year’s average but was well below Tuesday’s abomination.

 

Materials shares led the broad market higher. Freeport-McMoRan Copper & Gold rose 2.8 percent to close at $95.35. Commodities gained ground as the dollar fell to a near 15-year low against the yen.

 

Boeing provided the Dow Jones industrial average with it greatest boost as Boeing’s shares ended the day up 3.3 percent to close at $71.36. Boeing had reported a quarterly earnings number that exceeded Street expectations, while at the same time raising its full-year forecast, as a result of the ongoing recovery in the commercial airplane market.

 

Delta Air Lines and US Airways gained ground in terms of their share prices after the two companies reported strong earnings. Delta closed up 10.9 percent at $12.97,while US Airways ended the day up 7.4 percent at $10.84.

 

Eaton was among the major industrial companies that raised their earnings guidance for the rest of the year, sending its shares up 4.1 percent at $86.82. At the same time, earnings from financial companies were mixed. Wells Fargo reported higher earnings, but Morgan Stanley reported a surprise loss. As a result, Wells Fargo closed up 4.3 percent at $25.60, while Morgan Stanley fell 0.04 percent to end the day at $25.38. US Bancorp was up 0.1 percent at $22.83 after reporting higher earnings. Marshall & Ilsley, Wisconsin's largest bank, reported a larger-than-expected loss, sending its shares down 10.2 percent to $6.24.

 

Keep in mind that Wall Street's gains since the end of the summer are directly attributable to expectations that the Federal Reserve will aid the economic recovery through additional stimulus via the continuing purchase of both Treasury and mortgage backed securities. Keeping those expectations alive, the Fed said in its Beige Book that the economy grew sluggishly in recent weeks, with scant inflation pressures, adding that employers were reluctant to hire or invest.

 

The Fed feels it can change that attitude by means of an easier money policy.

 

Beige Book Shows Sluggish Growth – so what else is new

 

According to the latest release of the Beige Book by the Federal Reserve, the economy grew sluggishly in recent weeks, with businesses struggling to raise prices and reluctant to hire and invest, the Fed said on Wednesday. Its Beige Book provided the latest evidence that the economy is stuck in a recovery too weak to generate new jobs, and reinforced the view in financial markets that the Fed will soon ease monetary policy further.

 

"National economic activity continued to rise, albeit at a modest pace," the Fed said in the report, which was prepared its next policy-setting session on November 2-3.

 

The Fed's report, which showed consumers were focused on buying only necessary items, had little impact on Wednesday’s financial activity. The central bank's march toward more stimuli for the economy has driven the dollar down in the past month and caused consternation among emerging markets whose currencies have been pushed up by investors seeking higher yields in other countries.

 

Global currency tensions are expected to get a thorough airing at meetings of the Group of 20 nations in Korea later this week. Many emerging market countries have taken steps to restrain their currencies from rising out of fear their exports would get choked off.

 

The dollar slumped anew on Wednesday on a report from an influential consulting group saying the Fed plans to purchase $500 billion in U.S. Treasury securities over six months as part of its next round of help for the faltering recover.

 

Although comments from a number of Fed policymakers in recent days point to a growing consensus in favor of another round of monetary easing, one official signaled on Wednesday he does not think conditions warrant Fed action. However, the Fed has already cut rates to near zero and purchased $1.7 trillion in government and mortgage-related debt to support the economy.

 

Philadelphia Federal Reserve Bank President Charles Plosser said he does not currently see "a great fear" of deflation although he added that he could change his mind based on incoming data. "I don't see the pay-offs for unemployment as very great and I don't see the necessity of it at this point given my forecast on inflation," Plosser said.

 

The Beige Book found that manufacturing had strengthened in most of the Fed's 12 districts, buoyed by exports in many places. Consumer spending held steady or gained slightly, but shoppers focused on necessities. Housing markets remained weak, and although home prices appeared to be stabilizing, inventories were elevated and rising in areas, the Fed said.

 

Higher costs of agricultural commodities and metals were not passed on to consumers, it added, suggesting a squeeze on corporate profits. "Pass-through of rising input costs to final prices remained limited, although there were scattered reports of increases," the Fed said.

 

The report also found that wage pressures were minimal, and that the job market and business investment remained weak.

 

"Businesses continued to postpone capital spending plans because of economic and public policy uncertainties," the Fed said. "Hiring remained limited, with many firms reluctant to add to permanent payrolls given economic softness."

 

With the U.S. unemployment rate at 9.6 percent and unlikely to move much lower soon, some Fed officials are worried the economy risks falling into a deflation, a broad-based decline in prices that could further undercut economic activity.

 

The Beige Book was based on data collected from late September through October 8 by the Dallas Federal Reserve Bank.

 

U.S. Wants Currencies To Rise

 

The United States wants the Group of 20 countries to reduce global economic imbalances by committing to curb trade surpluses or deficits and by letting their currencies rise more freely. Ahead of weekend meetings of G20 finance ministers in Gyeongju, South Korea, Washington is lobbying for currency values to be a focal point and sees current account levels as a vital part of the discussion.

 

China wasn't mentioned by name but Beijing's practice of managing the value of its yuan has angered the United States, which argues the currency's low value is fostering global currency tensions. China in turn has argued U.S. policies are the root of strained currency relationships.

 

Expectations of a further loosening in our domestic monetary policy have driven the dollar down to 10-month lows against a broad basket of currencies, fueling currency problems elsewhere. Investors seeking higher yields have sent sudden flows of capital into dynamic emerging markets like Brazil, driving their currencies up and threatening to slow exports.

 

The United States sees the G20, an organization of both advanced and key emerging-market countries, as critical in the search for ways to limit currency instability and let market forces have more sway in setting foreign exchange rates.

 

Treasury Secretary Timothy Geithner departs on Wednesday for the gathering of G20 ministers and central bank governors where currency tensions will get a thorough airing. Underlining the seriousness of the divisions, Bank of England Governor Mervyn King said on Tuesday that if policymakers can't agree on how to manage foreign exchange issues and economic imbalances, they risk sparking a destructive world-wide trade war.

 

Apparently, the United States is willing to do its part by saving more and by strengthening exports to reduce its trade gap, but other countries that enjoy trade surpluses have to cooperate in correcting imbalances by allowing their currencies to increase in value.

 

The idea would be to agree to a pre-set limit on the size a country's current account surplus or deficit should reach, expressing it in terms of a percentage of national output. The problem would be that some countries that have very high deficits or surpluses might be unwilling or unable to quickly reduce them to an agreed level.

 

Currencies are central to the meetings on Friday and Saturday, but finance chiefs also will discuss ongoing efforts to shift voting power at key lending institutions like the International Monetary Fund to emerging-market nations to reflect their economic might.