MarketView for September 6

Summary  

It was another down day for Wall Street, its third in a row as fears that Europe still has failed to tackle its debt crisis, took its toll and raised the distasteful spectre that the markets could be headed to new lows for the year, although I still feel that the odds are more in favor of the market moving higher as we move through September.

Nonetheless, there was an undeniable movement of cash into less risky assets as doubts resurfaced over the political will of Italy and Greece to push through tough budget measures and as Germany hardened its stand against providing more aid. The worries over the European debt crisis renewed fears that the global economy could fall into recession.

The S&P 500 is now down 14.5 percent from its highest point in 2011, reached at the end of April. Though investors have periodically taken heart from signs that Europe has carved out a plan to deal with its festering crisis, confidence has been repeatedly walloped every time there is a development showing that the problems have not been solved.

A similar pattern of fractured confidence exists in bank stocks. Major domestic banks were among the biggest decliners on Tuesday. Not helping matters was a recent lawsuit filed by the Federal Housing Finance Agency against 17 large U.S. banks over subprime mortgage-backed bonds, compounding fears about the health of the sector. JPMorgan and Bank of America, both subjects of the suit, fell more than 3 percent on Tuesday. Bank of America lost 3.6 percent to $6.99 and JPMorgan Chase fell 3.4 percent to $33.44.

The CBOE Volatility Index, or Vix, a measure of expected market turbulence, posted its biggest gain in nearly two weeks, climbing 9.4 percent to 37.08.

Traders are monitoring lows set by major global indexes during the selloff in the first half of August. So far, only Germany's DAX, down nearly 25 percent this year, and Japan's Nikkei have fallen below those levels. The S&P 500 hit a 2011 low of 1,101 on August 9.

European shares extended losses on Tuesday, after falling more than 4 percent on Monday, hitting their lowest close in more than two years on worries the euro zone debt crisis was deteriorating. The ADRs of Credit Suisse fell 12.9 percent to $23.84.

Gold stocks moved higher as the price of gold rose to a record high above $1,920 after Switzerland pegged its currency to the euro in an effort to prevent its rapid appreciation in an extended spat of safe-haven buying. The precious metal then retreated 2 percent from that level due to profit taking.

The Financial Times reported that several large banks that are in talks with state officials on settling claims of improper mortgage practices, were offered a deal to limit legal liability in return for a multibillion-dollar payment. The offer did not go over well with the banks.

Among gainers, Sunoco rose 5.3 percent to $38.03 after the energy company said it plans to exit its refining business and focus on its logistics operations. Temple-Inland, a packaging company rose 25 percent to $30.85 after International Paper Co agreed to buy it for $32 per share. International Paper rose 8.9 percent to $27.77.

Trading volume was lower than usual at 7.9 billion shares changing hands on the major equity exchanges.

Services Sector Surprises to the Upside

The dominant services sector picked up steam unexpectedly last month, snapping a three-month streak of slower growth, though a slower pace of hiring underscored concerns about the broader job market. The surprise increase in the Institute for Supply Management's non-manufacturing index was cause for some encouragement, as it suggested consumers were holding up better than thought in what appears to be a stalling U.S. economy.

While new orders rose, suggesting continued demand, the employment index slipped to 51.6, its lowest since September 2010, underscoring the difficulties facing the roughly 14 million Americans who are out of work.

The services sector accounts for more than two-thirds of the U.S. economy, economists estimate, and is an important source of growth even for some big manufacturers such as Lockheed Martin Corp, the world's largest defense contractor.

Firmer growth in the U.S. service sector was at odds with readings from beyond U.S. borders. Data on Monday showed service sector growth slowed sharply in the euro zone, Britain and China, boosting fears of global recession.

If the United States, the world's largest economy, can keep out of recession, that outlook may improve. Wall Street increasingly expects the Federal Reserve, which already warned it may hold interest rates near zero until 2013, to pour more money into the financial system to boost growth.

Fed Chairman Ben Bernanke is scheduled to speak in Minnesota on Thursday about the U.S. economic outlook. The Fed's policy-setting committee will meet September 20-21.