MarketView for September 15

 

 

Summary  

 

Share prices rallied for the fourth consecutive day, sending the major equity indexes well into positive territory as coordinated central bank action calmed fears that Europe's financial sector was headed for a credit freeze due to the region's sovereign debt crisis. Specifically, the European Central Bank announced plans, in coordination with other major central banks, to make it easier for euro zone institutions to borrow dollars.

 

Worries about a Greek default have plagued the stock market for weeks. The central bank action was the latest sign this week that Europe's political and economic leaders were stepping up their commitment to contain the crisis.

 

The news helped the financial sector as evidenced by Bank of America, which ended the day up 4 percent to close at $7.33, while General Electric gained 2.8 percent to close at $16.08.

 

Although the S&P 500 index is still down 10 percent since July 22, the broad gauge has managed a 4.8 percent gain so far this week and is on track for its best weekly percentage gain since the start of July.

 

Optimism over containing the debt crisis offset the impact of disappointing U.S. economic data. New weekly U.S. jobless claims hit their highest level since late June and a gauge of New York state factory activity contracted in September. Another report showed manufacturing activity in the Mid-Atlantic region contracted for a second month in a row.

 

After the closing bell, shares of BlackBerry maker Research In Motion fell 17.4 percent to $24.40 after it reported a sharp drop in quarterly profit and gave an outlook that did not go beyond what analysts had anticipated. The stock had finished regular-session trading at $29.54.

 

Netflix closed down 18.9 percent to $169.25 after it cut its third-quarter subscriber outlook, citing a price increase that spurred customers to shy away from its DVD-only service. Shares of UBS fell 10 percent to close at $11.41 after the company said a trader who lost the Swiss bank around $2 billion in unauthorized deals had been arrested in London.

 

Volume for the day was 7.5 billion shares changing hands on the major equity exchanges, a number that was just below last year's average of roughly 7.6 billion shares.

 

Economic Data Remains Moribund

 

According to a report by the Labor Department released on Thursday morning, the consumer price index decelerated slightly in August as gasoline prices rose at a more modest pace and the cost of buying a new car held flat.

 

According to the Department, the CPI rose 0.4 percent in August, after rising 0.5 percent in July, with food prices posting their largest gain since March. Gasoline prices were up 1.9 percent after rising 4.7 percent the prior month. Food prices rose 0.5 percent after increasing 0.4 percent in July.

 

The core index, which excludes food and energy, rose 0.2 percent after rising at the same rate in July. In the 12 months that ended in August, the core index increased 2.0 percent, making it the largest increase since November 2008. This measure has rebounded from a record low of 0.6 percent in October 2010. Overall consumer prices rose 3.8 percent year-over-year, the most since September 2008.

 

The Labor Department also a report on Thursday indicating that the number of Americans filing new claims for jobless benefits rose unexpectedly last week, a continuing indication that the weak economy is sapping the strength from an already beleaguered labor market. 

 

Applications for unemployment benefits climbed to 428,000 in the week ended Sept. 10 from an upwardly revised 417,000 the prior week, the Labor Department said. It was the second straight week in which claims rose.

 

Excluding one week in early August, claims have held above 400,000 since early April. The four-week moving average of claims, which soothes out volatility, rose to 419,500 from 415,500 the prior week. Continuing claims eased to 3.726 million in the week ending Sept. 3 from 3.738 million the previous week. The number of total recipients on benefit rolls was 7.144 million.

 

Additional Liquidity for European Banks

 

Major central banks around the world have stepped up their offering of new lines of credit to European banks for longer periods than was offered previously. The European Central Bank said it would allow banks to borrow dollars for up to three months, instead of just for one week as before. The E.C.B. said it was acting in coordination with the with the United States Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank.

 

Shares of European banks, especially French banks, have sharply fallen in recent weeks amid reports that American money market funds have been reluctant to lend to them, because of fear they are vulnerable to losses on their holdings of Greek bonds. It did not help that two of France’s biggest banks, Société Générale and Crédit Agricole, were downgraded a notch Wednesday by Moody’s Investors Service.

 

The new liquidity moves will be in addition to the E.C.B.’s current weekly dollar swaps, the bank said. The E.C.B. action came on the same day that Spain pulled off a successful, although expensive, bond sale, and a top official of the E.C.B. rejected criticism from Germany that the bank has exceeded its authority by aiding Greece and other beleaguered countries in the euro area.

 

Meanwhile, Spain just raised €3.95 billion, or $5.4 billion, of bonds maturing in 2019 and 2020, just short of its maximum target of €4 billion. However, the yields remained near record highs. The bond due Oct. 31, 2020 was sold at an average yield of 5.16 percent, compared with 5.2 percent when it was last sold on Feb. 17. That was also the level at which it was trading on the secondary market before the auction.

 

As its borrowing costs have soared, the Spanish government has been struggling to rein in spending to avoid being forced into seeking a bailout, as has happened in Greece, Ireland and neighboring Portugal.

 

On Friday, the Spanish government is set to re-introduce a wealth tax that it removed in April 2008, shortly after José Luis Rodríguez Zapatero was re-elected as prime minister. Elena Salgado, the finance minister, on Thursday estimated that the tax could yield about €1.08 billion in additional revenue from about 160,000 of Spain’s richest taxpayers.

 

In 2007, the last year that the wealth tax was collected, revenue from the wealth tax reached €2.12 billion, after more than 900,000 people were charged between 0.2 and 2.5 percent of their declared assets.

 

The current government in Spain has also pledged to lower the budget deficit to 6 percent of gross domestic product this year, from 9.2 percent last year. However, that target was set on the assumption that the economy would grow 1.3 percent this year, but the most recent data suggests that growth will in fact fall short of 1 percent for the full year.

 

The wealth tax is likely to be the last legislative measure taken by the Socialist government before a general election on Nov. 20. Opinion polls indicate that Mariano Rajoy, leader of the main center-right opposition Popular Party, will defeat the Socialist candidate, Alfredo Pérez Rubalcaba, and replace Mr Zapatero as prime minister.

 

Even though the revived wealth tax will be more narrowly focused than before, the plan has added to tensions over fiscal strategy between the federal government and regional governments that will be collecting the wealth tax on behalf of Madrid.

 

A day after the leaders of France and Germany promised to support Greece’s continued membership in the currency bloc, the German Chancellor, Angela Merkel, adopted a scolding tone, telling indebted countries to “do their homework.”

 

Appearing at the Frankfurt Motor Show, Mrs. Merkel promised that Germany would defend the euro, but insisted that troubled countries are still responsible for tackling their own problems. “It is in our fundamental interest, as the largest economy in Europe, to make our contribution in order to ensure the future of the euro,” she said. But she rejected what she called a “debt union” in Europe.

 

Mrs. Merkel said that Germany has a “duty and responsibility to make its contribution to securing the euro’s future.” But, in a statement that could reinforce perceptions that political leaders are determined move at their own pace and not be driven by financial markets, she said that stabilizing the euro area “won’t happen overnight or with any one-time thunderbolt.” She once again rejected proposals for euro bonds, or debt backed jointly by all 17 euro-zone nations.

 

Bini Smaghi, a member of the E.C.B. executive board, said it would be a mistake to leave countries at the mercy of financial markets, which he said are not functioning properly anyway. He said criticisms of the bank are “the result of inadequate economic analysis, of insufficient knowledge of the crisis in which we find ourselves and of anxiety resulting from experiences in the distant past that are not relevant to the current situation,” an apparent reference to the hyperinflation of the 1920s, which still influences German attitudes toward price stability.

 

His comments were thus an implicit riposte to German critics who have accused the E.C.B. of betraying its mandate by buying government bonds of Greece, Italy, Spain and other euro area countries to help control their borrowing costs.

 

Mr. Bini Smaghi lowered expectations that the bank might take more radical steps to contain the sovereign debt crisis. Some economists have said the E.C.B. should effectively print money to prevent deflation and a downward spiral caused by government austerity programs and slower growth in the indebted countries.

 

In a clear response to Germans who say the bank has gone too far already, however, Mr. Bini Smaghi said that there is no evidence that “any of the interventions implemented have undermined the ability of the E.C.B. to maintain price stability in the euro area in the years to come.”

 

Disagreements about E.C.B. crisis policy became increasingly evident after Jürgen Stark, the only German member of the E.C.B. executive board; resigned unexpectedly last week. Mr. Stark was a well-known opponent of the bond purchases.