MarketView for September 4

Summary

The S&P 500 closed slightly lower on Tuesday as Wall Street patiently awaits clarity on the European Central Bank’s plans to shore up heavily indebted countries. Adding some momentum to the activity on the Street near the close was a rally in the shares of Apple. Apple rose 1.5 percent to $674.97 and helped erode broader losses. The tech giant distributed invitations to an event in San Francisco on September 12, setting the stage for what is widely expected to be the release of the iPhone 5.

Equities were lower for much of the session, with industrial and material shares weak after a report showing manufacturing contracted by its fastest pace in more than three years in August. FedEx cut its fiscal first-quarter forecast after the market's close, stating that the global economy is weaker than thought and is having a detrimental effect on the Company’s sales. Right or wrong, FedEx is seen as a window on the economy because of the wide range of industries it serves. The shares fell 4 percent in extended trading.

Manufacturing contracted for a third straight month in August while firms in the sector hired the fewest workers since late 2009, according to an Institute for Supply Management survey. The data followed similar disappointing readings on manufacturing elsewhere in the world.

Markets remain skittish ahead of the ECB's meeting on Thursday, where ECB President Mario Draghi is expected to unveil plans to lower borrowing costs for countries such as heavily indebted Spain and Italy.

While there has been disappointment with regard to past euro zone efforts to solve the debt crisis, some are now positioning themselves optimistically. Bill Gross, co-founder of PIMCO, tweeted that Draghi appeared willing to write two- to three-year checks to peripheral nations and recommended investors buy gold and Treasury Inflation Protected Securities.

Separate data showed U.S. construction spending in July fell by the most in a year as both the private and public sectors cut back on investment, according to a report that could dampen hopes of a pick-up in economic activity in the third quarter.

The all-important payrolls report due Friday will also be closely watched. The employment report will be the final major economic report before the Federal Open Market Committee meets on September 12-13.

Equities had risen lately on hopes the Fed will launch a third round of stimulus to boost the economy and that the ECB will soon start buying bonds of troubled euro zone economies to contain the debt crisis.

In company news, Valeant Pharmaceuticals agreed to buy Medicis Pharmaceutical for $2.6 billion in cash. Valeant shares climbed 15 percent to $58.78, while Medicis rose 38 percent to $43.65.

Trading volume was light, with about 5.53 billion shares changing hands on the three major equity exchanges, a number that was well below last year's daily average of 7.84 billion. Volume tends to be anemic during the summer but it has been especially low lately as investors await clarity on central bank action and many market participants were out for the Labor Day holiday.

Manufacturing Remains Depressed

Manufacturing in the United States contracted at its sharpest rate in more than three years last month, according to an Institute for Supply Management survey released on Tuesday. It was the latest sign that the slowing global economy is weighing on an already weak domestic economic recovery. The ISM's index of national factory activity fell to 49.6 for August from 49.8 in July. A reading below 50 indicates contraction in the key sector.

August was the third month in a row of contraction in the factory sector, according to ISM. Firms hired the fewest workers since late 2009, a piece of data that could be a possible red flag for the August U.S. jobs report due out on Friday.

Manufacturing has faded as a driver of our economic recovery, which is still struggling to add jobs more than three years after the recession was formally declared over. Furthermore, on Monday, data showed a contraction in manufacturing had deepened in both Europe and China.

A separate gauge of U.S. manufacturing showed the sector grew in August but at a pace that was still one of the weakest since October 2009. The Markit Manufacturing Purchasing Managers Index stood at 51.5 last month, higher than the 51.4 reading in July thanks to a slight increase in output and overall new orders. However, August's final reading, released on Tuesday, fell short of a preliminary estimate as exports declined for a third straight month, and firms were slow to add new workers. New export orders were a drag on activity, as slow or negative growth in Europe and elsewhere sapped foreign demand for U.S. products, the survey showed.

Meanwhile, the European markets await a European Central Bank meeting on Thursday. ECB President Mario Draghi, who has pledged to do "whatever it takes" to save the euro, may present details of a new bond-buying plan that could ease the crisis. On Monday, Markit's final Eurozone Purchasing Managers' Index (PMI) notched its 13th month of contraction, showing Germany and France are suffering downturns. In addition, surveys have indicated that China's vast manufacturing sector has been badly hit by slowing new orders.

Another report showed that lending to small U.S. businesses edged up in July, but the size of the increase was too modest to signal that there was much momentum to the economy. The Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of financing to small American companies, rose to 103.8 from 100.5 in June, PayNet said. Borrowing was up 15 percent from a year earlier.