MarketView for June 19

MarketView

Events defining the day's trading activity on Wall Street

Lauren Rudd

Thursday, June 19, 2008

Summary

Stocks rallied on Thursday as a decline in the price of crude oil, brought on by a statement from China that it was raising the tax on fuel to reduce demand, which in turn would mean greater supplies for the rest of the world, brought on a state of mild euphoria on Wall Street. There was also increased optimism with regard to consumer spending, with the result that the shares of transportation companies and retailers led the markets higher. Big retailers such as Home Depot ended the day higher. Home Deport itself was up $, or  2.37 percent to close at $27.18. The price of crude oil settled down 3.5 percent at $131.93 per barrel.

The shares of the large technology companies, such as Intel, rose as Wall Street reevaluated its outlook on the large techs and then proceeded to go on a buying spree on the view that several of the large techs were oversold in recent weeks. The Philadelphia Stock Exchange Semiconductor Index rose 2.6 percent, erasing about half of its more than 5 percent loss in the past two weeks.

The beaten-down airline sector saw its second-best day of the year, with several industry leaders like American Airlines' parent AMR ended the day with a gain of 85 cents, or percent, to close at $6.31. Delta Air Lines climbed 17 percent to close at $6.38; United Airlines owner UAL (UAUA increased 23.8 percent to $8.11 and Continental Airlines was up 16.0 percent to close at $15.59.

Shares of aircraft maker Boeing rallied 3.1 percent to $76.95, making it the top-weighted gainer on the Dow.

Citigroup  saw its share price take a major hit on Thursday, falling $, or 1.1 percent, to close at $20.17 after its chief financial officer, Gary Crittenden, told investors that it could have substantial write-downs on subprime mortgages in the second quarter Bank of America fell 0.8 percent to close at $28.14.

However, American International Group (AIG) rallied 4.9 percent to $33.07, helped by an upgrade from Citigroup, making it the second largest gainer on the Dow.

Fed’s Inflation Stance Hits Housing

The Federal Reserve's recent tough talk on inflation served notice to financial markets that the central bank was serious about tamping down price pressures. At the same time, the Fed’s buttress against rising inflation has hit a nerve in the economy...housing.

Markets took immediate heed of surprisingly strong comments delivered by Fed Chairman Ben Bernanke and Vice Chairman Donald Kohn on inflation earlier this month and began to judge chances of a rate hike at the Fed's August meeting a near certainty.

But a side effect of this new respect for the central bank's commitment to price stability came in the form of elevated longer-term interest rates, which reflects a steeper than previously expected march up in the overnight borrowing costs that the Fed controls.

These higher long-term rates on Treasury securities have quickly translated to higher rates for fixed-rate mortgages, a drop in mortgage applications and a slide in home loan refinancing that could push the prospect of a strengthening in anemic economic conditions further into the future.

The Fed may have been taken aback by the degree to which markets built in chances of rate hikes after Bernanke promised to "strongly resist" a rise in inflation expectations and Kohn said a rise in anticipated price increases over the longer term would be "troublesome."

In a sign the Fed may worry it overplayed its hand, anonymous senior officials and sources close to Bernanke were cited in newspaper reports this week as saying markets may have overreacted to hawkish Fed rhetoric.

The Fed would respond aggressively if inflation expectations spiked, but some Fed officials believe rates should hold steady if those elevated expectations do not materialize, the Financial Times said in one report.

The apparent efforts by the Fed to fine-tune its message came just shortly before its June 24-25 policy-setting meeting.

While the Fed is widely expected to hold interest rates steady next week, it may signal that its concerns have begun to move away from risks to growth and toward the risk of inflation.

In doing so, the Fed faces a delicate balancing act and the difficult task of offering a clear signal to financial markets as it tries to both tamp down inflation risks and nurse the economy back to health at a time oil prices have hit a record high near $140 a barrel.

Housing is at the heart of woes afflicting the sluggish economy. In each of the last two quarters, home building has fallen at an annual rate of more than 25 percent.

Reflecting rising worries about inflation, the yield on benchmark 10-year Treasury note leaped to a peak near 4.29 percent on June 13 from around 3.90 percent two weeks ago. Since last Friday, the 10-year Treasury's yield has settled back to about 4.20 percent.

Despite the moderation of its message, the Fed is signaling that now that the worst of the financial market crisis appears to be over, it would tolerate sluggish growth to wring inflation from the system.

Fuel Prices Rise in China

China raised retail gasoline and diesel prices on Thursday by up to 18 percent, a move that threatens to stoke domestic angst over decade-high inflation less than two months before Beijing hosts Olympics games. The increase in regulated fuel prices, China's first hike in eight months and its sharpest ever one-off rise, sent oil prices down by as much as $3 a barrel on the bet it might help curb soaring demand from the world's second-largest oil user. The rise shows China following its neighbors from India to Indonesia in bowing to the pressure of near $140 crude oil.

Most analysts had expected Beijing to hold off on an unpopular fuel price rise until after the Olympics in order to keep a leash on inflation. Prices for gasoline and diesel prices will rise by 1,000 yuan ($145.5) per ton each effective from midnight, state media reported on Thursday evening. China also raised jet fuel prices by 1,500 yuan per tonne.

"Global crude prices have been rising sharply and Chinese domestic fuel prices have lagged behind. The price difference has highlighted the contradiction between demand and supply," state television said, quoting the National Development and Reform Commission.

Beijing will also raise average electricity tariffs by 0.025 yuan/kwh or about 4.7 percent on average, a rise that will primarily affect industrial and commercial users, the NDRC, China's top planning body, said on its web site. The rise, which will be effective from July 1, is its first broad increase in years and will bolster power companies struggling with the soaring cost of coal, which generates some three quarters of China's electricity. Beijing meantime announced that it will freeze thermal coal prices, which would further safeguard profits for power firms to help avert brownouts as peak summer use nears.

However, U.S.-listed shares in top refiner Sinopec surged over 8 percent as the increase will aid their profits. Refiners Sinopec and number two PetroChina, which is less reliant on costly imported crude, will get an immediate boost from the price increase as they have faced years of losses from paying rising global prices for crude and selling refined gasoline and diesel at below-cost domestic rates.

The latest increase took many market watchers by surprise as Beijing has repeatedly vowed to rule out "near-term" price increases to battle high inflation and avoid social unrest barely two months away from the Beijing Olympics. Fearful of stirring popular resentment, Beijing pledged subsidies to weaker groups such as farmers, fishermen and cab drivers, right after the announcement of the price hike.

In Beijing and Shanghai, motorists queued for gasoline at petrol stations on Thursday night as word of the price hike leaked out. Police stood by at one Beijing petrol station. At least one station told customers that it could not serve them until the price hike took effect at midnight, prompting an altercation between staff at the station and a group of angry motorists.