Monday, May 17, 2010

Market Update; Europe is still a big focus for this tape; Empire Manufacturing Index

· Market Update equities staged an impressive rally into the bell off their lows; sp500 ends up 1 points at 1136 (low today 1114); stocks shrug off plenty of negatives to finish positive.  For a change, Europe wasn’t the biggest story of the day (although it certainly remains a big worry), w/investors turning their attentions to the prospect of a global demand slowdown.  The action in the big macro commodities/metals (esp. copper but also crude, zinc, and other metals) is sending warning signals about the outlook for global eco growth.  Copper (the metal w/a “PHD in economics”) fell ~5.5% today to sub $300 (it broke through its 200day MA on Fri); this was the steepest single day decline since Feb ’09.  Crude fell ~1.5% and is trading at the lowest levels since late ’09 (although it finished off its worst levels).  Chinese equities slumped >5% overnight (the largest single day decline since Aug) on worries the country’s economic growth has peaked and will slow going forward (the recent slump in the euro is raising worries that Chinese exports to the region will be negatively impacted, something acknowledged by Chinese officials overnight).  China is trading at the lowest level since May ’09 and is down 19% from its mid-Feb levels.  Datapoints in the US added to the tape’s negative tone.  The Empire Manufacturing Index, the first major eco data point for May, came in well below expectations.  On the earnings front, LOW kicked off a busy week of retail earnings on a downbeat note (guidance was weak) and the stock fell ~4%.  In addition to global demand worries, the Dodd bill continues to work its way through the Senate and is increasing an overhang for the financial stocks (the surprise passage of the rating agency and interchange amendments last week is raising worries that the Merkley/Levin provision, among others, could be attached to the broader bill also). 

However, on the Dodd front, one of the reasons financial stocks rallied into the close was due to reports that Reid will file for cloture as soon as tonight, which some are taking to mean that the more onerous outstanding amendments may not get a chance to be voted on (although this was talked about last Fri, so wasn’t a big surprise, and the amendments could still be voted on anyway even if cloture is called).  Away from Washington, Europe is still a big focus for this tape.  Signs of financial stress remain - LIBOR and other rates have been inching higher, although on the sov CDS front, while spreads did widen on Mon, they are well below the record wides of a couple weeks ago (Spain has a bond auction on Tues that will be closely watched).  Despite a bunch of negatives, US equities remain very resilient.  The master trust #s out today indicate that credit continues to move in the right direction for the country’s financials.  The robust M&A activity over the weekend/this morning (OSIP, PTV, GLG, DBTK, etc) is indicative of rising corporate confidence (and as the Barron’s cover story this weekend revealed, corporate balance sheets are very healthy and have plenty of capacity for shareholder friendly actions).  On the tech front, indications from the JPMorgan Tech conf (following comments from day 1) indicate that demand trends remain healthy, 2) the European sovereign crisis hasn’t materially impacted business levels, and 3) inventories are behaved (these were the three big worries for tech investors).  A couple other items helping sentiment – Fox Business reported late in trading that GS was accelerating its efforts to settle w/the SEC (GS rallied ~$4 off its lows today to finish off 0.4% to $142) and the NAHB Housing Survey coming in better than expected (see below for more).

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