The markets continued to gyrate this week, as investors remained fearful of issues related to European debt, specifically the debt related to Greece and Spain. The Euro after facing heaving selling pressure mid week was able to bounce and finish up the week with a slight gain. The S&P 500 Index also faced a large push to the downside but managed to climb higher to finish the week with a small loss. With all the gyration in the market, the S&P 500 Index is having a difficult time with strong resistance – the 50 day moving average.
The first bit of news the markets needed to digest on Monday was that the Dutch government collapsed over the weekend as the Labor Party withdrew from the government as it refused to agree to the NATO request to extend Dutch troops stay in Afghanistan. The spread between Dutch and German 2-year and 10-year bonds was flat Monday, suggesting no real market impact. It is the fifth Dutch government to falter since 2002.
On Tuesday, the equity markets were on the defensive as investors sold riskier assets after the conference board released a much worse than expected confidence number in the United States. The S&P 500 index fell 13 points below 1100 to 1094. Gasoline dropped 5 cents per gallon or 2.4%, and the dollar strengthened against most major currencies.
The confidence number took the markets by surprise. The Conference Board, a private research group, said its index of consumer confidence declined to 46.0 this month, from a revised 56.5 in January. The February reading was far below the 54.8 expected by economists. The present situation index, a gauge of consumers’ assessment of current economic conditions, fell to 19.4 this month from 25.2 in January. The February index was the lowest in 27 years. Consumer expectations for economic activity over the next six months dropped to 63.8 from a revised 77.3, the original was 76.5.
In other economic news, according to the S&P Case-Shiller home-price indexes, U.S. home prices fell in December but were up when adjusted for seasonal factors, , as yearly declines continued to ease. For the fourth quarter, the S&P Case-Shiller U.S. National Home Price Index posted a 2.5% decrease from a year earlier, a significant easing from the 19%, 15% and 8.7% declines in the rest of 2009. It fell 1.1% sequentially but rose 1.6% adjusting for seasonal factors. The indexes showed prices in 10 major metropolitan areas fell 2.4% in December from a year earlier, while the index for 20 major metropolitan areas dropped 3.1%. Both indexes dropped 0.2% from the previous month, although adjusted for seasonal factors, they increased 0.3%.
The markets presented a positive session on Wednesday despite dovish comments from Ben Bernanke. In his semi -annual testimony before congress, Federal Reserve Chairman Ben Bernanke said the U.S. economy still needs record-low interest rates for several months as the economic recovery is expected to be slow. In his testimony to the House Financial Services Committee, the Fed chief said the U.S. central bank is actively looking at what tools to use once the economy needs higher rates. Market participants celebrated the news that rates would continue to be low for an extended period of time.
Also of note, The Securities and Exchange Commission voted 3-2 Wednesday in favor of a final rule that will curb short selling for individual securities that decline at least 10% in a single day. The vote brings an end to almost a year of debate over the practice, in which investors attempt to profit by selling borrowed shares of a stock that is losing value.
Also on Wednesday, U.S. sales of new homes fell 11.2% in January, setting a record low and erasing all gains in the market for new homes during the past year. Demand for single-family homes fell 11.2% from the previous month to a seasonally adjusted annual rate of 309,000, according to the Commerce Department. Economists surveyed had estimated sales would rise 3.8%, to 355,000. It was the third drop in a row. Sales in December fell 3.9%, revised from an originally reported 7.6% decline. The new-home sales report is volatile because it is based on a particularly small sample. The government said it was 90% confident that the true change in new-home sales in January was between minus 25.2% and plus 2.8%. The 11.2% decrease carried sales to their lowest level since records began in 1963.
On Thursday, European news came into the spot light Moody warned that it might lower its credit rating on Greece within a month, if the Greek government misses its March fiscal targets. Moody’s credit rating, at A2, is already two notches above that of S&P (currently BBB+) which warned yesterday of a potential Greek downgrade within the month. A Moody’s downgrade would put the credit rating at the lowest investment grade before speculative grade. Even though the Euro presented a volatile session it bounced back at the end of the trading session after testing recent lows at $1.3450.
Weekly jobless claims in the U.S were also disappointing adding to the view that the outlook remains uncertain. Claims jumped unexpectedly to 496K (460K expected and vs. 474K in the prior week). The Labor Dept said the jump was due in part to a backlog of claims in the Mid-Atlantic States and New England following the recent storms. The four week average came out at 473K- a high number but still an improvement over the 513K averaged before the start of the holiday period in late November.
On Friday, Gross domestic product rose at a 5.9% annual rate October through December; the fastest rate since the third quarter of 2003. GDP expanded by 2.2% in the third quarter of 2009. A month ago, the department first estimated that GDP ,rose by an annual 5.7% in the fourth quarter. For all of 2009, GDP declined an unrevised 2.4%, which was the largest full-year contraction since the 10.9% drop in 1946. The economy expanded 0.4% in 2008 and 2.1% in 2007.
Forex
The British pound was under pressure most of the week and was hurt by the largest drop in UK business investment on record and concerns about a double dip recession. Business investment fell -5.8% q/q in Q409 vs. a consensus forecast for a 0.1% increase and vs. a downwardly revised -1.8% drop in Q309 (from -0.6%.) Adding to concerns about recession, the London Chamber of Commerce survey showed that 47% of companies expect the economy to dip back into recession with only 29% predicting a lasting recovery. While UK Q409 GDP was revised higher to 0.3% q/q (vs +0.2% expected and from an initial estimate at +0.1%) there are several negatives for the pound:
1) The upward revision in Q4 followed a downward revision in Q3 and growth throughout H209 was actually flat.
2) The upward revision in government spending boosted the overall figure and this is bad news for public finances prospects and is not sustainable.
3) Early indicators for Q110 have not been particularly promising, with the poor weather likely to bring an additional negative bias to the growth profile early this year.
The UK economy has contracted by nearly 5% in 2009, but the recovery will be very sluggish in 2010, with a 1.2% sub-trend growth rate. From a technical point of view the GBP/USD broke double support and headed lower. Friday’s session presented a doji candlestick, showing traders uncertainty going forward.
In Japan negative CPI readings are not a thing of the past: the Tokyo February CPI y/y rate was reported at -1.8% y/y (not as bad as the -2% expected outcome and from -2.1%) while the nationwide January inflation rate ran at -1.3% y/y (from -1.4%), with core CPI unchanged, at -1.2%. Continued weakness in the consumer sector (hardly a surprise at a time of struggling labor market and depressed real disposable income) was highlighted by the January large retailers’ sales (reported at a worse than expected -5.6%), but retail trade was up by a larger than expected 2.9% on the month. The USD/JPY collapsed throughout the week but managed to find support around 88.90 points. The move lower disappointed investors, hoping for a change of trend. To date the bias is still negative for the USD/JPY and a break of support could lead this pair to its prior low.
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