After last week’s Fitch downgrade of Spain’s sovereign debt, Europe reacted with significant red arrows to start the week. The Euro made a fresh 4-year low versus the Dollar in overseas trading after the European Central Bank said that Euro-zone banks could face up to $240 billion in write-downs this year and next. That pushed the Euro below the prior three week’s intraday low at 1.2144. Our market bounce last week was helped by the Euro holding this intraday low. Friday’s weakness also held, which is likely why we didn’t see our market break harder. By the time the Euro opened for trading in the US, it did recover above this level and traded back to the plus side. It was this movement that helped salvage a potentially worse day. In addition to the obvious weakness in the Financial sector throughout Europe, Energy and Oil Drilling stocks were falling after British Petroleum BP (-15.0%) failed to cap the Gulf Oil Spill over the weekend. BP was off 13% in UK trading. As the drop in BP adversely impacted the Energy ETFs, a wave of selling in these instruments caused further weakness in the broader underlying securities. There was also weakness throughout Europe and Asia after two economic reports on Chinese manufacturing were less optimistic in May. China’s equivalent of our ISM Index slipped to 53.9 in May from 55.7. HSBC’s PMI also fell to 52.7 from 55.2, suggesting a slowing in activity from its recent pace. It is still growth, but at a slower level. Between the stronger Dollar and weakening demand from China, commodities were under pressure early, causing Energy and Basic Material stocks to add to the pressure exerted by the Financials in European trading.
Our market did start the day over 80 points lower on the Dow. The catalysts were all of these fears that had negatively impacted Asian and European trading. However, the Euro recovered before our stock market opened and strengthened in the first half hour of trading. If there is any question as to how closely tied our market is to the Euro and the Dollar, yesterday was proof that we are not over it yet. One reason for the comeback rally was that our all-important gauge of manufacturing activity, the ISM Index, fell less than anticipated. The ISM for May dipped to 59.7 from 60.4. Expectations were for a decline to 59.0. Prices Paid were firm at 77.5 versus 78.0. A more significant decline was anticipated. This can be seen as good news, in that companies maintained some positive pricing power. The New Orders Index was unchanged at 65.7, a very strong number and a surprise after seeing several of the regional surveys reporting a decline in orders. Production was fairly steady at 66.6 versus 66.9. Employment was another positive surprise, rising to 59.8 versus 58.5. This is now the 5th consecutive reading over 50 and highest reading since November 2009. Heading into this Friday’s report on May jobs, this was encouraging news. Finally, with production and new orders steady, inventories continue to be depleted. The index on Inventories fell to 45.6 from 49.4, the lowest reading since December 2009 and a drop from the March push over 50 to 55.3. Just looking at the ISM Index, the recovery remains on track, and that little bit of positive domestic news was a significant boost to those trying desperately to look past the negative events in Asia and Europe.
There were a couple of other smaller economic reports. Another regional report on manufacturing activity was out from the Dallas Fed. The index dropped in May to 2.9 from 21.1, somewhat discouraging after the ISM number. Production increased to 20.8 from 18.2, New Orders were flat at 15.8, and inventories fell into the red at -4.6 from +2.2. Construction Spending in April surged 2.7% after edging up an upwardly revised 0.4% in March. This was the largest monthly increase in spending since 2000. Unfortunately, one could credit the end of the tax credit for home-buyers. Contracts needed to be signed by the end of April, causing a spurt of buyers in the new home market. However, even crediting the government for the rise, the number represents the ability to add to a depleted inventory of new homes.
There was a mixed bag of individual stock news. American International Group AIG (-3.2%) said it would not accept a lower bid from UK Prudential PUK (+5.9%). They originally agreed to pay $35.5 billion for the Asian operations at AIG. Prudential then lowered the offer to $30.38. AIG stock sank on the news, but Prudential’s stock rallied, since analysts thought the company was paying too much for the acquisition. Domestically, the BP failed “top kill” hurt several domestic producers, sending the NYSE Arca Oil Index XOI down 5.1%. Dow Component Hewlett-Packard HPQ (-0.9%) announced plans to invest $1 billion in consolidating and automating its data centers, resulting in 9,000 layoffs spread out over several years. Apple Inc. AAPL (+1.5%) announced it recently topped the 2-million mark on its iPad tablet sales. It may have been a small deal, but we’re willing to dig for good news. Covidien PLC COV (-2.7%) offered $2.6 billion for vascular device maker ev3 Inc. EVVV (+17.4%).
Yesterday’s action was mixed, at best. Even when the Dow was higher, it was led by the more defensive stocks. At the end of the day, it was the Food, Tobacco, Food and Staple Retailers, Household Products, Telecomm, and Pharmaceuticals that were holding up. This isn’t the kind of leadership that will sustain a rally, and it certainly didn’t yesterday. Energy, Basic Materials, Autos, Consumer Durables, Capital Goods, Financial, and Transportation were on the bottom of the list. Just looking at the internals uncovers the weakness within the market. There’s a lot of domestic economic data out this week, but the ability to focus on these data has been diverted by the global events. Today’s Pending Home Sales isn’t likely to be the kind of news that gets the attention away from the global crisis. Technically, the markets failed at the end of the day, and for good reason. Poor leadership and a worry that each morning we’ll wake up to yet another nasty start from how the Asian and European markets were trading have traders pushing for the exit at the end of the day and willing to recover tomorrow if there’s good news. This is a vicious circular cycle and the short-term has not been able to escape it yet.
After last week’s Fitch downgrade of Spain’s sovereign debt, Europe reacted with significant red arrows to start the week. The Euro made a fresh 4-year low versus the Dollar in overseas trading after the European Central Bank said that Euro-zone banks could face up to $240 billion in write-downs this year and next. That pushed the Euro below the prior three week’s intraday low at 1.2144. Our market bounce last week was helped by the Euro holding this intraday low. Friday’s weakness also held, which is likely why we didn’t see our market break harder. By the time the Euro opened for trading in the US, it did recover above this level and traded back to the plus side. It was this movement that helped salvage a potentially worse day. In addition to the obvious weakness in the Financial sector throughout Europe, Energy and Oil Drilling stocks were falling after British Petroleum BP (-15.0%) failed to cap the Gulf Oil Spill over the weekend. BP was off 13% in UK trading. As the drop in BP adversely impacted the Energy ETFs, a wave of selling in these instruments caused further weakness in the broader underlying securities. There was also weakness throughout Europe and Asia after two economic reports on Chinese manufacturing were less optimistic in May. China’s equivalent of our ISM Index slipped to 53.9 in May from 55.7. HSBC’s PMI also fell to 52.7 from 55.2, suggesting a slowing in activity from its recent pace. It is still growth, but at a slower level. Between the stronger Dollar and weakening demand from China, commodities were under pressure early, causing Energy and Basic Material stocks to add to the pressure exerted by the Financials in European trading.
Our market did start the day over 80 points lower on the Dow. The catalysts were all of these fears that had negatively impacted Asian and European trading. However, the Euro recovered before our stock market opened and strengthened in the first half hour of trading. If there is any question as to how closely tied our market is to the Euro and the Dollar, yesterday was proof that we are not over it yet. One reason for the comeback rally was that our all-important gauge of manufacturing activity, the ISM Index, fell less than anticipated. The ISM for May dipped to 59.7 from 60.4. Expectations were for a decline to 59.0. Prices Paid were firm at 77.5 versus 78.0. A more significant decline was anticipated. This can be seen as good news, in that companies maintained some positive pricing power. The New Orders Index was unchanged at 65.7, a very strong number and a surprise after seeing several of the regional surveys reporting a decline in orders. Production was fairly steady at 66.6 versus 66.9. Employment was another positive surprise, rising to 59.8 versus 58.5. This is now the 5th consecutive reading over 50 and highest reading since November 2009. Heading into this Friday’s report on May jobs, this was encouraging news. Finally, with production and new orders steady, inventories continue to be depleted. The index on Inventories fell to 45.6 from 49.4, the lowest reading since December 2009 and a drop from the March push over 50 to 55.3. Just looking at the ISM Index, the recovery remains on track, and that little bit of positive domestic news was a significant boost to those trying desperately to look past the negative events in Asia and Europe.
There were a couple of other smaller economic reports. Another regional report on manufacturing activity was out from the Dallas Fed. The index dropped in May to 2.9 from 21.1, somewhat discouraging after the ISM number. Production increased to 20.8 from 18.2, New Orders were flat at 15.8, and inventories fell into the red at -4.6 from +2.2. Construction Spending in April surged 2.7% after edging up an upwardly revised 0.4% in March. This was the largest monthly increase in spending since 2000. Unfortunately, one could credit the end of the tax credit for home-buyers. Contracts needed to be signed by the end of April, causing a spurt of buyers in the new home market. However, even crediting the government for the rise, the number represents the ability to add to a depleted inventory of new homes.
There was a mixed bag of individual stock news. American International Group AIG (-3.2%) said it would not accept a lower bid from UK Prudential PUK (+5.9%). They originally agreed to pay $35.5 billion for the Asian operations at AIG. Prudential then lowered the offer to $30.38. AIG stock sank on the news, but Prudential’s stock rallied, since analysts thought the company was paying too much for the acquisition. Domestically, the BP failed “top kill” hurt several domestic producers, sending the NYSE Arca Oil Index XOI down 5.1%. Dow Component Hewlett-Packard HPQ (-0.9%) announced plans to invest $1 billion in consolidating and automating its data centers, resulting in 9,000 layoffs spread out over several years. Apple Inc. AAPL (+1.5%) announced it recently topped the 2-million mark on its iPad tablet sales. It may have been a small deal, but we’re willing to dig for good news. Covidien PLC COV (-2.7%) offered $2.6 billion for vascular device maker ev3 Inc. EVVV (+17.4%).
Yesterday’s action was mixed, at best. Even when the Dow was higher, it was led by the more defensive stocks. At the end of the day, it was the Food, Tobacco, Food and Staple Retailers, Household Products, Telecomm, and Pharmaceuticals that were holding up. This isn’t the kind of leadership that will sustain a rally, and it certainly didn’t yesterday. Energy, Basic Materials, Autos, Consumer Durables, Capital Goods, Financial, and Transportation were on the bottom of the list. Just looking at the internals uncovers the weakness within the market. There’s a lot of domestic economic data out this week, but the ability to focus on these data has been diverted by the global events. Today’s Pending Home Sales isn’t likely to be the kind of news that gets the attention away from the global crisis. Technically, the markets failed at the end of the day, and for good reason. Poor leadership and a worry that each morning we’ll wake up to yet another nasty start from how the Asian and European markets were trading have traders pushing for the exit at the end of the day and willing to recover tomorrow if there’s good news. This is a vicious circular cycle and the short-term has not been able to escape it yet.