Developments at EU Summit Will Steer Markets
Markets Friday will be buffeted by headlines from the European leaders’ summit, but the bar is low for any progress.
“I’ve taken a view that expectations are just so low that anything positive could be constructive for the euro, and lead to a small squeeze,” said Alan Ruskin, G-10 currency strategist at Deutsche Bank. “I see the counterpoint too, where some people are thinking that you sold the rumor, and you can sell the fact too.”
Stocks Thursday traded sharply lower but rallied into the close, with the Dow down just 24 to 12,602, and the S&P 500 off 2 at 1,329. The Nasdaq fell 25 points to 2,849, dragged down by a big decline in technology stocks. The S&P tech sector was the worst performer, down 1 percent. The euro, meanwhile, was down 0.2 percent at 1.2444.
A late day rally came after wire service headlines said German Chancellor Angela Merkel canceled an evening press conference, suggesting to traders that leaders were making progress in talks. Later European Council president Herman Van Rompuy said the leaders agreed to the expected 120 billion euro stimulus package and a 10 billion euro boost to the European Investment Bank’s capital base.
After the first day of meetings Thursday, Van Rompuy said leaders would discuss short-term measures they could take to stop the crisis, and that two countries, believed to be Italy and Spain, wanted to discuss ways to drive down borrowing costs. Speculation circulated earlier that talks were underway about possible purchases of Italian and Spanish sovereign bonds.
“I think there’s a sense that everyone knows they need a roadmap that gets them from a monetary union, without banking union, without fiscal union, and without political union to include those other three main features. These are big things to get to from here,” said Ruskin.
“It’s a long and winding road to get to the road map, and we’re not even going to get proper details on a road map until the end of the year,” he said.
The stock market’s decline at its worst moments Thursday was “about 75 percent Europe,” said Art Cashin, director of floor operations at UBS. He said the Dow lost about 50 points from Thursday morning’s much anticipated Supreme Court ruling, which left in place some basic provisions of the health care overhaul but limited the Medicaid provision. Chief justice John Roberts, writing for the majority, said Congress could use its power to tax as a way to compel individuals to carry health insurance. The ruling was seen largely as a victory for President Obama.
Another negative for markets was the continuing weakness in employment data. Weekly jobless claims were again elevated, at 386,000 and a revision to last week’s number put it at 392,000. Friday’s data includes personal income and spending, at 8:30 a.m. ET; Chicago PMI at 9:45 a.m., and consumer sentiment at 9:55 a.m.
Ed Keon, managing director at Prudential Financial’s Quantitative Management Associates, said from a market perspective, the economic news and European concerns outweigh the health care ruling and other policy matters in the U.S., for now. Keon said he currently has more cash than usual.
“The good economic momentum we were getting in the first quarter slipped considerably. There are any number of events in Europe that could occur. We certainly saw that in 2008 in the United States, and I fear we are at least vulnerable to events that could spin out of control very quickly,” he said.
But there was also a view that a Supreme Court ruling that supported or split on the health care bill would be a negative, after there was so much speculation it would be overturned.
“Our view was if the bill was upheld it would be a clear negative, and it’s pretty consistent with our overall broad view,” said Barry Knapp, Barclays head of equity portfolio strategy. “We thought once we got into the second quarter and until the rest of the election was in much clearer focus, public policy uncertainty would be on the rise, and what it would do is it would dampen business confidence and we’ve seen evidence of that in weak capital spending and in labor investment, evident in this morning’s number.”
“We also though that would weigh pretty significantly on investor sentiment,” said Knapp, speaking on “Squawk on the Street.”
Thursday’s after the bell earnings news could also spill into stocks Friday.
Ford Motor rang the warning bell on Europe and other global weakness, saying its second quarter international division’s operating losses will be triple the first quarter’s $190 million. It will be overall profitable for the quarter.
Nike stock also fell sharply after it reported earnings of $1.17 cents a share in its fourth quarter, down from with $594 million, or $1.24 a share, a year ago and 20 cents short of expectations. Inventories jumped 23 percent, and future orders rose 7 percent.