Business Blog Posts

With the blow from the August 5 U.S. credit rating downgrade behind them, investors will focus on the outlook for the U.S. economy as well as signs that European policymakers may be able to contain the euro zone debt crisis.

Widespread investor panic put the market on a roller-coaster ride this week, with steep losses followed by nearly-as-steep gains in high-volume trading. It was the busiest week for volume since October 2008.

Though investors are still searching for a bottom in the selloff that has taken the benchmark Standard & Poor's index .SPX down 12.4 percent since July 22, indexes rose both Thursday and Friday -- the index's first two-day rally since mid-July -- and volatility eased.

The move could set stocks up for a calmer week, especially if economic data shows the United States is not headed for another recession, strategists said.

"Every bit of data that shows the economy not slipping into recession is going to be the basis for the market to begin to calm down in the weeks ahead," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

While Wall Street stocks ended higher on Friday, the market fell for the week. The Dow fell 1.5 percent and the Nasdaq lost 1 percent. The S&P 500 fell on 11 of the past 15 days, dropping 12.4 percent in three weeks.

Housing and manufacturing reports are among indicators on tap next week, including the New York and Philadelphia Federal Reserve regional manufacturing surveys and existing home sales.

Manufacturing has been among the strongest sectors of the economy, but a report earlier this month dented that picture.

The Institute for Supply Management manufacturing report, a gauge of factory activity, fell to in July to its lowest in two years and was barely above the mark dividing growth and contraction.

It was quickly followed by an ISM report showing the pace of growth in the U.S. services sector ticked down unexpectedly.

More recent data has suggested the economic recovery will stay on course.

U.S. Commerce Department data on Friday showed retail sales posted the biggest gains in four months in July, which was a catalyst for stocks to rise.

"We think the deterioration in the U.S. macro outlook got us into this mess and will likely get us back out," said Barry Knapp, head of US equity portfolio strategy at Barclays Capital in New York.

"If we're right...we will get the stock market to trade at least back into its old 1,250 to 1,350 range that prevailed from March through the recent downturn."

Retail earnings have been among the few bright spots in the market this week. Kohl's Corp (KSS.N) reported earnings that beat estimates and raised its full-year profit view.

Results from more top retailers are expected next week, including Wal-Mart Stores (WMT.N), due to report on Tuesday.

"I will be looking for any data that show what back-to-school (sales) might look like, and later, into the fall, we'll be looking for what the holiday season might look like," said Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Maryland, which manages about $14.8 billion.

Earnings growth for the second quarter is expected to have risen 11.8 percent, according to Thomson Reuters data, and many analysts consider the solid growth to remain a cushion for stocks going forward.

The S&P 500's price-to-earnings ratio is at 10.46, according to Thomson Reuters data, considered cheap by historical standards.

That valuations are cheap suggests to some strategists that stocks remain attractive, especially when compared with U.S. Treasuries, but others say earnings expectations are likely to deteriorate going forward.

Besides concerns about the U.S. economic outlook, worries about the European debt crisis persist.

Investors look forward to a meeting next week between French President Nicolas Sarkozy and German Chancellor Angela Merkel, who are expected to discuss how to make the euro zone work more effectively in dealing with the crisis.

TECHNICAL DAMAGE

Technically, the market remains weak.

"Most technicians would agree that the long-term market cycle has been damaged, given two-year uptrends have been broken, monthly momentum indicators have turned down, and a lengthy list of stocks have collapsed through important long-term support levels on expanding volume," analysts at RBC Capital Markets said in a research note Friday.

Bruce Zaro, chief technical strategist at Delta Global Asset Management in Boston, said this week one sign the market's downturn may not be over is a measure of stocks with 52-week highs versus 52-week lows, which is low.

(Reporting by Caroline Valetkevitch; Editing by Kenneth Barry)

The Commerce Department releases July retail sales data at 8:30 a.m. EDT. Economists in a Reuters survey expect a 0.5 percent rise compared with a 0.1 percent increase in June. Excluding automobiles, sales are expected to rise 0.2 percent versus a flat reading in June.

Thomson Reuters/University of Michigan Surveys of Consumers release preliminary August consumer sentiment index at 9:55 a.m. EDT. Economists expect a reading of 63.0 compared with 63.7 in the final July report.

Bank of America Chief Executive Brian Moynihan met privately this week with Treasury Secretary Timothy Geithner and Federal Reserve governor Daniel Tarullo amid the campaign to calm investors and employees about the bank's share price fall, the Wall Street Journal reported.

The Commerce Department issues Business Inventories for June. Economists in a Reuters survey expect a 0.5 percent increase versus a 1.0 percent rise in May.

At 10:30 a.m. EDT, Economic Cycle Research Institute (ECRI) releases its weekly index of economic activity for August 5. In the prior week the index read 128.3.

China's yuan currency looks set for a speedier rise against the U.S. dollar in the coming months as Beijing tries to tamp down inflation and reduce its exposure to U.S. and European debt, Chinese media and traders said on Friday.

Dollar funding costs edged up on Friday, hovering around the highest levels since the 2008 financial crisis, as markets saw Europe's move to ban short-selling of shares as only a temporary fix that would not address deteriorating conditions within the euro zone.

Korean company Samsung Electronics will go to a German court on August 25 to try to overturn a ban on it selling flagship Galaxy tablets in most of the European Union. Earlier this week, a Duesseldorf court temporarily barred Samsung from selling its tablets, following an injunction filed by Apple which had said the Galaxy line of mobile phones and tablets "slavishly" copied its iPad and iPhone.

Department store chain J.C. Penney is set to announce results.

The FTSEurofirst 300 index of top European shares was up 0.7 percent on Friday, extending the previous session's gains of 2.7 percent.

U.S. stocks shot up 4 percent on Thursday as bargain-hungry investors overcame the recent wave of fear that drove selling over the last two weeks.

The Dow Jones industrial average surged 423.37 points, or 3.95 percent, to 11,143.31. The Standard & Poor's 500 Index shot up 51.88 points, or 4.63 percent, to 1,172.64. The Nasdaq Composite Index jumped 111.63 points, or 4.69 percent, at 2,492.68.

(Reporting by Atul Prakash)

France, Italy, Spain and Belgium imposed the ban, under which details varied according to country -- while Britain, the Netherlands and Austria said they saw no need for action and Germany remained silent.

"It's naive to think that this in some way helps things," said Dipesh Patel, head of European equities at Espirito Santo Investment Bank.

"The worry now is that this is a last-ditch attempt to keep stocks up against investor opinion."

European markets have swung wildly this week on rumors about the health and funding needs of indebted euro zone governments, and more recently on some of its major banks, which have sent shares tumbling.

On Friday morning the STOXX Europe 600 banking index .SX7P yo-yoed, then crept steadily higher. By 4:49 a.m. EDT it showed a 2.2 percent gain, helping the broader market .STOXX to advance 3.8 percent.

French banks, at the center of much of the market's attention and included in the ban on short-selling, were up: Societe Generale (SOGN.PA) rose 1.2 percent, BNP Paribas (BNPP.PA) added 1.4 percent and Credit Agricole (CAGR.PA) gained 0.3 percent.

The banking index has fallen 36 percent from a peak in February and is down some 17 percent in August alone.

Short-selling is the process through which an investor borrows shares and sells them on the expectation their price will fall and they can be bought back at a lower price.

However, market players said the ban did not tackle the root causes of investors' concerns -- joined-up, long-term fiscal policy in the euro zone - and pointed out that nervous mutual funds were currently behind the sell-off.

A crackdown on speculative short-selling is unlikely to arrest moves from institutional investors who have decided they have little stomach for big holdings in banks and indebted governments who might call on them again for emergency capital.

"Data from various regulators of late have shown there is no short-selling activity out of the norm," said Davide Burani, financial analyst at Italian fund manager Horatius.

"Investors are selling in Italy from fear. Italian banks are holding around 200 billion euros of Italian bonds."

Alessandro Frigerio, fund manager at Milan's RMJ Sgr said the ban could work if, combined with proposals from Tuesday's meeting of French President Nicholas Sarkozy and German Chancellor Angela Merkel, it were to "give the idea that there could be a rescue for the euro zone and a rebound in the market"

"ABUSIVE" STRATEGY

The European Securities and Markets Authority (ESMA) said short-selling combined with rumor-mongering created a strategy that was "clearly abusive."

"Some authorities have decided to impose or extend existing short-selling bans in their respective countries," it said late on Thursday. "They have done so either to restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field."

France banned short selling on 11 financial stocks for 15 days, Spain said it would protect 16 stocks for 15 days, Belgium banned short selling of four financial stocks for an indefinite period and Italy said its ban covered 29 companies in the banking and insurance sector.

Banks on the list included France's BNP Paribas (BNPP.PA) and Societe Generale (SOGN.PA), and Spain's Santander (SAN.MC) and BBVA (BBVA.MC).

French Finance Minister Francois Baroin said he welcomed the ban and added the country's banks were among the world's safest.

This week's market turmoil focused on speculation about French banks, which are heavily exposed to European countries at the center of the region's debt crisis. Societe Generale, France's No. 2 lender, has especially been in the eye of the storm.

Those rumors sent shock waves through credit markets, pushing interbank borrowing rates higher and triggering a 3-month high of 4 billion euros in emergency overnight borrowing from the European Central Bank.

But French 10-year bond yields dipped below three percent on Friday for the first time since November showing demand for the country's debt remained intact despite banking sector concerns.

LEHMAN PARALLEL

The European assault mirrors one by the U.S. Securities and Exchange Commission on September 19, 2008, four days after Lehman Brothers collapsed, to temporarily ban short selling in 799 banks and other financial institutions.

Britain imposed a similar prohibition at that time.

The U.S. move was of questionable value, according to several academic studies. While share borrowing fell during the three-week ban, financial stocks continued to plummet.

"In 2008 we already saw that such a measure doesn't work..its a temporary patching up measure for a problem that needs still be resolved," said IG Markets strategist Soledad Pellon in Madrid.

(Writing by Sophie Walker; Additional reporting by Sarah Young, Sinead Cruise and Laurence Fletcher in London, Stephen Jewkes in Milan, Judy Simpson in Madrid; Editing by Alexander Smith)

Wall Street jumped 4 percent overnight in high volume, with relatively low valuations and short-term oversold conditions attracting buyers, though the see-saw moves this week appear to be continuing with U.S. equity markets set for a weaker open.

However, European shares were seen extending the previous sessions gains, with investors seen focusing again on macroeconomic fundamentals and bargain-hunters looking at beaten-down stocks.

"Markets are still trying to build a bit of a bottom and it still needs to be proved that this is the bottom," said Shane Oliver, head of investment strategy at Sydney-based AMP Capital, which has more than $100 billion in assets under management.

"For the next three months we are probably going to remain volatile. Markets may not be as messy as the last two weeks but I suspect the debt problems in U.S. and Europe will continue and concerns over a U.S. recession will linger for some time."

Volatility across financial markets has spiked over the past few weeks, with rumors flying about the health of European banks, questions mounting about the stability of money markets and growing fears that the U.S. economy may tip back into recession or a prolonged period of tepid growth.

The MSCI index of Asia Pacific stocks outside Japan was roughly unchanged on the day, trimming earlier gains as U.S. stock futures sagged.

The index lost around 3.6 percent on the week, underperforming the world index and taking Asia ex-Japan year-to-date losses to more than 11 percent.

NAPPING BEARS

"The risk-averse sentiment has not gone away really. For today, the bears are resting," said Kumar Rachapudi, a fixed income strategist at Barclays Capital in Singapore.

Japan's Nikkei share average reversed early gains to end 0.2 percent lower, while Hong Kong's Hang Seng Index rose 1 percent and Australia advanced 0.8 percent.

Some fund managers in Asia with long-term horizons have been slowly shifting their portfolios by buying more cyclical stocks, which are more sensitive to changes in business cycles, and reducing exposure to so-called defensive sectors.

"As prices come down and correct, we add to our current positions. We're not changing the basic strategy that we have which is commodities and consumers," Mark Mobius, executive chairman of Franklin Templeton's emerging markets group, told Reuters Television.

"We're looking for good consumer stocks and stocks in the commodities area particularly oil that can benefit from what's going on."

Similar strategies may have more to do with valuations and positioning than a call on global economic prospects.

For example, in some Asian markets, stocks in a defensive sector such as consumer staples are running a bit expensive relative to growth prospects compared with a cyclical sector such as industrials.

A look at the ratio of price-to-earnings over estimated earnings growth next year indicates Indonesia's consumer staples are trading at 1.3 times versus 0.5 times among industrials, Thomson Reuters Starmine showed. In Korea, staples are trading at 1.0 time versus the 0.3 times of industrials.

That investors in U.S. stocks focused more on value overnight despite the clear and present risks to economic growth is not so surprising considering the S&P 500 index is trading around 11.7 times forecast earnings in 12 months, well below the 10-year average of 16.2 times.

"For now, we believe that picking the EM equity markets with solid fundamentals remains a good strategy for global equity managers in this current environment," Win Thin, Global Head of Emerging Markets Strategy at Brown Brothers Harriman, wrote in a note.

SAFE HAVENS TO STAY IN FOCUS

The safe-haven Swiss franc rebounded in Asia on Friday, after posting record one-day falls against the euro and dollar overnight after the Swiss National Bank threatened to step up its fight to curb the franc's strength.

The euro was down 0.4 percent to $1.4190, though global focus would likely be on how the single currency fares against the Swiss franc.

The euro surged a record 5 percent against the franc overnight, but was trading down 0.8 percent at 1.0761 francs in Asian trading.

"Market reaction was probably a reflection of how long participants are of the Swiss franc," said Richard Grace, chief currency strategist at Commonwealth Bank.

Gold prices were down marginally at $1,765.19 an ounce, some 2.7 percent below a record high of $1,813.79 hit on Thursday. Still the metal was up 6.2 percent this week, on course for the biggest weekly gain since January 2009.

Oil also snapped a two-day rising streak, falling 1.2 percent, after having gained 6.4 percent over the last two days.

(Editing by Kim Coghill)