Business Blog Posts

Pressure for a correction in the stock market has been building up in the past few weeks as the euro and oil prices fell in tandem, knocking down shares of energy companies and dollar-sensitive multinationals.

Still, investors have averted a broad sell-off by diving into shares of companies that are less vulnerable to the economic cycle, including well-known defensive sectors such as utilities and household products, but also large-cap companies with steady earnings performance.

That strategy may hold the market afloat for a little longer. But with the end of the Federal Reserve's easy money policies just around the corner, investors are becoming more sensitive to risk in general.

"There is good reason for a pause, there is good reason to be conservative in here, and there is good reason to raise some cash ahead of a summer correction and a better buying opportunity," said Richard Ross, global technical strategist with Auerbach Grayson in New York.

The sharp sell-off in commodities markets earlier this month was seen by many as the first warning sign of a coming market correction. The U.S. dollar has been strengthening since then, in another sign that appetite for risk is dwindling.

Next month's end of the Fed's massive bond-buying program, also known as quantitative easing, is expected to knock down the value of stocks, commodities and the euro, a recent Reuters poll of 64 analysts and fund managers found.

CONSUMER STAPLES BACK IN STYLE

Ross, who believes that a correction could come at any moment, warned that Wall Street remains close to multi-year highs as investors head into a traditional period of weak seasonality that stretches from May to November.

The Standard & Poor's 500 index .SPX has kept its year-to-date gain of 6 percent for the past two weeks, as defensive sectors such as utilities advanced while more volatile technology shares posted losses.

Despite the rotation between sectors, the S&P 500 has been trading in a narrow range between 1,330 and 1,340, indicating Wall Street's lack of direction. Most technical analysts agree that the market is poised to break out of that range soon -- either with a sell-off or a rally.

Robert Sluymer, an analyst with RBC Capital Markets, said there is no technical evidence that the current market cycle has peaked. He recommended investors keep building exposure to defensive themes, while getting out of cyclical stocks.

Among the defensive sectors favored in the current environment, Standard & Poor's Equity Strategy recommended the stocks in the S&P 500 Consumer Staples Index .GSPS. For the week, this index was up 0.6 percent.

With the earnings season coming to a close, Wall Street will have just a sprinkling of marquee names set to release quarterly results in the coming week. On tap are earnings from Campbell Soup (CPB.N), Costco Wholesale Corp (COST.O) and HJ Heinz Co (HNZ.N), whose stocks are in the S&P 500 Consumer Staples Index. Preppies, take note: Polo Ralph Lauren Corp (RL.N) and Tiffany & Co (TIF.N) are also set to release their results. These companies' outlooks could shed light on the

consumer's mindset and headwinds facing the retail sector.

As far as economic indicators are concerned, there's no data with overwhelming star power. The calendar includes new home sales for April, a second look at first-quarter gross domestic product, personal income and consumption for April and the final reading for May on consumer sentiment from the Thomson Reuters/University of Michigan Surveys of Consumers.

So investors could very well be at the mercy of the headlines from Europe, where fears about a possible debt restructuring by Greece are on the rise.

With the euro, commodities and stocks trading with extraordinary correlation, investors should look at the euro-dollar trade for direction, said Ross of Auerbach Grayson.

"If you continue to see the dollar strengthening," he said, "it should provide a headwind for commodities and for the S&P."

(Editing by Jan Paschal)

The S&P 500 remains hemmed in between technical support at 1,330 and resistance at 1,340, suggesting a lack of direction and keeping the market vulnerable to events such as the uncertain outcome of the euro zone's debt problems.

"It seems like there's more of a consensus building that there's some potential risk coming on line here," said Natalie Trunow, chief investment officer of equities at Calvert Investment Management Inc in Bethesda, Maryland, which manages about $14.8 billion.

Shares of large multinationals, which tend to rely heavily on overseas sales, fell in sync with the euro's slide against the dollar. Shares of manufacturer 3M (MMM.N) dropped 1.2 percent to $93.56 and weighed on the Dow.

The euro lost nearly 1 percent over disagreements on how to handle debt problems in Greece and ahead of a Spanish regional election.

Gap Inc (GPS.N) fell 17.5 percent to $19.22 after slashing its full-year profit outlook late Thursday, saying higher price tags will not be enough to offset rising cotton costs. The S&P Retail index .RLX fell 1.4 percent.

In the options market, the predominant activity favored more bearish bets than have been seen over the past month.

"The economic recovery and macro picture do seem to indicate a more protracted slow economic recovery long term," Trunow said. "Unless we see a great deal of positive surprises on economic indicators, I think some of these negative events will continue to weigh on the market."

The Dow Jones industrial average .DJI was down 93.28 points, or 0.74 percent, to end at 12,512.04. The Standard & Poor's 500 Index .SPX was down 10.33 points, or 0.77 percent, at 1,333.27. The Nasdaq Composite Index .IXIC was down 19.99 points, or 0.71 percent, to close at 2,803.32.

For the week, the Dow was down 0.7 percent, the S&P 500 was down 0.3 percent and the Nasdaq was down 0.9 percent.

Ahead of May options expiration at Friday's close, traders had exchanged about 669,000 contracts on the S&P 500

Index as puts outpaced calls by a factor of 2.10:1, according

to options analytics firm Trade Alert. The ratio's 22-day moving average is 1.67. Trade Alert data shows.

Oil prices jumped but the S&P energy sector index .GSPE still fell 0.3 percent for the day. Exxon Mobil Corp (XOM.N) declined 0.9 percent to $81.57 and Chevron Corp (CVX.N) lost1.3 percent to $102.57, both dragging on the Dow.

In the industrial sector, Caterpillar Inc (CAT.N) shed 0.9 percent to $104.33, while the S&P Cap Goods sector index .15GSPIC lost 1.1 percent.

On the upside, Barnes & Noble Inc (BKS.N) shares jumped 29.9 percent to $18.33 after John Malone's Liberty Media Corp (LINTA.O) proposed buying the company for $1.02 billion. The largest U.S. bookstore chain put itself up for sale nine months ago.

About 6.71 billion shares were traded on the New York Stock Exchange, NYSE Amex and Nasdaq, compared with the average of about 8.4 billion last year.

Declining stocks outnumbered advancing ones by almost 2 to 1 on both the NYSE and the Nasdaq.

(Reporting by Caroline Valetkevitch; Additional reporting by Doris Frankel; Editing by Jan Paschal)

Shares in clothing retailer Gap Inc (GPS.N) will be under pressure after it slashed its full-year profit outlook, saying higher price tags will not be enough to offset rising cotton costs, sending its shares down 15 percent in extended trading. Gap shares traded in Frankfurt (GPS.F) were down 17 percent.

John Malone's Liberty Media Corp (LINTA.O) has proposed buying Barnes & Noble Inc (BKS.N) for $1.02 billion, nine months after the largest U.S. bookstore chain put itself up for sale.

Big outflows from equity exchange-traded funds overwhelmed actively managed stock mutual funds in the week ended May 18, while municipal bond funds extended their outflow streak, data from Thomson Reuters Lipper showed on Thursday.

Overall, U.S.-domiciled equity funds suffered nearly $6 billion in net outflows, with the vast majority bleeding out of domestic-focused equities.

Oil prices recovered on Friday as traders seized the previous session's dip as a chance to snap up cargoes amid expectations that the concerns over supply disruptions in the Middle East and North Africa would continue to support the market.

European stocks were up 0.4 percent in morning trade, led by a 3 percent rise in BP (BP.L) after MOEX, a unit of Japanese trading house Mitsui & Co (8031.T) and a partner in BP's Macondo Gulf blowout well has agreed to pay the UK oil major $1.1 billion toward the cost of the oil spill.

Tokyo Electric Power Co (9501.T) reported a net loss of $15 billion on Friday to account for the disaster at its Fukushima nuclear power plant, marking Japan's biggest non-financial loss, and it warned its future was uncertain. The company said President Masataka Shimizu, 66, will step down to take responsibility for the disaster and radiation leaks at the plant, making way for an insider, managing director Toshio Nishizawa, 60.

U.S. stocks edged higher on Thursday, with LinkedIn one of the few standouts in an otherwise lackluster session as its shares doubled in their trading debut.

The Dow Jones industrial average .DJI gained 45.14 points, or 0.4 percent, to 12,605.32. The Standard & Poor's 500 Index .SPX rose 2.92 points, or 0.2 percent, to 1,343.60. The Nasdaq Composite Index .IXIC added 8.31 points, or 0.3 percent, to 2,823.31. (Reporting by Blaise Robinson; Editing by Greg Mahlich)

Tokyo Electric, commonly known as Tepco, is struggling to bring its Fukushima Daiichi nuclear plant in northern Japan under control after damage from the March 11 earthquake and tsunami crippled reactors and triggered radiation leaks.

The company, Asia's largest utility, posted a net loss of 1.25 trillion yen for the year ended in March, compared with a profit of 133.8 billion yen a year earlier. It was the biggest loss by a non-financial firm in Japan, exceeding the 835 billion yen loss by Nippon Telegraph and Telephone in 2002.

The massive loss was flagged by media. The Nikkei newspaper had predicted a net loss of about 1 trillion yen, while the Yomiuri forecast a loss of 1.5 trillion yen.

The loss, the biggest in Tepco's 60-year history, reflects costs to scrap damaged nuclear reactors at Fukushima Daiichi and a write-off of deferred tax assets with compensation payouts likely to depress profits for many years.

Tokyo Electric did not offer guidance for the current year to March 2012 given uncertainty over how much of its profit will go toward paying the people forced to evacuate the areas surrounding the crippled plant and others due compensation.

The government last week agreed to set up a fund using taxpayers' money to help Tepco cope with compensation. Tepco can draw on the fund to make upfront payments and repay the fund from its annual profits over several years.

Tepco has not made an estimate for the likely cost of compensating all victims. Analyst forecasts have ranged from around $25 billion up to $130 billion if the crisis at the nuclear complex drags on.

($1 = 81.610 Japanese Yen)

(Reporting by Nathan Layne; Editing by Joseph Radford)

While equities and the euro posted small gains on Friday, commodity markets were still finding their feet after sharp drops this month with disappointing U.S. data weighing on sentiment.

Japanese shares .N225 clung to early gains after the Bank of Japan kept interest rates on hold at the end of a two-day policy meeting despite warning that the economy will remain under strong downward pressure for the time being.

Outside Japan, the broader Asian market .MIAPJ0000PUS was mostly flat, but set to fall for the fourth consecutive week.

Korean shares .KS11 were slightly higher while Australian shares .AXJO dipped, led by miners.

Technology companies, in particular the Chinese internet sector, might get a look in after LinkedIn's (LNKD.N) stellar debut saw its market value more than double in a single day.

Tencent (0700.HK), China's dominant internet firm, looks poised to benefit from lofty valuations social media firms are fetching despite its 31 percent gains so far this year, as the stock approaches a record high hit last month.

YIELD HUNTERS

Overnight, data showed a slowdown in manufacturing growth in the U.S. Mid-Atlantic region and an unexpected dip in existing home sales in April.

That cemented views that if economic data continues to disappoint it could delay Fed action until well into 2012 or later, encouraging investors to hunt for yields, especially in Asian fixed income markets.

Solid responses to recent credit issues have already taken the year-to-date volume in the Asian primary market to $44.7 billion, more than half of last year's record $83.4 billion. Morgan Stanley has projected the annual tally could end up in excess of $100 billion at the current pace.

ICICI Bank (ICBK.BO), India's second-biggest lender, sold $1 billion in bonds at 295 basis points over US Treasuries, tighter than an initial guidance of above 300 basis points above.

Emerging market debt funds more than doubled inflows to $223 million in the week of May 18 from the prior period, according to Thomson Reuters Lipper data.

In currency markets, the soft patch of U.S. data gave the euro a brief respite after recent heavy selling, with the euro holding much of its overnight gains versus the dollar.

Notwithstanding Friday's small gains, the euro remains around 4 percent below an early May peak of $1.4940 as a rout in commodities spooked investors, prompting the unwinding of dollar-funded bets in risky assets.

Financial markets remained on edge amid lingering concerns about the possibility of debt restructuring in Greece and before the U.S. Federal Reserve's bond-buying program winds down next month.

The 19-commodity Reuters-Jefferies CRB index .CRB, a popular gauge for market performance, has steadied after tumbling 9 percent from an April 29 high, while oil climbed before a contract expiry and spot gold rose on bargain hunting. <GOL/>

U.S. Treasury yields softened on weak data with the 10-year U.S. Treasury yield hovering around 3.17 percent, though some analysts warned the market's six-week rally was near an end. Yields have fallen from as high as 3.62 percent on April 8.