Business Blog Posts

After seeing oil prices skyrocket from days of turmoil in Libya, investors now must grapple with political protests in the world's top oil exporter, Saudi Arabia, and the impact of the biggest earthquake on record to strike Japan.

The S&P 500 was trading below its 50-day moving average this week, and is within reach of support at 1,275, a low touched in late January.

The confluence of events is making investors increasingly cautious. The market's recent weakness revived talk a correction is near, analysts said, even though stocks recovered on Friday from early losses to finish the day higher with the Dow back above 12,000 and the S&P 500 back above 1,300.

Stocks have rallied sharply since the start of September, with the S&P 500 still up 24 percent for that period, but have faltered in the last two weeks. At Friday's close, the Standard & Poor's 500 Index .SPX was down 1.3 percent for the week.

"Oil prices were already moving higher before unrest in the Mideast, and if we do have something that is pronounced in Saudi Arabia -- and I don't think that's a high probability -- but if we do, the cards are off the table as far as where prices could go," said Thomas Villalta, portfolio manager for Jones Villalta Asset Management in Austin, Texas.

"The impact from that is, I think you've got a chance for another recession."

Protests in Saudi Arabia were more muted than what some had anticipated on Friday. Concerns arose that planned "Day of Rage" protests in the country could lead to further instability in the Middle East and North Africa.

INFLATION AND THE FED

The jump in crude oil prices to 2 1/2-year highs has raised anxiety about their dampening effect on the economy.

Given those concerns, investors will be tuned into any comments on energy from the Federal Reserve when it releases a statement following its policy meeting next Tuesday.

European Central Bank President Jean-Claude Trichet warned last week about inflation risks, and surprised investors by saying the bank may raise interest rates as soon as next month.

The U.S. central bank is unlikely to hint at policy changes next week, and is expected to keep interest rates near zero.

"The Fed is essentially on autopilot. I think the market is correct in assuming they will do everything it takes, including initiating a 'quantitative easing part three,' if they have any evidence this economy doesn't have an escape velocity," said Joseph Battipaglia, market strategist at Stifel Nicolaus, in Yardley, Pennsylvania.

Next week also brings readings on inflation in the U.S. Producer Price Index and the U.S. Consumer Price Index, as well as data on industrial production.

Stocks snapped back from early-week losses even as other markets were hit hard by a devastating earthquake in Japan, the country's strongest on record. Oil refiners and industrial-related shares led Wall Street higher.

Investors had been on edge that planned "Day of Rage" protests in Saudi Arabia could lead to further instability in the Middle East and North Africa. Those fears had intensified after police used force to disperse demonstrators in Riyadh on Thursday.

"The Day of Rage in Saudi Arabia did not end up causing as much of a stir as they thought," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco. "That's been the concern all week."

Shares initially fell as investors reeled from images of mass destruction after the Japanese earthquake and tsunami left at least 1,000 dead. But the market reversed losses and notched solid gains as investors shook off fears of the quake's impact on Japan, the world's third largest economy. Japan's major cities and manufacturing facilities were not affected by the quake.

The Dow Jones industrial average .DJI rose 59.79 points, or 0.50 percent, at 12,044.40. The Standard & Poor's 500 Index .SPX climbed 9.17 points, or 0.71 percent, at 1,304.28. The Nasdaq Composite Index .IXIC added 14.59 points, or 0.54 percent, at 2,715.61.

Refiners Valero Energy Corp (VLO.N) rose 6.3 percent and Tesoro Corp (TSO.N) jumped 8.4 percent after Japan's oil refining capacity was hit by the earthquake and tsunami.

Howard Ward, a fund manager at the GAMCO Growth Fund, said speculative moves would likely be a short-lived overreaction. "It's generally a mistake for people to be too reactive to a natural disaster like this," he said.

Short sellers were quick to react to the quake. The ProShares UltraShort MSCI Japan exchange traded fund (EWV.P), which amplifies the reverse of the underlying MSCI Japan index by a factor of two, rose 3.2 percent on over 100 times its usual volume.

Japanese shares traded in New York fell sharply. The Bank of New York Mellon's index of Japanese ADR's .BKJP lost 2.1 percent. Toyota Motor Corp (TM.N) lost 2.1 percent to $85.65.

Investors said some industrial shares could benefit in the rebuilding operation in Japan but said information on the extent of damage was still scarce.

"The long-term impact is probably going to favor large equipment CAT-type stocks and some of the basic materials," said Pado, referring to heavy-equipment maker Caterpillar Inc.

Caterpillar (CAT.N) shares rose 1.7 percent to $100.02. The Dow Jones industrials index .DJUSIN rose 1 percent.

Stocks of global insurers were also in the spotlight on expectations of claims for damages.

Among insurers in the United States likely to have exposure in Japan, Aflac Inc (AFL.N) fell 0.3 percent to $55.55 and Berkshire Hathaway Inc (BRKb.N) rose 0.4 percent to $85.26. The KBW Insurance index .KIX rose 0.6 percent.

Muted protests in Saudi Arabia contributed to the sell-off by investors who had been spooked by plans for "day of rage" demonstrations in the world's top oil exporter. Funds have bailed out of oil markets for the past several days after lifting their positions to a record high as of Tuesday.

U.S. heating oil and gasoline futures held up better than crude, receiving support from expectations that Japan will require more fuel imports after the quake and tsunami affected about a fifth of its capacity.

Brent crude futures for April delivery fell $1.59 to settle at $113.84 a barrel, losing 1.8 percent on the week, the first loss in seven weeks and biggest since November.

U.S. crude futures for April delivery fell $1.54 to settle at $101.16 a barrel, off a low of $99.01. It fell 3.12 percent on the week, its first weekly loss in four. Trading volume was light, however, at about 670,000 lots, nearly a third below the average of the past month.

The U.S. front-month heating oil crack spread, or refining profit margin, rose $1.21 to $26.39 a barrel at 4:45 p.m. EST, while the gasoline crack spread rose 67 cents to $24.79.

"From an oil pricing perspective, the situation in Japan is likely to result in a negative impact on crude oil prices and a positive for refined products," said Dominick Chirichella, senior partner at the Energy Management Institute in New York.

Japan was hit by a magnitude 8.9 earthquake, the largest since observations began in the late 19th century.

Top Japanese refiner JX Nippon Oil & Energy Corp (JXHLY.PK) halted operations at three plants and fire engulfed a storage tank at a unit of Cosmo Oil Co (5007.T).

MIDDLE EAST PROTESTS

The Japanese quake triggered across-the-board selling in commodities as funds who had piled into markets that were at or near record highs took profits in the face of uncertainty.

Speculators' net-long positions in U.S. crude futures rose to a record high in the week to March 8, the Commodity Futures Trading Commission said in a report on Friday.

Traders also pared positions on signs that a security clampdown in Saudi Arabia's capital kept a lid on a planned protest, even as demonstrations and unrest continued to rumble in nearby Kuwait, Bahrain and Yemen.

Fighting continued in OPEC-member Libya. Rebels repelled a counter-offensive by leader Muammar Gaddafi's forces, but appealed to foreign powers to impose a no-fly zone to stop further attacks. Most analysts have now written off any chance of a quick return of Libyan production.

CHINA, U.S. ECONOMIC DATA

The biggest earthquake on record to struck Japan on Friday, triggering a roughly 30-foot tsunami that swept away everything in its path, including houses, ships and cars.

Chinese inflation topped expectations in February at 4.9 percent and looked set to climb further in coming months, adding to pressure for another dose of monetary tightening.

Japanese stock futures fell 2.4 percent after the earthquake, but market players said the slide may not be too deep because major cities and manufacturing facilities were not affected. .T

"Had yesterday been a decent day, today would've been the sell-off. Something tells me this is not going to be a big event for our market," said Jamie Cox, managing partner of Harris Financial Group in Colonial Heights, Virginia.

"I'm not sure that the equities markets are the ones that are going to be on ball bearings today," he added. "It is going to be all the commodities markets. Those markets are going to be the ones you have to watch and that is actually good for equities."

Brent crude futures fell 2 percent to near $113, and U.S. crude dropped 2.5 percent to about $100 as the earthquake shut down dozens of plants in the world's third-largest oil consumer.

S&P 500 futures lost 2.5 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures fell 35 points, and Nasdaq 100 futures dropped 6.25 points.

Investors watched the Middle East and North Africa ahead of a planned day of demonstrations in Saudi Arabia that will test whether online calls for protests move to the streets.

Insurer Aflac Inc (AFL.N) fell 3.2 percent to $53.92 in premarket and Berkshire Hathaway Inc (BRKb.N) lost 1.4 percent to $83.79.

On the economic front, investors will monitor U.S. retail sales data at 8:30 a.m. EST 1330 GMT.

Apple Inc (AAPL.O) kicks off sales of its latest iPad model Friday and analysts expect the company to extend its lead in the burgeoning tablet computer market.

European shares hit a three-month low, falling 0.6 percent with sentiment worsening after Japan's earthquake and on growing unrest in the Arab world, but analysts expect equities to bounce back. .EU

Asian shares dipped as weak economic data and spreading Middle East unrest prompted profit-taking.

Fears about the economy and unrest in Saudi Arabia darkened the outlook for equities on Thursday, pushing major indexes below key technical levels.

(Reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)