Friday, 4 June 2010

Market brief 4/6: Euro belows 1.2, stocks plummet, earnings prospect doubt

Stocks plunged, sending benchmark U.S. indexes to four-month lows, commodities slid and Treasuries rallied as lower-than-forecast American job growth and a widening government debt crisis fueled concern the global economic recovery will slow. Hungary’s currency, equities and bonds plummeted.

The Standard & Poor’s 500 Index tumbled 3.4 percent to 1,064.88 at 4 p.m. in New York, with only three stocks in the gauge rising. The Dow Jones Industrial Average sank below 10,000 and both measures closed at the lowest levels since Feb. 8. Oil fell 4.2 percent to $71.51 a barrel, while tin sank 9.5 percent to lead declines in metals.


“If the worker is not going back to work, then the question becomes whether earnings estimates for the second half of this year are too high, and if they are too high, is the market priced appropriately?” said Stephen Wood, who helps manage $176 billion as chief market strategist for Russell Investments in New York. “There’s a tug-of-war between a sloppy economic recovery and some very negative headline news. The rest of 2010 is going to be choppier.”


Asian commodity stocks fell this week on concern China’s economic growth is slowing, while carmakers rose after a report showed their U.S. sales advanced in May.


Earnings Watch

Profits for companies in the S&P 500 are forecast to rise 17 percent to a combined $81.34 a share in 2010, according to estimates from more than 2,000 analysts tracked by Bloomberg. That implies a price-earnings ratio of about 13.1, compared with an average multiple of 20 over the previous two decades.

“Stock valuations are low and on the back of this report we might conclude that they should be justifiably more low,” said Barry Knapp, the head of U.S. equity strategy at Barclays Plc. “We should be adding 250,000-300,000 jobs a month and we’re not doing that. I don’t think any strategists are about to adjust their earnings estimates because of this but forward estimates are probably too high as we get into 2011.”


Hungary’s 10-year bond yield jumped 69 basis points to 8.08 percent, the highest since September. It surged to 12.47 percent in March 2009.

Credit-default swaps on sovereign bonds jumped to a record. The cost of insuring against losses on Hungarian sovereign debt rose 63 basis points to 371, according to CMA DataVision at 3:30 p.m. in London, after earlier reaching 416 basis points. Swaps on France, Austria, Belgium and Germany also rose, sending the Markit iTraxx SovX Western Europe Index of contracts on 15 governments as high as a record 174.4 basis points.


The euro slid below $1.20 for the first time since March 2006 and the yen climbed against all 16 major counterparts. The forint tumbled to an almost 15-month low against the dollar on concern Hungary may default.

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