EmailLast week ended on a very disappointing note, as the major averages succumbed to broad-based selling pressure. The S&P 500 fell 1.4% and incurred its sixth straight weekly decline.
Notably, there was an effort to rebound from large losses late Friday after CNBC reported the extra capital buffer for extra big banks is likely to be in the neighborhood of 2.0-2.5% versus the 3.0% that had been expected. The latter gave the financials a bit of a boost, but the effect on the broader market was fleeting. Selling efforts resumed in the final hour and the market closed near its lows for the day.
Buyers simply haven't had any conviction and who can blame them?
There are a lot of unresolved issues with an unnerving bent to them right now, none more so perhaps than the political standoff in dealing with the debt limit, which is shaping up in a manner that suggests participants will have to deal with uncertainty about raising the debt ceiling right up to the 11th hour on Aug. 2.
Since the market closed on Friday, there haven't been any trend-altering changes on the news front. China was out with May lending data that was weaker than expected; Germany is reportedly making waves again about the provisions for another Greek bailout; Japan's machine tool orders for April declined 3.3%, which was also weaker than expected; and Financial Times reports U.S. banks are allegedly going to step off the gas pedal with their Treasury purchases in early August due to concerns about Congress not raising the debt ceiling.
Still, the S&P futures, trading 0.4% above fair value, are pointing to a slightly higher open. It is a reflex bid as participants expect some bargain hunting to happen following Friday's losses. It isn't the most convincing disposition, though.
The recent losing streak has seen the S&P 500 drop 7.0% since the end of April, so to be called only 0.4% higher this morning speaks to a lingering sense of unease about what the near future holds.
This week has the potential to swing sentiment in a more positive direction or to keep it moving in the same direction. That's because there are a number of influential economic releases, beginning with the Retail Sales and PPI reports for May tomorrow that will be preceded by an inflation report out of China; CPI, Empire Manufacturing, and Industrial Production data on Wednesday; Initial Claims, Housing Starts, and the Philadelphia Fed Index on Thursday; and the University of Michigan Consumer Sentiment and Leadings Indicators Index on Friday.
Today the economic calendar is empty. The M&A calendar is not. VFC Corp. (VFC) has agreed to buy Timberland (TBL) for $43 per share, representing a total enterprise value of roughly $2 bln net of cash acquired. The offer price is a 43% premium to where shares of TBL closed on Friday. Additionally, Allied World Assurance Company (AWH) and Transatlantic Holdings (TRH) are merging in a $3.2 bln stock deal that is billed as a merger of equals.
The M&A activity is providing a measure of support, yet the real support will come if the market can demonstrate that it is able to maintain a bid. That hasn't been the case for a while now, and with the incoming economic data this week, it could be asking a lot today as well. A good finish today, however, and good economic news later in the week could get things turned around in a hurry.
--Patrick J. O'Hare, Briefing.com
Patrick J. O'Hare is the Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial please email researchsales@briefing.com.
