A pause last week for financial markets as the steady rise since March hit turbulence.
It was the worst week for US shares since the rally started in the wake of 12 year lows hit on March 9.
The S&P 500 has risen 30.5% from a 12-year closing low hit two months ago, but it ended its worst week since the rally began.
But US shares stumbled on Friday as oil prices fell because of fears of weak demand; the US dollar strengthened, or commodities eased and concerns about the health of some banks in Europe and the US also re-emerged.
These concerns offset early gains in the US and late trading in Europe as reports, including consumer prices and sentiment, added to confidence that the slump was easing.
It looks like it, but the question some analysts were asking Friday in the US was if it’s easing, where’s the earnings power to now drive markets higher?
Asian and European economies remain weak and US companies are not getting any boosts from there: China is seeing mixed economic reports, Japan is weak and Germany seems to be still contracting.
Some US technical analysts are now warning that the last week saw some "ominous signs" (as Reuters termed it) as volumes began to slacken and investors rotated money from some of the recent winners in US sharemarkets:- technology, financials and industrials – and back into more defensive areas such as healthcare and consumer staples.
While the KBW bank index has doubled since early March as investors hoped banks had seen the worst of the fallout from the credit crisis, its strength waned last week as investors sold some stocks and took profits.
News that some of America’s major insurers were getting billions in government aid didn’t help sentiment for financials either.
The Dow fell 62.68 points or 0.75% Friday to 8,268.64; the Standard & Poor’s 500 Index dropped 10.19 points, or 1.14%, to 882.88 and Nasdaq eased 9.07 points, or half a per cent to 1,680.14.
The Nasdaq fell 3.4% for the week, breaking a nine-week winning streak, the S&P 500 lost 5% and the Dow shed 3.6%.
A stock to watch in the US this week will be General Motors which on Friday said it will drop about 1,600 of its US dealers as it tries to cut billions of dollars in operating costs and debt before an expected bankruptcy filing at the end of May. GM’s stock dropped 5.2% to $US1.09.
The move comes on the heels of Chrysler saying it will shut 789 dealerships by early June. The automaker filed for bankruptcy protection at the end of April.
Chrysler’s collapse sent US unemployment claims up in the first week of May, and is expected to boost them again last week.
GM will see them surge in June if it fails at the end of this month, as most analysts now expect.
That will have an enormous impact on unemployment, consumer spending and confidence, even though confidence rose strongly.
Official figures showed US consumer prices were unchanged last month, while consumer confidence in May pushed to its highest level since Lehman Brothers’ collapse last September.
Industrial output declined at a slower 0.5%, (1.7% in March and 1% in February) and gave more signs that the recession’s worst phase may be easing.
The report showed that manufacturing production fell 0.3% in April, compared with a much steeper 2.1% drop in March.
Manufacturers have been forced to reduce production as companies seek to clear stockpiles of unsold goods. Fed figures showed that process continued in March.
But analysts pointed out much of that improvement came from car plants restarting in April after being closed for most of the first quarter.
Chrysler’s closures will hit output this month, and if GM goes, will hit it in June and July, making for a confusing start to summer.
But the latest figures for credit card use and debt was not so optimistic: defaults rose in April to record highs, with Citigroup and Wells Fargo (both claim to be recovering strongly) posting double-digit loss rates as the economy sheds more jobs.
While the macro figures tell or rather, suggest improvement across parts of the economy, micro stats, such as on credit card default rates, show us the US consumer is still being battered.
Unemployment is by far the biggest policy concern in the US (as it is in Europe).
In Europe, the Financial Times analysts were now questioning the strength of the rally, especially with the region’s economy (and each country) seemingly in the grip of a strengthening slump.
The FT reported:
"European markets fell 3 per cent this week, which some analysts took as the end of an equities rally in which shares have risen 30 per cent from March’s lows.
"Robert Quinn, European equity strategist at Standard & Poor’s, said he saw “very limited upside potential and very limited downside potential”.
"He added: “We think the market is fully valued and that any subsequent rallies will probably be unfounded.”
Over the week France’s CAC 40 lost 4.3% and Germany’s Xetra Dax 3.6%. London’s Footsie 100 shed 2.6%, ending a four week bounce.
In Asia shares fell as well with the MSCI Asia Pacific Index down 0.7% over the week with Japan’s Nikkei down 1.8% and Australia’s ASX 200 lost a large 4.3%.
That was after Australian shares rose 1.3% on Friday after Rio Tinto reaffirmed its belief in the link up with Chinalco.
The ASX200 index added 1.3%, or 49.8 points, to end at 3773.2 and th
