Markets sustained an impressive rally this week, providing welcome relief after weeks of bad news and worse performance. Bullish commentators speculated that the market was finally bottoming out, while the bears expressed caution, stating that downside risks still exist. The week also saw the close of the first quarter, with traders saying goodbye to one of the roughest periods in the last decade. The week was punctuated by Fed Chairman Bernanke's appearance before Congress, in which he testified that “a recession is possible,” though also reiterated the belief that economic growth would return in the second half of the year. Evidence continues to emerge that the crisis that began in the housing market and led to the near seizure of the credit markets has finally found its way into the labor market. Thursday's initial jobless claims climbed above 400K for the first time since 2005 which was followed by today's dire employment readings. March payrolls contracted by more than 80K jobs--the worst reading in five years--while the unemployment rate ticked above 5% for the first time in almost three years. However, today's stock market resiliency indicates that much of the bad news may already be priced into the market. It seems that like Bernanke, investors are starting to focus on the second half of the year and hopes for a recovery in the economic landscape. The first signs of a notable shift in investor optimism appeared on Tuesday, April Fool's Day ironically enough, with a triple-whammy in financials. UBS announced that it was writing down a further $19B worth of subprime mortgage debt, Deutsche Bank took a $4B write down and Lehman floated $4B worth of stock in hopes of squashing any liquidity rumors similar to the ones that brought down Bear Stearns. The DJIA responded by jumping nearly 400 points, an impressive outcome in any market but doubly so given that investors likely would have pummeled markets on this type of news just a few weeks ago. It also remains clear that the precarious situation for the U.S. consumer is here to stay for some time. A New York Times/CBS News poll released on Friday showed the economy's deepening woes were weighing on the minds of Americans, with 81% of those polled saying they believed things were "pretty seriously" on the wrong track, up from 69% a year ago and 35% in early 2002. Despite the continued underlying economic pessimism, bond markets also indicated a possible shift in dynamics. PIMCO's Bill Gross called U.S. Treasury's the “most overvalued asset class in the world, bar none.” In a sign that the insatiable demand for high quality Treasuries may be waning, the 2-year yield was up for the week. Despite the decidedly negative economic data, the benchmark curve has maintained a flattening bias. The 2-10 year spread remains near its lowest level in weeks at 165 basis points, indicating investors are starting to unwind the steepeners that were in such demand during last month's flight to quality. The biggest losers of the week were Merck and Schering-Plough, whose shares were brutalized early this week after The New England Journal of Medicine published an editorial on Sunday stating that the firms' lucrative cholesterol drugs Vytorin and Zetia may not work and should only be used "as a last resort." On Wednesday SGP announced it would slash its workforce by 10% to help it absorb this blow. MRK was down more than 15% and SGP was down nearly 30% by Wednesday, but both names were seen recovering slightly later in the week. The rest of the pharmaceutical sector rallied modestly this week. With worldwide food prices rising strongly and commodities soaring, agricultural names continued to benefit this week. Shares of POT were up this week after a CIBC analyst raised his price target to $240 from $200 on strong demand and high prices for fertilizer, and the company's comment that its gross margins would rise 250% y/y. MON doubled its Q2 earnings on increasingly strong sales of corn seed and herbicide in the US, and revenue was up 45% to $3.8B y/y. Gold and crude oil futures slumped early in the week on more talk of deleveraging, with front month gold falling below $900 for the first time in two months, but rebounded in the latter part of the week as the US dollar failed to gain any significant ground this week. Crude ended the week back above $106, after the weekly petroleum inventory report showed a larger than expected draw in gasoline stocks, pushing energy futures higher as traders looked toward the upcoming summer driving season. For the week, the DJIA rose 3.1%, Nasdaq was up 5%, and the S&P500 gained 4.2%. Trade The News Staff Breaking News | |
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