The same set of market factors are driving stocks again this morning, though this time on acid. Yesterday's report focused investor attention to rising borrowing costs for Italy. Today, after Moody's downgrade of Spain and Cyprus, fear is rising. Spain's sovereign debt rating was cut to one level above junk, to Baa3, from A3. The rating agency based its view on the increased likelihood of Greece dropping out of the eurozone (I'm not so sure about that). The rater also noted last weekend's bailout of Spanish banks and Spain's forward need to recapitalize its banking system. Having to go to others for help is certainly a sign of softer credit worthiness, but that's old news. It's the possibility of losing Greece, and intensifying pressure on Spanish borrowing costs that is driving current ratings downgrade, and perhaps an attempt to save face post the bailout, in my view.
The market is troubled by a Spanish 10-year bond rate of 7% today, up sharply from yesterday. If Spain cannot borrow at manageable cost, it will be in need of the same rescue Greece received, only the Spanish economy is much more significant as the world's 12th largest. Meanwhile, disease is spreading to Italy, which is even more important. While Italian 10-year bond costs only edged slightly higher, newly issued debt Friday was sold at much higher cost. Italian 3-year bond yields were up more than a percentage point, while 7-year bonds almost reached a point higher.
This is the nightmare the world has sought to mitigate since the Greek crisis began. As a result, European shares were lower Thursday, with the Euro STOXX 50 Price EUR down 0.4%. The Vanguard MSCI Europe ETF (VGK), iShares MSCI Spain Index (EWP) and the iShares MSCI Italy Index (EWI) are each set to head lower Thursday.
Euro STOXX 50 Price EUR: -0.4%
German DAX: -0.7%
France CAC 40: -0.6%
FTSE 100: -0.8%
Nikkei 225: -0.2%
Hang Seng: -1.15%
S&P/ASX 200: -0.5%
In the States, stock index futures indicated a higher open as of 7:40 AM, but turned lower after a poor U.S. labor data point detailed below. Until the weekend has passed, I doubt you could expect any better market action. The economic data schedule for the day included Weekly Jobless Claims, the Consumer Price Index, the Current Account, Bloomberg Consumer Comfort Index and Natural Gas Inventory. The SPDR S&P 500 (SPY) was off 0.6% yesterday and doesn't seem to have a better chance Thursday.
Weekly Initial Jobless Claims were reported up to 386K, up 6,000 from the prior week's revised figure. It was a higher number than the consensus of economists, which was set at 375K according to Bloomberg's survey. This is a clear negative driver for stocks Thursday.
The Consumer Price Index (CPI) was down 0.3% month-to-month, on lower fuel prices. The Core CPI, excluding food and energy prices, rose 0.2%, in line with expectations. Lower gasoline and energy prices are important to consumers, but inflation concern is not put aside by the Core CPI number. That said, it's also not threatening at the reported rate of increase. As a result, this is likely a mildly positive factor for stocks today.
The Current Account deficit measured -$137.3 billion in the first quarter, from $-118.7 billion (revised) in the fourth quarter of 2011. Exports of goods increased at a slower rate than imports, which is probably a positive sign for our consumption economy. Services exports grew over imports, also a positive, but at a mild rate. The report is a net positive in my view, though the market may not incorporate the information immediately Thursday. The market will certainly look forward to what is developing in the global economy anyway.
Bloomberg's Consumer Comfort Index will be reported at 9:45 AM ET. The most recent data shows improvement in this measure to a still low level, but looking back a few weeks, we see a deteriorating trend preceding the latest bump higher. Consumers are very wary of what is developing in Europe, because they are acutely aware of how it impacts their stock and retirement portfolios. In addition, the latest employment data raised concern about a previously overlooked sluggishness in economic growth, as reflected by various data points.
Stocks Trading on News:
Apple (AAPL) won its trademark case with the Beatles. A judge ruled that Apple's use of the bitten apple logo for its iTunes digital music store did not infringe upon Apple Corps' (Beatles interests) territory. That's all you need to know with regard to this matter, in my view. AAPL shares were down fractionally in the pre-market, after declining fractionally Wednesday. The stock has now given back its gain from Monday's new products news.
Certainly because of Apple, Nokia (NOK) announced it will lay off 10,000 employees of its global cell phone operations. The company warned that it would lose more than expected in its second quarter, likely on market share loss to Apple and Samsung (005930.KS). The company's smartphone hope, Lumia, uses Microsoft (MSFT) software and has been slow in helping the company keep up with Apple and with Google (GOOG) Android driven competitors. With fear the shares might follow the path of Research in Motion (RIMM), NOK shares are off almost 10% in pre-market trading.
On Wednesday, Facebook (FB) announced it would begin testing an advertising bidding system called Facebook Exchange. The system will employ cookies to place relevant advertising per user, but promises to protect user privacy. FB shares were down slightly yesterday, after showing some stability over the last five trading days. FB shows unchanged in the pre-market.
Statoil ASA (STO), Norway's largest oil producer, with its partner Exxon Mobil (XOM), said it made a second "high impact" gas discovery off Tanzania. The company said the discovery may add 3 trillion cubic feet of natural gas to its reserves (530 million barrels of oil equivalent). The find is in addition to the 1 billion cubic feet added to reserves from the company's Zafarini discovery, which is estimated to contain 5 billion cubic feet of gas. The shares have given way this spring, and with natural gas prices offering little support, the shares may have a subdued rise Thursday. I recently suggested XOM to investors.
Pier 1 Imports (PIR) is up 1.5% in the pre-market after meeting the Street's EPS view for $0.16 in its fiscal first quarter, up from $0.12 the year before. The company reported strong sales growth and margin leverage. Same-store sales were up an impressive 7.2%. Supporting the shares this morning, PIR raised its full-year guidance by 2 cents. The shares are up 12% this year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.