The Week in Review for the week ending August 24, 2012
Last week investors faced an array of negative news –– from declining manufacturing activity in China and the eurozone to a poor profits picture among large US corporations to continued concerns about weakness in Greece and Spain. Greek Prime Minister Antonis Samaras spent the week lobbying key leaders to grant the struggling country an additional two years to reduce its deficit to an acceptable level. In a week in which the Standard & Poor’s 500 Stock Index hit its highest close in four years, the broad US benchmark also had its worst week in two months. US Treasury yields fell throughout the week as their prices rose on expectations that government bond purchases would increase through a possible third round of quantitative easing (QE3) while negative sentiment drove investors away from riskier assets. Oil prices continued their recent rise until Thursday’s spate of weak economic reports drove crude oil futures down by $1 to just above $96. Overall, oil prices have risen by more than 9% in August.
Amid this environment the DJIA was down -0.9%, the S&P 500 was down -0.5%, the Russell 2000 was down -1.3%, the Global Dow Ex-US was down -0.2% while crude oil rose 0.2%.
Chinese manufacturing activity continued to contract in August, based on the preliminary HSBC China Manufacturing Purchasing Managers Index. The closely watched gauge fell for the tenth straight month, reaching 47.8 in August from a final reading of 49.3 in July. Because surrounding countries, including Japan, South Korea and Taiwan, depend heavily on China to import their products, China’s ongoing weakness weighs heavily on all of Asia as well as the rest of the global economy.
Eurozone business activity declined in August at roughly the same pace it did in July, with the composite purchasing managers index at 46.6, up slightly from 46.5 in June. German business activity fell at its fastest pace in three years in August, with its preliminary PMI dipping to 47.0.
With the eurozone reporting contracting numbers for two of the three months in the third quarter, it is now almost certain that the region will officially enter its second recession in three years in this quarter.
The latest data include a rise in sales of new and existing homes plus a solid jump in the price of US homes. Existing home sales increased 2.3% in July from June, the National Association of Realtors reported. Sales of new homes rose 3.6% in July from June –– and 26% from July 2011 –– to reach a two-year high, according to the US Department of Commerce. Home prices had their largest quarterly increase in more than six years, the Federal Housing Finance Agency reported.
Inventories of new homes fell to their lowest level since 1963, when the government started tracking it.
Other than a strong set of housing data, US economic reports were lukewarm. The preliminary manufacturing Purchasing Managers Index improved slightly in August, to 51.9 from 51.4, surpassing other major global economies. Durable goods orders increased 4.2% in July, which was more than expected, driven by strong demand for cars and airplanes. However, a key measure of business investment, orders for non-defense capital goods excluding aircraft, fell by 3.4%.
Initial jobless claims rose slightly for the week ended 18 August, to their highest level in five weeks, with the four-week moving average also rising.
Consumer confidence declined to its lowest point since January, as the Bloomberg Consumer Comfort Index dipped to minus 47.4 for the week ended 19 August. The US Federal Reserve Board is slowly moving closer to taking action to stimulate the economy, based on the minutes of the Fed’s most recent meeting, held 31 July to 1 August. Consensus is apparently growing for the Fed to take stimulus action barring “a substantial and sustainable strengthening in the pace of economic recovery.” Speculation continues on when that might occur and what shape it might take, but anticipation will grow as the September meeting of the Federal Open Market Committee approaches.
Japan recorded a much larger-than-expected trade deficit in July, almost doubling the forecasted gap, as exports sharply fell because of weaker Chinese and European demand. The UK economy shrank -0.5% in the second quarter, based on the second estimate by the country’s Office for National Statistics. While the revised number was better than the preliminary estimate of -0.7%, the country’s gross domestic product shrank by -0.3% and -0.4% in the two previous quarters, and its economic growth has been flat for two years.
Hewlett-Packard posted its worst-ever loss in its fiscal third quarter, as it was hurt by a steep sales decline along with heavy restructuring costs and a $9.2 billion write-down related to its 2008 acquisition of Electronic Data Systems. Dell joined rival computer maker H-P in announcing deeply disappointing results for its second quarter, as its earnings fell 18% on an 8% drop in revenue.
Cnooc, China’s largest offshore oil and natural gas producer, posted a 19% drop in its net profit for the first half of 2012. Cnooc still expects to meet its yearly production target as it aggressively attempts to acquire overseas shale-gas and oil assets. Cnooc recently announced a
$15 billion plan to acquire Canadian energy firm Nexen.
Best Buy reported sharply lower quarterly earnings compared with a year earlier on a steady decline in same-store sales. Same-store revenues fell -3.2% in the latest quarter, marking its eighth such decline in the last nine quarters. Best Buy is suffering from a sharp shift among consumers to lower-margin phones and tablets.
Lowe’s reported a 10% decline in second-quarter earnings as same-store sales declined slightly and profit margins tightened.