Week in Review: Stocks flat as investors conclude economy on slow road to recovery

For the week ended June 12, 2009

U.S. consumer confidence increased in May for fourth month
U.S. trade deficit widens
Household wealth drops
BlackRock becomes world’s largest money manager
Fiat buys Chrysler
Airlines cut jobs
Brazil and Russia move to diversify reserves
S&P cuts Ireland’s debt rating

Stocks were flat on the week despite the Standard & Poor’s 500 Stock Index’s advance to a seven-month high on Thursday. Overall, investors seemed to conclude that the global economy was on a slow road to recovery. In June confidence rose around the world for a third month as U.S. job losses slowed and global production improved, according to the Bloomberg Professional Confidence Index Global Economy. Oil rose to a seven-month high of $72.68 per barrel.

Despite the optimism, the World Bank cut its global economic outlook this year, saying it expects the world economy to shrink close to 3% amid rising unemployment and weak production. In March the bank forecast a 1.7% contraction.

U.S. economic news
Mixed data point to slow recovery

In the United States, economic data this week told the tale of an economy that was turning the corner slowly. U.S. consumer confidence rose for the fourth month in a row in May amid a slowing in job losses and stabilization in manufacturing and the housing market, according to the Reuters/University of Michigan preliminary index of consumer sentiment. The government reported initial jobless claims fell, although continuing claims hit a nineteenth-straight record high. Retail sales rose 0.5% during May, the third increase in five months.

The U.S. trade deficit widened in April for a second month as exports fell to their lowest level in almost three years. The gap between imports and exports grew 2.2% as foreign demand for U.S. goods dropped 2.3%, exceeding a decline in imports. The export drop reflected reduced foreign demand for engines, machinery, and metals. Meanwhile, prices of goods imported into the United States rose in May for the third month in a row.

Household wealth fell in the first quarter by $1.3 trillion, extending the biggest drop on record as home sales and declines in stock prices eroded wealth. Net worth for households and nonprofit groups decreased $50.4 trillion.

U.S. and global corporate news

BlackRock and Fiat go shopping
BlackRock agreed to buy Barclays investment unit, Barclays Global Investors, for $13.5 billion, becoming the world’s largest money manager. Barclays will hold 19.9% of the combined company.

Fiat SpA bought a stake in most of Chrysler’s assets, creating the world’s sixth-largest carmaker. Fiat will own 20% of Chrysler and is aiming to increase that to 35% if certain operational goals are achieved.

Airlines cut jobs
AMR’s American Airlines will cut 1,600 jobs, and Delta Air Lines said it may follow suit. American’s reductions equal about 2.4% of its work force. US Airways Group said it wants 400 flight attendants to take leaves, or it will have to resort to layoffs.

Global economic news

Russia and Brazil move to reduce dollar dependence
Russia and Brazil announced plans to buy $20 billion of bonds from the International Monetary Fund in an effort to reduce their dependence on the dollar and diversify foreign currency reserves. Russia’s central bank said it may cut investments in U.S. Treasuries one week after China said it may reduce reliance on the dollar and U.S. bonds. Brazil’s finance minister said his country would buy $10 billion of debt sold by the IMF.

S&P cuts Ireland’s debt rating
Standard & Poor’s lowered Ireland’s credit rating for the second time this year. The country’s rating was cut one step, to “AA” from “AA+,” and assigned a negative outlook. S&P said it viewed Ireland as the weakest fiscal link in the European Monetary Union. It attributed the downgrade to the fiscal costs to the government for supporting the Irish banking system. Those costs are expected to be significantly higher than what S&P had expected when the rating was last lowered in March.

Japan’s current account surplus shrinks
Japan’s current account surplus shrank in April for the third month as the global economic crisis cut demand for exports. The surplus narrowed 54.5% amid an ongoing decline in exports, which fell 40.6% in April after declining 46.5% in March and a record 50.4% in February. Imports dropped 37.8%, the same pace of decline as in March. Orders for Japanese machinery fell to a 22-year low, and producer prices shed 5.4% in May from a year earlier and the most since 1987, as dwindling profits forced companies to cut costs amid the worst postwar recession.

A mixed outlook on manufacturing
South African manufacturing contracted by a record 21.6% in April compared with the same month last year, as the global recession curbed exports and factories closed for public holidays. It was the biggest decline in manufacturing since at least 1991. Manufacturers in the country have scaled back output and fired workers as the global recession slashed export demand and pushed the economy into its first recession in 17 years.

Manufacturing in the United Kingdom rose in April for the second month as a rebound in motor vehicle production helped end the year-long factory slump. The seeming stabilization in the sector has been seen by some analysts as a sign that the U.K. economy has passed the worst phase of the recession.

Things looking up down under
Australian consumer confidence rose in June by the most in 22 years after the economy unexpectedly avoided a recession, increasing speculation that the central bank has finished cutting rates.

New Zealand’s central bank kept its key interest rate unchanged for the first time in a year as signs mounted that a pickup in the housing market might bring the worst recession in more than three decades to an end. The bank has cut interest rates 5.75 percentage points since last July to help kick start the economy that began contracting in the first quarter of 2008.

Chinese spending jumps
China’s spending on factories, property, and roads soared by the most in five years as the government’s $585 billion stimulus package countered a record slump in exports. New lending in the country doubled in May, and industrial output and retail sales climbed more than expected as the government stimulus seemed to help revive the economy.

Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times.

Arturo E. Miranda C.
VP International Sales
Thales Securities
amiranda@thalessecurities.com