Week in Review: Worries of European debt default rock global markets

For the week ended February 5, 2010

* Concerns over eurozone defaults spark renewed risk aversion
* U.S. unemployment rate falls, job losses mount
* U.S. productivity rises
* Berkshire Hathaway loses “AAA” status
* Trichet tries to calm markets
* ECB, BOE leave rates unchanged
* Greece lays out recovery plan

Stocks fell around the world this week and commodities declined as fears of a European debt default called into question the fate of the euro and raised the possibility of the need for a bailout. At the same time, the much-anticipated U.S. employment numbers were mixed, showing that last year’s decline in employment was much worse than was previously thought, even as the unemployment rate dropped to 9.7%.

Volatility and uncertainty returned to markets in full force this week amid concerns that the worsening sovereign debt crisis in the eurozone could derail economic recovery. On Thursday, the Standard & Poor’s 500 Stock Index fell to a three-month low, and by week’s end the Chicago Board Options Exchange Volatility Index, or VIX, had risen 6.5%. The spike reflects the jitters across financial markets about exposure to risky assets. As the cost of insuring the debt of several European economies rose, investments and currencies with the most exposure to the debt were heavily sold, and the euro plunged to a nine-month low against the U.S. dollar.

U.S. economic news

Mixed unemployment news sobers markets
The U.S. unemployment rate, which measures numbers of people seeking work, unexpectedly declined in January to 9.7%, the lowest level since August, while companies continued to cut jobs as they boosted hours worked and overtime instead of hiring new workers. Employment fell by 20,000 last month. The decline reflected a drop in construction jobs and in state and local government hiring. These numbers mirrored weekly claims, which showed that more Americans unexpectedly filed first-time claims for unemployment insurance last week. Initial jobless application increased to 480,000 in the week ended January 30, the most in seven weeks. On the flip side, the numbers are consistent with a gradual recovery in the labor markets.

Productivity continues to rise
Productivity continued to surge in the fourth quarter as companies squeezed more out of remaining workers to boost earnings. The trend has enabled companies to reduce labor costs and increase profits. Employee output per hour rose at a 6.2% annual rate, capping the biggest one-year gain since 2003. For all of 2009, productivity increased 2.9%, the largest increase in six years. The same report showed that unit labor costs, a measure of what it costs firms to pay workers for a unit of output they produce, fell at a 4.4% annual rate in the last three months of 2009.

U.S. and global corporate news

Berkshire Hathaway loses “AAA” status
Standard & Poor’s stripped Berkshire Hathaway, owned by billionaire investor Warren Buffett, of its “AAA” credit rating after Buffett agreed to buy the Burlington Northern and Santa Fe Railway. Berkshire is taking on debt to fund the $26-billion takeover and was cut to “AA+.”

U.S. auto sales rise
U.S. auto sales rose in January as the economy strengthened, consumer confidence grew and the employment outlook improved. Results, however, were tempered by Toyota Motor’s recall and sales halt of more than half of its vehicles. Toyota’s monthly sales dropped 16% from a year ago. The seasonally adjusted annualized selling rate for all carmakers in January was 10.8 million cars and light trucks. The gain marks the third year-over-year increase for the auto industry and a 12.5% increase over last January’s annual sales.

Cisco profits bode well for capex trend
Cisco’s profits rose 23%, and its revenue increased 8%. This is the first increase in net income that Cisco has experienced in a year. The news adds to the growing evidence that companies are starting to spend after the recession. Pfizer’s quarterly profit more than doubled as did Comcast’s earnings amid solid subscription growth.

United Parcel Service signaled that an economic recovery may be underway and reported a strong fourth-quarter profit that was almost triple its profit of the same quarter a year ago. The company predicted shipping volume gains and higher pricing this year. Because of their roles in enabling commerce, freight handlers, such as UPS and FedEx, are among the first to feel the effects of a slump or recovery.

Deutsche Bank posted a net profit in the fourth quarter. However, a slowdown in corporate and investment banking gains from the previous three quarters disappointed some analysts. The profits were boosted by a tax benefit that was mainly related to deferred-tax assets in the United States.

Global economic news

Trichet tries to calm markets; banks keep rates unchanged
European Central Bank President Jean-Claude Trichet struggled to calm markets this week and claimed that the economy of the 16-nation eurozone is solid despite the economic problems of some of its members. The ECB president said he is confident that Greece can get its budget deficit under control.

The European Central Bank kept interest rates unchanged and signaled it has no plans to raise its key interest rate from a record low of 1%. ECB President Jean-Claude Trichet said the rate is appropriate.

The Bank of England opted not to expand its asset-buying program for the first time since it began last March and kept its benchmark interest rate unchanged at a record low of 0.5%. The bank left open the option to buy more bonds as it monitors the health of the U.K. economic recovery.

Greece lays out recovery plan
Greece’s Prime Minister George Papandreou laid out a plan to trim its deficit. His consolidation plan calls for about $13.7 billion of spending cuts and revenue increases this year. However, Greece’s unions threaten to derail the prime minister’s plans. On Thursday, the country’s biggest union approved its second mass strike this month to protest the spending cuts, and tax collectors began a 48-hour walkout.

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