Market Analysis

The major U.S. index futures are pointing to a lower opening on Monday, with the risk aversion intensifying on the developments in the eurozone. The Greek crisis is assuming enormous proposition, as Greece has failed to avert the political crisis stemming from a hung parliament. The specter of the nation going to elections for a second time is looming large due to the disagreement among the major political parties over the formation of government.

The possibility of Greece exiting from the eurozone has now become the moot point. The developments in Greece may widen the chasm among the eurozone nations over their outlook towards bailouts. As a case in point, German Chancellor Angela Merkel, who was widely supporting the cause of the fiscally frail nations, suffered a major setback in a local election. Added to that, the solvency of the Spanish banking system has also become a grave concern. Against this backdrop, it remains to be seen if the Dow Industrials could hold support around its 100-day moving average.

U.S. stocks extended their slide in the week ended May 11th, as the political impasse in Greece, a lack of any major domestic economic catalysts and a couple of insipid corporate tidings spooked markets.

Last Monday, the major averages closed on a mixed note, as caution prevailed in the wake of the parliamentary elections in Greece and presidential elections in France. The Greek elections did not have a decisive result, while in France, incumbent president Nicolas Sarkozy was unseated and socialists were voted to power. The political uncertainty in Greece dampened spirits on Tuesday, sending the major averages moderately lower.

Greek fears continued to haunt traders on Wednesday, as the averages closed lower yet again. Stocks meandered to a mixed close on Thursday, as positive sentiment generated by bargain hunting was impacted by the disappointment over Cisco’s (CSCO) weak guidance and the fluid political situation in Greece. The major averages closed mixed yet again on Friday, as a $2 billion trading loss reported by J.P. Morgan (JPM) weighed on sentiment along with the macroeconomic uncertainties.



For the week ended May 11th, the Dow Industrials and the S&P 500 Index ended down 1.67 percent and 1.15 percent, respectively, while the Nasdaq Composite slid 0.76 percent.

Among the sector indexes, the NYSE Arca Gold Bugs Index and the NYSE Arca Biotechnology Index fell over 4 percent each, while the NYSE Arca Securities Broker/Dealer Index declined close to 4 percent. Additionally, the Dow Jones U.S. Basic Materials Average, the NYSE Arca Oil Index and the Philadelphia Semiconductor Index were down more than 2 percent each.

Currency, Commodity Markets

Crude oil futures are slipping $2.05 to $94.08 a barrel after declining $2.36 or 2.40 percent to $96.13 a barrel in the week ended May 11th. Last Monday, oil slipped moderately in line with the lackluster equity market sentiment. The commodity lost close to a dollar on Tuesday and fell by a more modest margin on Wednesday.

Oil snapped its decline and rose modestly on Thursday amid the release of a fairly positive jobless claims report. The commodity reversed course on Friday amid the strengthening risk aversion before ending the week lower.

Gold futures, which ended down $61.20 or 3.72 percent to $1,584 an ounce in the previous week, are currently slipping $24.80 to $1,559.20 an ounce.

Among currencies, the U.S. dollar strengthened across the board in the week ended May 11th, as the currency benefited from its safe haven appeal. The euro suffered a backlash due to the political turmoil in Greece and fears that the newly elected government in France may not tow in line with the rest of the eurozone nations with regard to the bailout of troubled eurozone nations. The greenback added 1.27 percent against the euro before settling the week at $1.2917.

The U.S. dollar is currently trading at 79.77 yen and is valued at $1.2833 versus the euro.

Asia

The major Asian markets closed Monday’s session on a mixed note, with the Japanese, Australian and New Zealand markets closing higher, while the rest of the markets closed lower. The underlying mood was cautious, as traders looked ahead to the Eurogroup ministers’ meeting scheduled for later in the global trading day.

The Chinese central bank announced over the weekend that it would lower the reserve requirement for banks by 50 basis points in a bid to inject more liquidity into the system. The move comes after prognostication of weaker growth for the Chinese economy this year.

Japan’s Nikkei 225 average opened higher and rose in early trading, capitalizing on the Chinese move, but gave back all its gains by the mid-session as Greece woes worsened. The average moved modestly higher amid some volatility before closing higher. The index added 20.53 points or 0.23 percent before closing at 8,973.

Australia’s All Ordinaries also saw some degree of volatility before closing up 9.20 points or 0.21 percent at 4,342. Modest gains seen among most sectors were offset by weakness in the material space.

Meanwhile, Hong Kong’s Hang Seng Index moved about in a listless manner in the morning before retreating sharply in the afternoon. The index closed down 229.59 points or 1.15 percent at 19,735.

Europe

The major European averages are trading notably lower amid multiple negative catalysts confronting the markets.

Fears concerning the Spanish banking system intensified after last Friday’s government diktat requesting that lenders set aside of 30 billion euros to cover losses on real estate loans.

Meanwhile, the political stalemate in Greece continues, with the Greek president expected to meet with political parties in a bid to form a new government. Staunch opposition from Alexis Tsipras, the leader of the radical leftist Syriza coalition and the second biggest party, reduces the likelihood of clinching a deal.

Spain sold about 2.90 billion euros in 12 and 19-month bills, close to the higher end of the 2-3 billion euro target. However, demand slackened from the previous auction, while yields were also higher.

The Italian bond auction also revealed waning demand for the nation’s debt amid the developments brewing in the eurozone.

All eyes are likely to be on the Eurogroup meeting to be held in Vienna, which has discussions on the banking crisis in Spain and the political uncertainty in Greece on its agenda. Greece is likely to be warned about not setting its house in order, with analysts even broaching the issue of the likelihood of Greece’s exit from the eurozone.

U.S. Economic Reports

Manufacturing and retail sales are among the key economic reports due for release in the unfolding week. Traders are expected to closely track the results of the manufacturing surveys for May by the New York Federal Reserve and the Philadelphia Federal Reserve, the Federal Reserve’s industrial production report for April, the Commerce Department’s retail sales report for April, the FOMC minutes and the weekly jobless claims report.

The National Association of Home Builders’ housing market index for May, the housing starts report for April and the consumer price index for April may also draw some attention. The Commerce Department’s business inventories report for March, Fed speeches, the Conference Board’s leading economic indicators index for April and announcements concerning the Treasury auctions of 2-year, 5-year and 7-year notes round up the economic events of the week.

Retail sales growth may have been muted in April, given the earlier-than-usual Easter. Chain store sales reported by the nation’s retailers weren’t very encouraging, given the dent made by higher gasoline prices. At the same time, firmer auto sales may have given a boost to the headline number.

Economists expect housing starts to snap a 2-month losing streak and see a moderate rebound. The expectations are based on the premise that homebuilders have recently reported an increase in new orders. That said, BMO Capital Markets cautioned that the housing market may be far off from a sustained take-off, given the depressed home prices and bloated inventories of foreclosed homes.

Stocks in Focus

Yahoo (YHOO) announced that its board has named Ross Levinsohn as interim CEO, effective immediately, replacing former CEO Scott Thompson, who resigned over the resume padding scandal. The company also replaced Roy Bostock with Fred Amoroso as Chairman. The company also said it has reached an agreement with Third Point to settle its pending proxy contest.

Avon’s (AVP) board said it would consider Coty’s revised offer communicated through the letter dated May 9th and respond within a week.

Cabot (CBT) announced a 2 cents increase in its quarterly dividend to 20 cents per share.

Agilent (A), JDA Software (JDAS) and Groupon (GRPN) are among the companies due to release their quarterly results after the markets close.