US Markets jump off the cliff on oil woes

Crude prices shooting up more than ten dollars in a day makes stocks plummet

US Market ended the week on Friday, 06 June with very strong losses. Stocks remained extremely volatile together with the volatile dollar and volatile commodity prices, mainly the crude. Economic reports that checked in were better than expected for majority of the cases except for the main May employment report. Stocks mainly reacted to the jittery financial market which was again full with credit related problems. But it was the spiraling crude price that took the maximum toll on the market’s health for the week.

The Dow Jones Industrial Average lost 428 points for the week. Tech - heavy Nasdaq lost 48 points. S&P 500 lost 39 points. In percentage terms the three indices lost 3.4%, 1.9% and 2.8% respectively.

With this week’s losses, market wiped out all of last week’s gains. Oil prices shot higher by almost $11 a barrel on Friday, scoring their biggest one-day gain in dollar terms as talk about a potential Israeli attack on Iran combined with a slide in the U.S. dollar to send prices to their highest levels on record. July crude climbed $10.75 (8.4%) to close at $138.54 a barrel on the New York Mercantile Exchange on Friday. That was an all-time closing high. It climbed as high as $138.80 during the regular trading session. The contract climbed 8.8% for the week on Nymex.

Thursday, 05 June was the only day when the indices made decent gains during the course of the week. Other than that, indices ended in the red on all the other days.

In the financial sector, Standard & Poor's cut its financial strength ratings for bond insurers Ambac Financial and MBIA to 'AA' from 'AAA'. Though market seemed to have discounted the news as stocks immediately soared but then gave up their gains. Also, in the financial sector, Lehman Brothers shares was under tremendous pressure after there were news in the market that the company is about to raise capital and has also borrowed from the Fed.

On Friday, 06 June, the U.S. government reported the unemployment rate in May jumped to 5.5%, the highest since October 2004 and the biggest increase in seasonally adjusted unemployment in 33 years. The same pressured the dollar immensely.

But there were quite a few economic reports during the week that came in better than expected. Starting with the ISM manufacturing survey and construction spending reports on Monday, 02 June, and carrying on with the factory orders, weekly initial claims, first quarter productivity, and wholesale inventories reports during the remainder of the week, did not surprise market by any means.

Retailers, led by Wal-Mart reported better-than-expected same-store sales for May. Wal-Mart was the headline leader in that respect, posting a 3.9% increase, excluding fuel. The company had forecast same-store sales to be flat to up 2%. For June Wal-Mart is expecting same-store sales to be up 2% to 4% due in part to an expected benefit from the spending of stimulus checks.

Next, the weekly initial claims data was better than expected and certainly not recession-like, as claims fell 18,000 to 357,000.

Also, May (Institute of Supply Management) ISM services - a survey of nonmanufacturing purchasing managers - was nearly unchanged at 51.7 compared to 52 in April. Market had forecast a reading of 51. Because the reading is above 50, it indicates the services sector is expanding.

In the M&A arena, Verizon is reportedly going to buy privately-held Alltel for $28.1 billion. In the process, it will supplant AT&T as the biggest mobile phone operator in the country.

Executive Summary

For the week, indices registered substantial losses. DJIx and S&P 500, each closed down by 3.4% and 2.8% respectively. Nasdaq closed down by 1.9%. With this week’s losses, market gave up all of prior week’s gains.

The week was mainly dominated by the crude oil and economic reports. Oil prices shot higher by almost $11 a barrel on Friday, scoring their biggest one-day gain in dollar terms. The contract climbed 8.8% for the week on Nymex. Economic reports were in most part better than expected.

For the year, Dow, Nasdaq and S&P 500 are down by 8%, 6.7% and 7.3% respectively.