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While you were sleeping: Short-circuited by techs

Friday 30th July 2010

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Technology shares added a fresh hurdle for equities to clear and further clouded a murky outlook for the world’s biggest economy.

In late trading, the Dow Jones Industrial Average fell 0.20%, the Standard & Poor's 500 Index declined 0.27% and the Nasdaq Composite Index lost 0.29%.

Among the most active on Wall Street were Akamai Technologies, Nvidia, Symantec and Metlife.

Nvidia shares tumbled 10% after the graphics chipmaker cut its sales outlook. It hurt other chip stocks, sending the Philadelphia Semiconductor Index 2.8% lower in midday trading.

Nvidia now expects revenue of US$800 million to US$820 million in the quarter ending August 1, down from its estimate of US$950 million to US$970 million.

Both Stanley Black & Decker and Masco underpinned concern that struggling US consumers are reining in their spending, which has dampened profit expectations through the rest of 2010.

So far, 60% of companies in the S&P 500 have reported quarterly earnings. Of those, 75% beat expectations and earnings have grown 35.1% year-over-year, according to Thomson Reuters Proprietary Research.

But forecasts for the third and fourth quarters, which investors are using as a barometer for the economic recovery, have frequently missed the mark.

"Earnings are looking good but confidence in the future is missing," Gail Dudack, chief investment strategist at Dudack Research Group in New York, told Reuters.

Additionally, policymakers seem to be suggesting that investors are right to be concerned.

A subtle but significant shift appears to be occurring within the US Federal Reserve over the course of monetary policy, the New York Times reported, citing James Bullard, the president of the Federal Reserve Bank of St. Louis.

Bullard, who is a voting member of the Fed committee that determines interest rates, warned that the American economy was at risk of becoming “enmeshed in a Japanese-style deflationary outcome within the next several years”.

Bullard’s comments come days after Fed chairman Ben Bernanke said the central bank was prepared to do more to stimulate the economy if needed, though it had no immediate plans to do so. Bullard has generally been cast as an inflation hawk, or reining in the measures taken to bolster the economy.

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s ‘fear gauge’, fell 1.16% to 23.97.

The Stoxx Europe 600 Index fell 0.4% to 256.26.

Across Europe, the UK’s FTSE 100 slipped 0.11%, Germany’s DAX fell 0.72% and
France’s CAC 40 declined 0.5%.

Among the most active stocks in Europe were Nestle, Unilever, Vallourec and Telefonica.

US Treasury seven-year notes gave up gains after an auction of US$29 billion of the securities attracted less demand than forecast.

The sale drew a yield of 2.394%, higher than the 2.375% in pre-auction trading, a condition called a tail that means the government had to pay a higher rate to sell the notes, according to Bloomberg News. The average forecast of 6 of the Fed’s 18 primary dealers in a survey also was a yield of 2.375%.

The yield on the current seven-year note fell less than 1 basis point to 2.39% at 2.15pm in New York, according to BGCantor Market Data. The benchmark 10-year note yield rose 2 basis points to 3.01%.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.78, compared with 3.01 at the last sale, on June 24, and an average of 2.8 for the past 10 offerings.

The Dollar Index, which measures the greenback against a basket of six major currencies, fell 0.73% to 81.58.

The euro hit a 12-week high against the US dollar after economic sentiment in the euro zone climbed to a 28-month high and German unemployment declined.

Investors sold the greenback before the end of the month to hedge the currency exposure on their holdings of US assets, and euro gains accelerated once the currency went over US$1.3050, a level in which automatic buy-orders were triggered, forcing investors to unwind bets against the euro, traders said.

In late morning in New York, the euro was up 0.6% at US$1.3065, its strongest since May 4.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, rose 1.46% to 270.05.

US crude oil prices advanced.

US crude for September delivery rose 77 cents to US$77.76 a barrel at 12.51pm EDT.

ICE Brent rose US$1.03 to US$77.09 a barrel.

Gold rose too. Spot gold was bid at US$1,164.10 an ounce at 1514 GMT, against US$1,162.55 late in New York on Wednesday. US gold futures for August delivery rose US$2.40 to US$1,162.80.

The precious metal has struggled to maintain higher levels since hitting a record US$1,264.90 an ounce in June, with investors liquidating their gold holdings in favour of other assets as equities recovered some of the losses made earlier this year.

"Gold does very well in a market disruption/risk environment, which is what we obviously saw in May and June to some extent," Michael Lewis, head of commodities research at Deutsche Bank, told Reuters.

"Those concerns have come off the boil a bit."

US copper futures rose. Copper for September delivery advanced 1.4% to US$3.2925 per pound by 10.50am EDT (1450 GMT) on the COMEX metals division of the New York Mercantile Exchange.

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