American House Prices Help US Equities

Posted on | June 30, 2009 |

US equity markets edged marginally higher in early trading today following a report that pointed to further signs of stabilisation in American house prices.

Equity market gains were later relinquished on the back of an unexpected drop in US consumer confidence data and a surge mortgage delinquencies, however.

The S&P/Case-Shiller home-price index was the first macroeconomic report released today. The index, which tracks house prices across 20 major US metropolitan areas, showed a drop of 18.1% from a year earlier in April. This was better than Bloomberg’s median forecasts for a fall of 18.6% year-on-year and the prior month’s 18.7% decline. ‘While one month’s data cannot determine if a turnaround has begun, it seems that some stabilization may be appearing in some of the regions,’ said David Blitzer, the chairman of the S&P index committee, in a statement released today. [1]

In the meantime, a separate report has revealed that US business activity in the Chicago region shrank less than anticipated in June. The Chicago Purchasing Managers Index (PMI) rose to 39.9 in June from 34.9 the month before. Readings below 50 indicate a contraction.

So far so good, but the big blow to equity market sentiment came after the Conference Board’s US consumer confidence index slumped six points to a reading of 49.3. In the meantime, a separate government report revealed that prime mortgage delinquencies, which are the least risky, more than doubled through March, climbing 2.9%.

By 3:30pm (London time), the Dow Jones Industrial Average had declined 93.86 points (-1.1%) to 8435.52, while the broader S&P 500 had fallen 11.04 points (-1.19%) to 916.19.

Crude Oil Spread Betting Futures, which rose as much as 3.5% to $73.50 a barrel earlier today, retreated back to the $69 a barrel mark this afternoon, also pulling down the share price of US energy majors with it. Shares in Chevron Corp were, not surprisingly, down 1.3% to $66.04, Exxon Mobil slid 1.2% to $69.75 and ConocoPhillips fell 1.75% to $41.48.

Weighing on the oil refining shares, meanwhile, was Goldman Sachs, which downgraded the sector to ‘cautious’, writing that ‘even with meaningful underperformance having already occurred this year, we see little reason for investors to own the sector.’ Goldman also downgraded refiners Sunoco and Tesoro Corp from ‘neutral’ to ‘sell’. [2]

Shares in Sunoco Corp declined 2.2% to $22.77, while Tesoro slumped 3.4% to $12.44.

In the meantime, shares in Goldman Sachs traded 1.4% lower at $147.3, paring earlier gains which came on the back of a ‘buy’ recommendation from broker UBS.

Goldman Sachs ‘is very well positioned to manage through the cycle given its strong capital ratios, manageable legacy risk exposures, limited direct consumer & corporate credit exposure, and top notch risk management,’ UBS wrote in its latest research report on the company. [3]

Rival Morgan Stanley traded 2.3% below its previous close at $28.4, JPMorgan Chase fell 1.5% to $34.09, Bank of America eased 0.9% to $13.08 and Citigroup lost 1.7% to $2.97 following the bleak mortgage delinquencies report.

Elsewhere in the financial services sector, Insurer AIG was knocked 15% lower to $1.13 a share, after warning that its company’s results would suffer from a ‘material adverse effect’ should the price of credit-default swaps sold to European banks decline in value. A credit-default swap is a financial instrument which can be thought of as an insurance against credit default, with rising prices reflecting higher default risks and vice versa.

In corporate news, H&R Block rose 8.55% to $17.01 after predicting that its earnings per share for 2010 will come in between $1.60 and $1.80, beating Bloomberg’s average analyst estimate.

Education company Apollo Group, meanwhile, jumped 7% to $70.59 after its earnings per share topped Bloomberg’s average analyst projection by 12%. The company also said that it will increase its share buyback programme to $500 million.

Back home, BG Group, the third largest natural gas company, announced that it has bought $1.06 billion worth of assets from Exco Resources in order to develop its first US shale gas project. Shale gas is a natural gas that is stored in organic rich rocks.

‘This alliance brings material new resources and supply to our existing US business at a competitive price and in a prime location at the heart of the world’s largest gas market,’ said Chief Executive Frank Chapman in a statement. ‘The transaction increases BG Group’s exposure to long-term unconventional gas resources and skills.’ [4] Shares in the company were down by 2.3% to 1013p this afternoon.

By 3:30pm (London time), the FTSE 100 was down by 57.96 points (-1.35%) to 4236.07, while the FTSE 250 had lost 51.18 points (-0.68%) to 7426.03.

[1] Bloomberg News ( 30 June 2009)
[2] Reuters News ( 30 June 2009)
[3] Bloomberg News ( 30 June 2009)
[4] Bloomberg News ( 30 June 2009)

By Anthony Grech, Research Analyst, IG Index.

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