After dropping in the opening minutes of trading US stocks once again moved higher, aided by M&A news in the tech sector that helped to offset a rate hike by the Chinese central bank and a slight slowdown in the US services sector.
ISM non-manufacturing news
Activity in the US services sector declined in March, which helped to dispel some of the optimism about the US economy engendered by Friday’s non-farm payrolls report. The Institute for Supply Management’s index fell to 57.3 from 59.7 in February, having been forecast to drop 0.2 points to 59.5. The survey, which covers utilities, healthcare, finance and others, remains above the average of 52.9 seen since the beginning of the current recovery. The decline is disappointing, since it illustrates the current choppy and uncertain state of the US economy, but the reading above 50 shows that expansion is still the underlying theme.
Tim Geithner’s warning
US Treasury Secretary Tim Geithner has warned that the US will reach its borrowing limit by mid-May unless lawmakers resolve a stand-off over budget cuts. Mr Geithner said that failure to reach agreement would result in severe hardship for Americans as government services such as social security payments are suspended. A government shutdown, when authority to spend money is revoked, will mean that the US Treasury will be unable to borrow more money if it reaches the debt ceiling of $14.29 trillion. In a stark warning, Mr Geithner also said that a US default would cause ‘a financial crisis potentially more severe than the crisis from which we are only now starting to recover’.
China tightens monetary policy
As central bankers in the US, UK and Europe debate the wisdom of a slight tightening of their current loose monetary policy, the People’s Bank of China has taken action once again to curb price increases. The Chinese central bank raised interest rates for the fourth time in five months, lifting the benchmark lending rate by twenty-five basis points to 6.31%. Market commentators said that the move could be seen as an indication that March inflation figures, which are due for release next week, could be higher than expected. The battle against inflation is one of China’s main priorities, since runaway price increases could prompt social unrest, an outcome that the Chinese Communist Party is desperate to avoid. Societe Generale said that the move would ultimately be good news since a calmer Chinese economy would be better for sustainable global growth.
Nasdaq reshuffle affects Apple, Microsoft and Oracle
By 3.30pm (London time), the Dow Jones had risen 14.04 points (0.11%) to 12414.07, and the S&P 500 was up 2.22 points (0.17%) to 1335.09. The Nasdaq 100 was 2.25 points (0.1%) higher at 2336.79.
Shares in Apple fell by 0.94% to $337.99 after the firm’s weighting in the Nasdaq 100 index was cut in the first reshuffle of the technology index since 1998. Apple’s representation will fall from 20.49% to 12.33%, after previous rules caused a disproportionate growth in its weighting. In contrast, the weighting of Microsoft and Oracle will more than double. The change means that tracker funds will need to cut their holdings to reflect the different measures, which will push the share price down as selling takes place. Microsoft shares rose 1.14% to $25.84, while Oracle advanced 0.4% to $34.28.
Also in the technology sector, shares in National Semiconductor leapt 71% to $24.06 following news that the company will be bought for $25 per share, a 78% premium to its Monday closing price. Also gaining were Advanced Micro Devices and Nvidia, on hopes of further consolidation in the microchip sector.
UK afternoon trading – WPP, Drax, Andor Technologies
Wall Street’s move into positive territory helped the FTSE 100 to par losses, with rising commodity prices helping to lift the mining sector. Vedanta Resources and Randgold Resources were the biggest gainers, up 3.5% and 2.4% respectively. By 3.30pm (London time), the FTSE 100 was down 0.16% at 6007.29.
Advertising giant WPP has moved into the youth market with a minority stake in Vice Holdings, a youth media brand that operates in more than 30 countries. The brand includes a record label, a publishing division and its own television services. The deal is WPP’s fifth acquisition for 2011, having bought a Vietnamese firm in March, and then making three purchases in the space of a single week in January. The shares declined 0.38% to 786.5p.
Drax, the operator of the eponymous coal-fired power plant, will be getting a bit richer after reaching an agreement with the British government. The two parties have struck a deal over a bond financing structure, and as a result £180 million (including £63 million in losses that will be offset against tax charges in the coming years) will be released. Drax said the cash would be used to improve its biomass operations, providing increased amounts of renewable energy. Drax rose 1.73% to 422.5p.
Amongst the small-caps, camera manufacturer Andor Technologies jumped 12% to 441.3p after it raised its earnings guidance for the full year. It said that the order book was strong, with a healthy sales pipeline. During the first half of its current financial year, the firm received its largest ever single order, which was worth around $2.1 million.
Fed minutes due later
Don’t forget that at 7pm (London time), the Federal Reserve will publish the minutes of its March meeting. This will be a key moment for determining the current weight of opinion among US policymakers, and could help set the tone for market moves for the rest of the week.
