Small caps flat to lower on mixed feelings for slower global growth
After spiking into the green out of the gate, small caps have since plunged and are flickering in and out of the green and red midday after waning global economic growth weighed on oil, pushing the dollar and larger-cap equities higher.
At 12:30 p.m. ET, the Russell 2000 (NYSE:IWM) slipped 3.46, or 0.46%, to 750.91, while the Dow had gained 18.73, or 0.16, to 11634.66.
Crude has touched a low on today’s session, selling off $3 a barrel to roughly $111 midday and posting a three month low, after OPEC forecasted that global demand for energy continue to falter.
Higher oil prices have pushed input costs for all companies higher and have weighed on operations. A decline in global growth would mean a reduced thirst for oil, which would push down the escalating raw material costs for most firms. However, that slower growth means less demand for final products. So it’s a double edged sword keeping equities in check.
“The global economic race to the bottom appears to be over as the U.S. has hit bottom and the rest of the world is still falling,” Andy Busch wrote in an email today.
The potential slowing global growth’s effect on oil sent the dollar surging to $1.4686 against the euro and 110.47 against the yen midday. The surge in the dollar as of late all started with the European Central Bank’s dovish comments last Thursday followed by reported negative GDP growth in the euro zone.
“[The] European Union has a little rule for government budget deficits of only 3% of GDP,” Busch wrote. “This means they are seriously constrained from creating stimulus packages when they need it most.....like now. As the economic crisis deepens, you can expect massive strains in the EU resulting from the 3% rule and the ECB intransigence on reducing interest rates. It's a powder keg that could explode.”
The small cap index initially opened higher on the session posting the highest intraday price since Jan. 2, as better-than-expected economic data buoyed investor sentiment.
The NY Manufacturing Survey came out at plus 2.77, more robust than the forecast for minus 4.4, and marked the first positive reading since April. This survey for August marks one of the earliest manufacturing reports of the month, and sets a positive tone going forward.
Adding to the good economic news on the docket, the industrial production report also topped the forecast, clocking in at plus 0.2%, compared with the forecast for flat growth. Production benefited from the best output in 10 months.
However, on the down side, the University of Michigan consumer sentiment survey came in slightly below the forecast for 62%, at 61.7%.
In corporate large cap news, big name investors are shopping for investments on the Street today, perhaps bolstering the psychology of the overall stock market. Billionaire investor George Soros raised his stake in embattled brokerage firm Lehman Brothers Holdings Inc. (NYSE:LEH) to 9.5 million shares from 10,000 shares and the “Oracle of Omaha” Warren Buffet has amassed a stake of 3.24 million shares in NRG Energy Inc. (NYSE:NRG).
On the financials front, Wachovia Corp., (NYSE:WB) said it will buy back $9 billion worth of auction-rate securities in order to pay a $50 million fine to settle state and federal allegations that it deceived investors about the quality of the debt securities.
MBIA Inc. (NYSE:MBI) and Ambac Financial Group Inc. (NYSE:ABK) are rallying after rating agency Standard & Poor’s affirmed the bond insurers’ credit standings and said their actions to buttress their operations were positive.
In broader industry groups, airlines, tires and home construction are gaining ground, while consumer electronics, coal and forestry are under pressure.
In small cap headlines, Delta Apparel (Amex:DLA) is up 31% midday on earnings related news and upbeat guidance for fiscal 2009. Shares of Lifeway Foods (Nasdaq:LWAY) slipped 13% following the dairy products producer’s lackluster second-quarter profit report and after Lazard Capital downgraded the stock to “hold” from “buy.”
