Market Scrambles For Footing After Cool Retail Sales

This morning's soft Retail Sales number further raised market hopes that a recent wave of cool data was right on the money, that the economy has indeed begun to slow down and that the Fed may be able to hold off on raising interest rates at its June 28 meeting. But it wasn't enough to convince the market, and it may have inspired fear of further drops in earnings.

Right after the data was released at 8:30 a.m. EDT, futures spiked into the green, but settled back to more moderate levels shortly afterwards and then turned lightly into the red.

At 9:20 a.m. EDT, the S&P 500 futures were up 0.5 points, fractionally below fair value and not much of an indication for the open. The Nasdaq 100 futures were 0.5 points lower also not a clear indication for large-cap tech stocks in the early going. Earlier this morning, S&P 500 and Nasdaq futures were up 4.6 points and 22.5 points respectively.

"We look a little bit lower at the opening," said Peter Coolidge, managing director of trading at Brean Murray Foster Securities. "Retail sales are interesting but the CPI is more relevant," he said.

"We will probably remain in a holding pattern and drifting today. This market is lacking leadership. Anything's possible," he added.

The headline Retail Sales number came in at a 0.3% drop, far below the Reuters consensus poll estimates that they would remain unchanged. The core number saw a 1.3% drop against expectations of a 0.3% gain.

Today's number and a slew of cool data in the past two weeks have bolstered confidence that the Fed has done its job well and that the last six rate hikes have indeed whacked the runaway exuberance out of this economy.

But investors may not be entirely convinced. Some say one month of data is not enough, and a cooler-than-expected number may have exacerbated worries over a slowdown in earnings. A bit of a relief rally spurred by the first round of cool data lost steam in recent days, partly due to a rash of bad earnings pre-announcements which inspired fears that an economic slowdown was hurting profits.

The market will still be watching Alan Greenspan's speech closely this afternoon for hints to his interest rate plans. At 1:10 p.m. EDT, the Fed boss will address the New York Association for Business Economics on "Business data analysis." And tomorrow's Consumer Price Index will be decisive. If that number is in line with expectations, many market observers say the Fed will be convinced not to hike rates on June 28.

In any case, if the market can get past these interest-rate concerns, it could still see a bit of a summer rally, observers contend.

Another thing weighing on stocks is Friday's futures and options expiration, which could inject a little volatility into the market as institutions begin to roll over their contracts. The September contract started trading on Thursday.

Meanwhile, there are plenty of telecom companies in the news today. AT&T(T) said it will license speech-processing technologies to SpeechWorks in return for a minority stake in the company, while France Telecom(FLF) and Global Crossing(GBLX) are both in talks to snatch up Dutch telecom Equant(ENT) for $10 billion. France Telecom has a bit of a head start.

The Treasury market was slipping with the 10-year note down 3/32 at 102 30/32 and yielding 6.092%.

European markets remained sluggish at midsession after released of U.S. retail sales.

The Paris CAC, back from a Pentecostal holiday, was 11.05 higher, or 0.17%, to 6560.10.

Frankfurt's Xetra Dax was up 26.08, or 0.36%, to 7261.72.

London's FTSE was up 46.9, or 0.73%, to 6477.8.

The euro was lately trading higher at $0.9583.

Asian markets hobbled lower Tuesday, partly on weakness in the Nasdaq.

Hong Kong's Hang Seng index was off 362.11, or 2.26%, to 15692.94,

South Korea's Kospi index slipped 41.36, or 4.89%, to 804.45 despite an encouraging South-North Korea summit that day.

In Tokyo, the Nikkei 225 index fell 65.66, or 0.39%, to 16914.95.

The greenback fell slightly against the yen to around 106.52 in listless trading. It was recently just barely higher at 106.53 yen.

Brocade and Cisco Ink Pact

Brocade Communications(BROC), whose go-go momentum stock has forced investors to pay attention to the mundane world of networked storage systems, announced a joint-development agreement today with Cisco(CSCO), the undisputed heavyweight of networking products.

The announcement is important to Brocade, which went public in a spectacular 1999 IPO, because it signals Cisco's stamp of approval on Brocade's approach to connecting storage devices and computer servers on large networks.

The Brocade-Cisco tie-in comes ahead of an all-day Brocade investors meeting near its San Jose, Calif., headquarters for a briefing on its business. It will gather senior executives from partners at Cisco, ONI Systems(ONIS), Compaq(CPQ), Veritas(VRTS) and Storagenetworks in an effort to convince investors that its storage switching device is the linchpin of the burgeoning market for networked storage.

"We don't want to get out on a limb and point to the centerfield bleachers," quips Brocade CEO Gregory Reyes. "But we do want people to know the market is a lot bigger than they thought it was." International Data Corp. has estimated that the market for storage area networks -- which Brocade leads -- will grow from $250 million in 1999 to $3 billion in 2003. Says Reyes: "We think the total available market is ten times that."

After having gone public in May, 1999, at a split adjusted 4 3/4, Brocade's stock soared as high as 185 earlier this year before falling to 134 5/16 yesteday.

-- Adam Lashinsky

For a look at stocks in the pre-open news, see Stocks to Watch, published separately.

>To order reprints of this article, click here: Reprints