The Nitty Gritty Details:
Recent calm in Europe, decent retail sales numbers and several upbeat earnings reports are helping stocks this morning add to yesterday’s big rally. While the U.S. news is having some impact, markets are much more focused on Europe, where reduced use of ECB emergency funding and lower bond yields are helping instill some confidence in Europe’s financial system and European banks in particular. Better-than-expected earnings and guidance from a major retail department store chain and a Technology sector chipmaker are helping buoy investor confidence, as both stocks are trading sharply higher after their results. Overseas, European stocks are higher on signs of reduced stress among European banks, while Asian markets closed mixed, with a higher yen weighing on Japan’s exporters and the Hang Seng and Shanghai markets inching higher. Oil is up about 2% overnight to over $87, while gold eased about $10 to near $1470 as the market shifts toward risk assets and more economically sensitive commodities.
Looking back at Thursday, the Dow closed more than 400 points away from where it opened for the fourth consecutive session, a never-before-seen feat that illustrates just how volatile this market has been. Nonetheless, the surge leaves the S&P 500 down about 2% for the week and 14% below 2011 highs. In a welcomed development, markets responded to fundamentals Thursday as an unexpected drop in weekly jobless claims and a relatively upbeat outlook from a major Technology sector player helped encourage bargain hunters to step in. Europe remained on center stage, as the rally was also driven by hopes that next week’s meeting between France’s Sarkozy and Germany’s Merkel would be productive in providing a path toward resolution of the European debt crisis. Financials and the resource sectors led the rally, while only Telecom and Consumer Staples failed to keep up with smaller advances.
Around our financial planning services firm this morning, we were discussing four items that we thought would be of particular interest to our readers:
The Markets Broken Down:
1. There was a weak Treasury auction yesterday. The 30-year Treasury auction drew much less interest than prior auctions this week. The bid-to-cover at 2.08 was well below the 2.80 in Wednesday’s 10-year auction. Indirect bidder participation, an indicator of foreign interest, fell sharply to 12%, well below the 38% on Wednesday. Clearly potential buyers were less comfortable with the longer-term commitment at lower yields (3.6%), pushing 10- and 30-year Treasury yields higher by nearly 20 basis points yesterday to over 2.3% and near 3.8%, respectively.
2. Economic data out of China suggests monetary tightening policies are working. Two economic data points from China, the M2 money supply and new loans, were both lower and below economist’s forecasts. This follows a decrease in China’s Purchasing Managers Index in July. China has been tightening to slow growth in order to bring inflation down to within its target of 4%.
3. Consumers continue to “hang in there.” It’s hard to call these numbers good, but they clearly weren’t bad either. Retail sales rose 0.5% month-over-month in July, and 0.3% excluding autos and gasoline sales, both in line with expectations (nominal gains). Year-over-year, sales improved a solid 8.5% overall and 8.5% excluding autos and gasoline. In addition, May and June sales were revised higher. In a market lacking confidence, key numbers that don’t disappoint are welcomed. Solid results from retailers in recent days coupled with these positive government numbers suggest that consumers continue to hang in there. Also on tap for today is the University of Michigan’s consumer confidence report.
4. In another interesting twist, the SEC is looking into the S&P downgrade. The SEC has reportedly started a preliminary inquiry into potential insider trading in connection with S&P’s downgrade, asking the firm who knew about the ratings cut before it was announced. However, proving a leak could be difficult, as many in the market anticipated the downgrade and trades can occur across numerous securities or currencies. Earlier this week, a financial publication reported “compelling evidence” that S&P leaked the decision to banks and hedge funds prior to the announcement.
As always, email me here with your questions or comments. I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.
Greg Powell, CIMA
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.
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