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US Market Commentary

Optimism About Europe May Help Stocks Extend Upward Move

12/5/2011 9:21 AM ET

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(RTTNews) - The major U.S. index futures are pointing to a higher opening on Monday, with stocks likely to add to the strong gains posted last week.

Optimism about the financial situation in Europe is likely to contribute to any early strength among stocks, with bond yields in the region moving to the downside amid news that Italian Prime Minister Mario Monti has unveiled 30 billion euros of austerity and growth measures.

Traders are also likely to keep an eye on a meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy, who will look to iron out their differences ahead of a European Union summit on Friday.

U.S. stocks advanced solidly in the week ended December 2nd, as earnest attempts by eurozone nations to solve the debt crisis and coordinated policy responses from central banks along with some solid domestic data points generated strong buying interest in the markets.

Last Monday, the major averages rallied over 2-3 percent as a strong start to the U.S. holiday shopping season and efforts underway among eurozone members improved risk appetite among traders. Traders exercised caution on Tuesday, especially after the previous session’s strong advances, and consequently, the major averages ended on a mixed note.

An announcement from the Federal Reserve regarding coordinated actions along with some of its compatriot central banks to ease the pressure on dollar funding led to a strong wave of buying in the markets on Wednesday. The major averages all ended up over 4 percent. Despite the release of some positive domestic economic data, the major averages moved about in a listless manner on Thursday before closing mixed.

After an early rally sparked by the positive monthly jobs report, which showed a sharp drop in the jobless rate for November, the major averages gave back their gains over the course of the session on Friday before once again closing mixed.

For the week ended December 2nd, the Dow Industrials, the S&P 500 Index and the Nasdaq Composite Index all rose over 7 percent.

Among the sector indexes, the NYSE Arca Broker/Dealer Index, the KBW Bank Index, the NYSE Arca Oil Index and the Philadelphia Oil Service Index rose about 10 percent each for the week, while the Philadelphia Semiconductor Index, the Philadelphia Housing Index and the Dow Jones Transportation Average advanced about 9 percent each.

Commodity, Currency Markets

Crude oil futures are rising $1.08 to $102.04 a barrel after advancing $4.19 or 4.33 percent to $100.96 a barrel in the week ended December 2nd.

Oil futures jumped close to $1.50-a-barrel last Monday, as strong Black Friday sales and hopes concerning the eurozone debt crisis led to buying. The momentum was sustained on Tuesday, as oil rose over $1.50-barrel amid the release of a positive consumer confidence reading.

Despite the overbought levels, oil gained further on Wednesday, although by a moderate margin, after the coordinated central bank actions and positive domestic economic data. However, the commodity edged lower on Thursday before resuming its rally on Friday after the release of the U.S. monthly jobs report.

Gold futures, which climbed $62.80 or 3.72 percent to $1,751.30 an ounce last week, are slipping $14.90 to $1,736.40 an ounce.

Among currencies, the U.S. dollar ended weaker against most risky currencies in the week ended December 2nd, while it rose against its fellow safe haven, the yen. The dollar added 0.33 percent against the yen before ending the week at 77.9875 but fell 1.15 percent against the euro to $1.3391.

The greenback is currently trading at 77.949 yen and is valued at $1.3448 versus the euro.

Asia

The Asian markets turned in a lackluster performance, as the past week’s sharp gains made traders wary and pushed them to the defensive, especially after a private survey showed that Chinese service sector activity moderated. That said, the markets ended mostly higher on the activities underway in Europe.

Japan’s Nikkei 225 average ended up for the fifth session in six, closing up 52.23 points or 0.60 percent at a 1-month high of 8,697.

Meanwhile, Australia’s All Ordinaries added 33.20 points or 0.76 percent before closing up 4,380, its sixth straight session of gains. Hong Kong’s Hang Seng Index closed at 19,180, up 139.30 points or 0.73 percent.

Europe

The European averages are also climbing, with the French CAC 40 Index up by 1.3 percent, while the German DAX Index is climbing by 1.1 percent and the U.K.’s FTSE 100 Index is up by 0.9 percent.

Italy announced yesterday a new austerity plan worth 20 billion euros, including spending cuts and tax increases as well as pension overhauls and growth enhancing measures.

In corporate news, TUI Travel reversed to a profit in its fiscal year, aided by a strong core performance and cost cuts. The company also announced a 2.7 percent increase in its dividend payout.

The eurozone region’s service purchasing managers’ index came in at 47.5 in November, downwardly revised from the preliminary estimate of 47.8, according to a report released by Markit.

Meanwhile, the eurozone sentix index measuring sentiment among investors fell to –24 in December from –21.2 in November.

A Eurostat report showed that eurozone retail sales grew 0.4 percent month-over-month in October following a 0.6 percent drop in September.

U.S. Economic Reports

The European debt scenario and its ramifications for the global economic outlook have heightened anxiety concerning each incoming piece of economic evidence, even as most recent domestic economic data has come in stronger than expected. The results of the Institute for Supply Management’s service sector survey, the weekly jobless claims report and the Reuters/University of Michigan’s preliminary consumer sentiment reading are among the key economic data that may dictate market movement in the unfolding week.

The trade balance report for October, the Commerce Department’s factory goods orders report for October, a Federal Reserve report on outstanding consumer credit, the wholesale inventories report for October and announcements concerning Treasury auctions of 3-year and 10-year notes and 30-year bonds round up the economic events of the week.

Export growth is crimped by the turmoil in Europe and a stronger dollar. Additionally, stronger consumer spending trends suggests solid import growth and the net result is likely to be a wider deficit. BMO Capital Markets expects trade to subtract modestly from fourth quarter GDP growth after adding a half percentage point in the third quarter.

The survey by Reuters and the University of Michigan may show that consumer sentiment improved in the period through mid-December. The positive consumer momentum seen in late November and the unexpected drop in the jobless rate for November may encourage consumers and lift their morale.

The Commerce Department is due to release its report on factory goods orders for October at 10 am ET. Economists estimate a 0.3 percent drop in orders for factory goods.

Durable goods orders, which make up the bulk of factory goods orders, fell 0.7 percent month-over-month in October. Transportation equipment orders slumped 4.8 percent, dragging down the headline number. Excluding transportation, orders were up 0.7 percent. In September, factory goods orders rose 0.3 percent.

The Institute for Supply Management is scheduled to release the results of its non-manufacturing survey at 10 am ET. The non-manufacturing index is expected to show a reading of 53.9 for November.

The non-manufacturing survey for October showed that the pace of expansion in the sector slowed modestly. The non-manufacturing purchasing managers' index fell to 52.9 in October from 53 in September. Of the 18 industries surveyed, 8 reported growth and 8 said they experienced contraction, while the remaining 2 saw little change.

Chicago Federal Reserve President Charles Evans is scheduled to speak on the outlook and the Fed's dual mandate at Ball State University Center for Business and Economic Research Annual Outlook Luncheon in Muncie, Indiana, at 12:10 pm ET.

Stocks in Focus

American Apparel (APP) said ahead of a presentation that its same store sales for the quarter-to-date period through November 30 rose 4 percent. Total sales were up 7 percent through November 30th.

SAP (SAP) announced a deal to acquire SuccessFactors (SFSF) for $40 per share in cash, representing an enterprise value of about $3.4 billion. SAP expects the deal to close in the first quarter of 2012 and be slightly dilutive to its non-IFRS earnings per share in 2012 and accretive in subsequent years.

Altria (MO) said it would record charges and interest of $119 million towards the tobacco and health judgments related to the Williams and Bullock cases. The company downwardly revised its full year earnings guidance to $1.58-$1.64 per share from $1.60-$1.66 per share. The company now expects adjusted earnings of $2.01-$2.07 per share for the full year, with the guidance also reflecting the negative impact arising out of the bankruptcy filing of American Airlines. Analysts estimate earnings of $2.04 per share.

FedEx (FDX) said its FedEx Ground and FedEx Home Delivery shipping rates will be increased by a net average of 4.9 percent, effective January 2, 2012.

Equity Residential (EQR) said it has entered into a contract to buy a 26.5 percent stake in privately-held Archstone for $1.325 billion in cash.

For comments and feedback: contact editorial@rttnews.com

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Optimism About Europe May Help Stocks Extend Upward Move