Broadly Higher Market Earnings Fuel Confidence July 13, 2010

Tuesday, July 13, 2010

Encouraging results from bellwether corporates helped push U.S. stocks towards a sixth straight day of gains. The rally showed no signs of letting up Tuesday after a rousing start to the earnings season. Stocks are adding to a rally that includes the Dow Jones Industrial Average's best week in nearly a year.

The Dow climbed 162 points, and all 30 of the blue-chip index's components advanced.

Dow 10,363.02 +146.75 (1.44%)
S&P 500 1,095.34 +16.59 (1.54%)
Nasdaq 2,242.03 +43.67 (1.99%)
Crude Oil 77.28 + 0.17%
Natural Gas 4.37 + 0.28%
Gasoline 2.08
Heating Oil 2.05
Gold 1212.03 + 1.25%
Silver 18.25 + 1.90%
Copper 3.02 + 0.57%
U.S. Dollar Index Day Range: 83.54 - 83.57

Small businesses continue to feel highly pessimistic about the U.S. economic outlook, according to a report from the NFIB, whose Small Business Optimism Index drops 3.2 points to 89.0 last month, more than erasing a modest 1.6-point gain in May.

For the second month in a row, consumers are less upbeat about the economy and their own finances, according to a report released Tuesday.

The IBD/TIPP Economic Optimism Index, compiled by Investor's Business Daily and TIPP, a unit of TechnoMetrica Market Intelligence, fell to 44.7 in July from 46.2 in June. The index's all-time average is 50.9.

The U.S. trade deficit widens by 4.8% to $42.27 billion in May, above economists expectations of $38.9 billion and the highest level in a year and a half, as a surge in imports from China more than offset the impact of falling oil prices.

The US risks depression unless it reverses its trade deficit according to the personal views of Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business and
former chief economist at the U.S. International Trade Commission.

Imports are rising much faster than exports, and the overall trade deficit will increase even more sharply when oil prices rebound, threatening the economic recovery.

Still, investors pointed to the fact that the earnings season has literally just begun and hundreds of companies have yet to file quarterly reports in the coming weeks that could curb investor optimism. Technology bellwether Intel reports after the market close, and J.P. Morgan Chase & Co. and General Electric later in the week.

"We're going to have an OK second-quarter earnings period," said Brad Thompson, managing director at Frost Investment Advisors. But he cautioned that as investors start to mull over the recovery's trajectory, "we'll see the risk premiums start to come back in.

We're not ruling out a rocky period in the third quarter," he said. "We wouldn't be at all surprised to see us get back to the recent lows." There are still a host of economic worries that hang over the market. The Commerce Department reported the U.S. trade deficit unexpectedly widened in May to its highest level of the year and Moody's Investors Service cut Portugal's sovereign-debt rating by two notches on concerns it might need new austerity measures next year.

Still, the euro rose broke above $1.27, trading recently at $1.2719 from $1.2593 late on Monday in New York, as riskier assets gained. The euro got an additional boost from a successful T-bill auction in Greece.

Record spending in June offset higher corporate tax receipts and pushed the U.S. budget deficit above $1 trillion in the first nine months of fiscal 2010.

Government spending exceeded revenue by $68.42 billion in the ninth month of the fiscal year, which began Oct. 1, 2009, the U.S. Treasury said Tuesday. The deficit was a little smaller than
projected; economists surveyed by Dow Jones Newswires had estimated a $69.5 billion gap in June.

The government usually runs a surplus in June. The deficit last month was the 21st straight shortfall. In the first nine months of fiscal 2010, the government spent $1.004 trillion more than it took in. That figure is about $82 billion lower than during the comparable period a year earlier. For all of fiscal 2009, the U.S. ran a record $1.42 trillion deficit.

Financing a trade deficit exceeding 5% of GDP required massive capital inflows from China and other nations, and those investments suppressed long-term interest rates and instigated excessive risk taking in the bond market.


Treasurys

Treasury prices fell as demand for safe assets eased, sapping demand on a $21 billion auction of 10-year notes. Optimism on corporate earnings reports and easing concern over the euro-zone's
debt problems reduced fear about the economic outlook, driving investors out of the Treasurys market that has rallied significantly in recent weeks.

Tuesday's monthly Treasury statement said U.S. government revenue in June totaled $251.05 billion, compared with $215.34 billion in June 2009. Corporate tax revenue was higher as the economy emerges from recession.


Canadian Market

Canada Posts Unexpected Trade Deficit In May," at 9:46 a.m. EDT, misstated the amount of May exports in the third paragraph. The error was also contained in earlier versions of the story at 8:35 and 8:59 a.m. EST.

The trade deficit was C$503 million (US$485 million), Statistics Canada said Tuesday, widening from C$330 million the prior month, which was originally estimated as a C$175 million surplus.

Canada's monthly trade surplus with the United States, its largest trading partner, widened to C$3.6 billion from C$3.5 billion as exports grew 5.5% and imports rose 5.8%.

The trade deficit with countries other than the U.S. widened to C$4.1 billion from C$3.8 billion as exports grew 4.4% and imports rose 5.5%.

For additional information visit: http://www.statcan.gc.ca


South America

Mexican stocks opened higher Tuesday, led by equities gains in the U.S. where investors were encouraged by positive early earnings reports.

The market's IPC index of leading issues was up 0.9% at 32,138 points around 10:25 a.m. EDT. Volume was 28.5 million shares worth 796.8 million pesos ($62.5 million).

Mexican earnings reports, most of which are expected in the last two weeks of July, are also seen coming in positive as the economy recovers from the recession of a year ago.

The CPO shares of cement and building materials company Cemex (CX, CEMEX.MX) were up 1.4% to MXN12.62. Bellwether America Movil (AMX, AMX.MX) L shares were up 0.6% at MXN31.38.

The peso was stronger against the dollar, quoted in Mexico City at MXN12.7315 compared with MXN12.8370 at the close Monday. While the peso remains vulnerable to external events, particularly bouts of risk aversion, many analysts expect the currency's near-term trend to be one of appreciation.

"The technical position in the FX market probably deteriorated over last week as the peso gained ground. In spite of that, players should still be willing to add risk as the MXN remains a very attractive pair," BNP Paribas said in a report, in which it reiterated its expectation for the peso to reach MXN12.50 to the dollar.

Brazil

Brazil retail sales recovered in May, after sliding in April, although growth appears not to be as torrid as in the first quarter.

May retail sales went up a seasonally adjusted 1.4% compared with April and grew 10.2% from May 2009, the Brazilian Census Bureau, or IBGE, said Tuesday.

The monthly figures were slightly below the average analyst forecast of 1.8%. "The retail data reinforce ideas that the Brazilian economy is still growing but at a slightly calmer rate than in the first quarter," said Flavio Serrano, an economist at BES Investimento in Sao Paulo.

April retail sales dropped 3.0% in the month-on-month comparison, reflecting a hangover from the first quarter when government stimulus helped drive the economy to grow 9%. The May figures showed rising employment, growing salaries and the expansion of credit continue to drive retail, but at a slightly slower rate, said Silvio Campos Neto, chief economist at Banco Schahin in Sao Paulo.

Brazil's vigorous consumer-driven growth has caused some inflationary pressures and the central bank is in the middle of a series of rate hikes to cool the economy. The benchmark Selic interest rate currently stands at 10.25% after two hikes of 75 basis points. The rate will rise to 11.75% by the end of the year, according to the central bank market survey, released Monday.

The Brazilian Central Bank on Tuesday bought U.S. dollars at a snap auction for BRL1.7530 to the dollar. The bank did not reveal the volume of dollars it purchased at the auction.

The Brazilian real closed stronger against the U.S. dollar Tuesday on rising global commodity prices and expectations of fresh inflows from overseas bond placements.

The real closed at BRL1.7535 to the dollar, stronger against Monday's close of BRL1.7650.

The Brazilian government Tuesday unveiled guidelines for the tender offer of a project to construct and operate a high-velocity, or bullet, train in the country's busy southeast corridor, setting a Dec. 16 date for the concession auction.

The tender offer projects a total cost if 34.6 billion Brazilian reals ($19.5 billion) for the bullet train. Of this, BRL20 billion in financing will come from Brazil's National Development Bank, or BNDES, and BRL4 billion from import-export banks in supplier countries, leaving a little more than BRL10 billion for financing by private sources.

The auction will take place at Brazil's BM&F Bovespa stock exchange in Sao Paulo on Dec. 16 and will be open to both domestic and foreign investors.

The government will award the concession to the proposal that promises the lowest user fees, but it will also consider years of experience in high-velocity train operations in the case of a tie.


Argentina

Chinese banks will provide Argentina with $9.5 billion in financing to build and improve its train networks, Argentine President Cristina Fernandez said Tuesday.

Fernandez, who made the announcement during a visit to Beijing, said Argentina will get the funds in 19-year loans carrying an interest rate of Libor plus 600 basis points.

Further details of the financing detail are scarce and it isn't clear exactly how much financing the Argentine government itself will provide as part of the agreements.

Argentina has been shut out of international credit markets for years following its late 2001 sovereign default. Fernandez said China is offering a kind of low-rate financing "that doesn't exist anywhere in the world."

The funding will largely come from China's Citic and the China Development Bank. She said the funding will allow Argentina to invest in urban and rural transportation networks and improve a national railway known as Belgrano Cargas.

The cargo network spans across some 10,000 kilometers through 13 provinces and is considered key to improving Argentina's commodities infrastructure.


European Markets

The European Central Bank and the euro zone's 16 national central banks settled EUR796.5 million of bond purchases and another EUR35.5 million of euro-denominated covered bonds in the week ended July 9, the ECB said Tuesday.

That brings the total value of securities held for monetary policy purposes by the ECB and national central banks--collectively called the Eurosystem--up EUR832 million to EUR120.9 billion.

The Eurosystem in May started to intervene in the region's public and private debt markets to restore investor confidence in debt issued by governments with weak public finances.

The data indicate central banks continued to slow down their debt purchases last week. The Eurosystem settled EUR 3.7 billion in the week ended July 2; EUR4.2 billion in the week ended June 25; EUR4 billion in the week ended June 18 and EUR6.7 billion in bond buys in the week ended June 11.

The Eurosystem's reserves of gold and gold receivables remained unchanged at EUR352.092 billion.

Bank of England Monetary Policy Committee member Andrew Sentance said Tuesday interest rates need to be adjusted to reflect the recent significant improvement in economic conditions, but that the withdrawal of stimulus should be radual.

In a speech to the Thames Valley Chamber of Commerce, Sentance said that ongoing market nervousness shouldn't be the dominant influence on the MPC's decisions, and stressed the importance of maintaining public confidence that inflation will be around its 2.0% target in the future.

Official data released earlier Tuesday showed that annual consumer price inflation slipped to a slightly-higher-than-expected 3.2% in June from 3.4% in May, while core inflation edged back up to a joint-record high.

Sentance noted that inflation has been above target in 36 out of the past 45 months, and that it has been more than a percentage point above target in 15 of those months.

"We need to adapt our tune to the changing performance of the economy, and to absorb what we learn about the economy in new and unprecedented circumstances, such as the recent financial crisis," Sentance said.

"In my view, that now points to a gradual withdrawal of some of the stimulus we provided to the economy in more difficult circumstances last year--not so much as to undermine the recovery, but to keep it on a low inflation path, consistent with the Committee's remit."

The inflationary impact of the pound's weakness may have been affected by monetary policy and perceptions about its future stance, he added.

The BOE has held its key interest rate at an all-time low of 0.5% since March last year, when it also commenced a GBP200 billion program of quantitative easing bond purchases through the creation of new central bank money.

Sentance surprised investors when minutes from June's MPC meeting revealed he had voted for an immediate interest rate hike to 0.75%. Explaining that decision, Sentance noted that economic conditions had changed significantly since the MPC introduced the current level of stimulus, with a rebound in the world economy, a recovery of demand in the U.K., less spare capacity than was feared and higher inflation.

While it won't always be possible to keep inflation on target, "what we need to do is to maintain confidence that inflation will still be anchored around this target in the future," Sentance said.

He noted that the predominant worry a year ago that inflation could be significantly depressed by the impact of the recession hadn't materialized.

"While I'm not yet worried that we face a major and serious risk in the opposite direction, I do think we need to adjust the policy settings we put in place to head off the downside risks to inflation identified in the immediate aftermath of the big financial shocks in late 2008 and early 2009," he said.

He added that financial market nervousness could continue for some time to come, and shouldn't be the dominant influence on MPC policy.

Spain is expected to request an EU extension for use of the Bank Bailout Fund.

Ahead of the publication of bank stress-test results on July 23, Spain will ask the European Commission for an extension to use its state-financed bailout fund, or FROB, to provide capital to any banks that are found to be dangerously weakened, Finance Minister Elena Salgado said Tuesday.

Following a meeting with European Union finance ministers, Salgado told journalists in Brussels Spain would ask for the extension as a "precautionary" measure, according to an audio clip on a Spanish government website. Salgado said any possible capital shortfalls in the Spanish banking system would not be large.

In an effort to boost investor confidence in EU banks, the Committee of European Banking Supervisors is testing 91 EU banks for their ability to maintain solvency in the face of adverse economic and financial conditions.

After a forcing a wide restructuring of mutually owned savings banks, Spanish authorities have said their banking system is basically healthy and spearheaded the push for the EU-wide stress tests in order to show that. Nearly one third, or 27, of the banks to be tested are Spanish.