Evening Market Update

5 for 5 Market Holds on to Gains to Extend the Streak

On Friday, the Equity markets extended their winning streak to five days, overcoming a weak start to finish higher and close out their second best week in a year. News from Europe continued to be the primary driver of sentiment, but a greater-than-expected increase in the preliminary University of Michigan Consumer Sentiment added to the day’s upbeat mood. In earnings news, Research in Motion's 2Q results severely disappointed investors, while Texas Instruments posted better-than-expected earnings and raised their dividend. Treasuries also finished the day higher.

The Dow Jones Industrial Average picked up 76 points (0.7%) to 11,508, the S&P 500 Index gained 7 points (0.6%) to 1,216, and the Nasdaq Composite rose 15 points (0.6%) to 2,622. In heavy volume, 1.8 billion shares were traded on the NYSE and 2.7 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.49 to $87.91 per barrel, wholesale gasoline lost $0.01 to $2.78 per gallon, and the Bloomberg gold spot price added $21.33 to $1,810.05 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was up 0.7% to 76.59. For the week, including dividends, the DJIA was up 4.7%, the S&P 500 Index gained 5.4%, and the Nasdaq Composite rose 6.3%.

Research In Motion Ltd. (RIMM $24) reported 2Q earnings of $0.80 per share, below the $0.88 consensus estimate of analysts surveyed by Reuters, with revenues dropping 10% year-over-year (y/y) to $4.2 billion, missing the $4.5 billion that the Street had forecasted. The company said it shipped 10.6 million BlackBerry smartphones, down from the 12.1 million it shipped in the same period last year and slightly below our forecast,due to lower-than-expected demand for older models. RIMM said it expects full-year EPS ex-items to be towards the low end of its previous guidance, while issuing a 3Q outlook that was roughly inline with expectations. Shares were sharply lower.

Texas Instruments Inc . (TXN $28) announced that it will raise its quarterly dividend by 31% to $0.17 per share, resulting in an annual dividend of $0.68 per share. TXN said the increase reflects the strategic shift of its product portfolio to a greater percentage of analog and embedded chip technologies, “which generate high returns on investment and strong cash flow.” Shares closed higher.

September consumer sentiment improves more than expected to finish out the week

The preliminary University of Michigan's Consumer Sentiment Index showed consumers’ psyches rebounded more than expected in September, increasing from 55.7 in August to 57.8, and compared to the increase to 57.0 that economists surveyed by Bloomberg had projected. The larger-than-expected improvement in the index came as a slight decline in the economic outlook component was more than offset by a solid increase in the current economic conditions aspect of the survey. On inflation, the 1-year expectation rose to 3.7% from 3.5%, and the 5-year inflation outlook was increased to 3.0% from 2.9%.

Treasuries overcame early losses and finished higher as the yield on the 2-year note fell 2 bps to 0.17%, the yield on the 10-year note dropped 2 bps to 2.06%, and the 30-year bond declined 3 bps to 3.33%. 

Greek crisis remains the focal point for global markets

Global sentiment took a hit upon the release of reports showing that indications of private sector participation in the second wave of a bailout for Greece came in lower than execrated. Further pressuring sentiment, Greek default concerns were exacerbated as Finland said it has no deal on a collateral deal with Greece as part of its participation in the second bailout of the troubled nation. Greece will receive bailout funds from the eurozone's first bailout package pending a quarterly review by EU officials in October, and the country has noted that it has cash to cover its obligations for only a couple more weeks.

Elsewhere, attention was paid to the meeting between European finance ministers on the efficient use of the eurozone's bailout facility, known as the European Financial Stability Facility (EFSF), which was also attended by US Treasury Secretary Timothy Geithner. According to Bloomberg, the Treasury Secretary noted during the meeting that the "ongoing conflict" between national governments and the European Central Bank is very damaging from the outside," since coordination is needed to handle the crisis. Also, Geithner said the US wants to do whatever it can to help Europe manage more adroitly and avoid recession. Meanwhile, Chairman of the Eurogroup Jean-Claude Juncker ruled out providing further stimulus measures, saying "We don't see any room for maneuver in the euro area which could allow us to launch new fiscal stimulus packages. That will not be possible." Reuters reported that Geithner urged European leaders to leverage the EFSF to combat the crisis, but, Juncker said "We are not discussing the expansion or increase of the EFSF with a non-member of the euro area." Today's reemerging concerns pared optimism from yesterday's announcement that the European Central Bank decided, in coordination with the US Federal Reserve and other major central banks, to provide more US dollar liquidity to the region's financial sector.

In a light day for international economic news, the eurozone trade deficit in July remained at 2.5 billion euros, following a solid downward revision to the prior month's figure. In India, the nation's central bank expectedly increased interest rates for the twelfth time since March 2010, as the country tries to fight inflation amid rising food and fuel prices despite the recent slowdown in the global economy.

Eurozone concerns ease to help string together a series of gains

Despite US data showing softer-than-expected retail sales, continued contraction in key manufacturing regions, and hotter-than-projected core consumer prices, stocks moved solidly higher, gaining ground in every session of the week. The likely key for the winning streak for the US equity markets was eased eurozone contagion concerns on the heels of a few sentiment-soothing events. Germany and France offered reassuring comments regarding Greece's status as a eurozone member, China was reported to be in talks to purchase Italian debt, and major global central banks announced coordinated efforts to provide US dollar financing to support liquidity availability for the European financial sector. However, sentiment remained sensitive to the headlines coming from across the pond and late in the week concerns resurfaced about a possible default of Greece as eurozone policymakers continued to show a lack of coordination on the euro-area's bailout efforts and indications of private sector participation in the next bailout package for the troubled nation was reported to be below expectations.

Will the "twist" be the Fed’s next move?

The focus of the week will be on the Federal Open Market Committee's (FOMC) monetary policy meeting, which was changed to a two-day meeting after placing a mid-2013 timeframe for the exceptionally low level of the fed funds rate at the August meeting, which resulted in three dissenters to the decision. Amid the weak economic data, traders will be looking for any signs the Fed feels a stepped up response is necessary or would be effective to stem a further slowing of the economy. In particular, some in the market believe the next step for the Fed may be a "twist" of their balance sheet maturity, in reference to reducing its share of short-term securities and increasing its longer-term holdings. The effect of this action would be somewhat similar to QE, as it would reduce the supply of longer-term securities in the market and potentially lower longer-term rates, with the hope of pushing investors toward higher-risk securities elsewhere.

The US economic calendar will also have several reports on the housing market, starting with homebuilder sentiment in Monday's NAHB Housing Market Index, while Tuesday brings housing starts, expected to fall 2.3% m/m in August to an annual rate of 590,000 units, while building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, are forecasted to decline 1.8% m/m, also to a rate of 590,000 units. Lastly, Wednesday brings existing home sales, forecasted to rise 1.7% m/m to an annual rate of 4.75 million units in August. Other releases scheduled next week include the MBA Mortgage Applications Index, weekly initial jobless claims, and the Conference Board’s Index of Leading Indicators. Other reports in the Americas include Canada's leading index, wholesale sales, CPI, and retail sales, Brazil’s unemployment rate, as well as Mexico’s retail sales and unemployment rate.

Other international reports include eurozone consumer confidence, manufacturing and services PMIs, and industrial new orders, the German ZEW Survey of Economic Sentiment Index and producer prices, UK home prices, Japanese department store sales, and the leading index from Australia and China, as well as the preliminary manufacturing PMI for China released by HSBC. The central bank of Norway meets to discuss monetary policy and the minutes from the last Reserve Bank of Australia meeting will be released.