A look at some of the market movers from the week:
- With much struggle, Slovakia approved the expansion of the European Financial Stability Facility
- Franco-Belgian bank Dexia received a bailout that included $121 billion in state guarantees
- Superior Energy agreed to buy Complete Production Services for $2.6 billion
- Owners of online streaming service Hulu decided to end the auction process
- Alcoa started off third-quarter earnings season on a dour note as profit trailed estimates
- Details of the so-called Volcker Rule were released to much criticism
- Research in Motion was reeling from a massive Blackberry outage
- President Obama’s jobs bill was voted down in the Senate
- The Senate passed a bill that would put duties on imports from China and other countries seen as currency manipulators
- The Federal Reserve discussed further intervention in its most recent meeting
- The House of Representatives approved a trade pact with South Korea, Panama, and Colombia
- Google reported third quarter results that were better than expected
- Fitch downgraded UBS and put other major banks on review
- U.S. retail sales grew faster than expected
- Four banks were closed on Friday, bringing the year-to-date total to 80
The market surged this week, with the S&P 500 index gaining 6% by week’s end. The jump started on Monday with a big 3.4% uptick and continued through the week, finishing strong on Friday with a 1.7% increase. October is now on a tear, notching an 8.2% gain month to date and paring the S&P’s year-to-date loss to 2.6%.
With the fiscal crisis in the European Union still hanging like a hurricane-sized storm cloud over global markets, it was a pledge from German Chancellor Angela Merkel and French President Nicolas Sarkozy last Sunday that clicked markets into rally mode as the week kicked off. Markel and Sarkozy promised to deliver a “comprehensive solution” to stabilize Eurozone banks and help backstop the region’s single currency. Though light on details, the pair said that the plan will be delivered before the G-20 summit in Cannes, France in early November.
As if to underscore the seriousness of the commitment, on Monday, Franco-Belgian bank Dexia agreed to allow its Belgian banking division to be nationalized as it accepted $121 billion in state guarantees. The agreement came as the bank lost access to wholesale funds and its stock plunged last week.
A workable solution for the woes in Europe has serious implications for U.S. investors. Many of the U.S.’s major multinationals do significant business in Europe, so a struggling European economy could mean struggles for companies as varied as Procter & Gamble, McDonald’s, Cisco, and Ford. Not only could that hurt the U.S. stock market, but it could have implications for the already struggling U.S. job market.
Back on U.S. shores, minutes from the Federal Reserve’s most recent rate-setting meeting showed a significant level of dissention among board members. Some members wanted to consider significant further action to stimulate the economy and potentially launch a third round of quantitative easing. On the other end of the spectrum, three dissenting members believed that the Fed’s current activity and the proposed “Operation Twist” are already too much and are more likely to create inflation than economic growth. In the end, Operation Twist, which will replace $400 billion in current short-term Treasury holdings with longer-dated paper, was put in place. However, markets may have been cheered to some extent to find out that QE3 is not off the table for the central bank.
Looking out over the week’s economic data releases, there were some signs that perhaps QE3 won’t be necessary. Initial unemployment claims fell slightly from last week and were below expectations, while, more notably, retail sales were well above expectations. Sales grew 1.1% in September, well above the 0.3% in August and easily ahead of the 0.6% estimated growth. Business inventories also showed stronger-than-expected growth for August, growing 0.5% against a 0.4% expectation. The University of Michigan consumer sentiment survey, on the other hand, continued to fall, clocking in at 57.5 against the anticipated 60.
On this macro backdrop, investors were greeted with the initial salvo from third-quarter earnings season. Alcoa started the reporting off on a sour note as profits badly trailed analysts’ estimates. JPMorgan managed to top expectations, but was helped by a non-operating debt valuation gain and offered a tepid outlook. PepsiCo and Google, meanwhile, both reported strong quarters while Mattel matched analysts’ estimates.Looking ahead
Europe is clearly the most pressing concern for both U.S. and global investors right now, and it’s unlikely that that dynamic will change next week. With the Merkel/Sarkozy pledge hanging out there now, investors will be anxiously waiting for details as the key G-20 meeting in early November approaches.
Back in the U.S., earnings reports will start to ramp up significantly next week. Among the notable reports hitting the wires next week will be Delta Air Lines, Halliburton, Apple, Bank of America, Coca-Cola, Goldman Sachs, Intel, Harley Davidson, Johnson & Johnson, Yahoo!, eBay, Morgan Stanley, Stryker, Eli Lilly, Microsoft, General Electric, and Honeywell.
There will also be a handful of economic releases worth keeping an eye on. Early in the week we’ll see the Empire manufacturing report, industrial production, capacity utilization, and the producer price index. The Empire manufacturing index is expected to have fallen four points in October after an 8.8 point plunge in September. Industrial production, on the other hand, is seen registering 0.2% growth for September.
Late-week releases will include the consumer price index, housing starts, the Federal Reserve’s Beige Book, initial unemployment claims, existing home sales, the Philadelphia Fed report, and leading indicators. The overall consumer price index is expected to have risen 0.3% in September, while the core index — which excludes volatile components like food and energy — may have risen 0.2%. The Philadelphia Fed report, another regional manufacturing measure, is expected to show a 9.6 point drop for October after a big 17.5 point dip last month.
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