Broadgate: Market News 26/11
26 November 2012
Volatility is the name of this game.
With the S&P 500 above 1,400 following five days of gains, traders will be hard pressed not to cash in on the advance at the first sign of trouble during negotiations over tax hikes and spending cuts that resume next week in Washington.
President Barack Obama and U.S. congressional leaders are expected to discuss ways to reduce the budget deficit and avoid the “fiscal cliff” of automatic tax increases and spending cuts in 2013 that could tip the economy into recession.
As politicians make their case, markets could react with wild swings.
The CBOE Volatility Index, known as the VIX, Wall Street’s favorite barometer of market anxiety that usually moves in an inverse relationship with the S&P 500, is in a long-term decline with its 200-day moving average at its lowest in five years. The VIX could spike if dealings in Washington begin to stall.
“If the fiscal cliff happens, a lot of major assets will be down on a short-term basis because of the fear factor and the chaos factor,” said Yu-Dee Chang, chief trader and sole principal of ACE Investments in Virginia.
“So whatever you are in, you’re going to lose some money unless you go long the VIX and short the market. The ‘upside risk’ there is some kind of grand bargain, and then the market goes crazy.”
He set the chances of the economy going over the cliff at only about 5 percent.
Many in the market agree there will be some sort of agreement that will fuel a rally, but the road there will be full of political landmines as Democrats and Republicans dig in on positions defended during the recent election.
Liberals want tax increases on the wealthiest Americans while protecting progressive advances in healthcare, while conservatives make a case for deep cuts in programs for the poor and a widening of the tax base to raise revenues without lifting tax rates.
“Both parties will raise the stakes and the pressure on the opposing side, so the market is going to feel much more concerned,” said Tim Leach, chief investment officer of U.S. Bank Wealth Management in San Francisco.
“The administration feels really confident at this point, or a little more than the Republican side of Congress may feel,” he said. “But it’s still a balanced-power Congress so neither side can feel that they can act with impunity.”
THE MIDDLE EAST AND EUROPE
Tension in the Middle East and unresolved talks in Europe over aid for Greece could add to the uncertainty and volatility on Wall Street could surge, analysts say.
An Egypt-brokered ceasefire between Israel and Hamas came into force late on Wednesday after a week of conflict, but it was broken with the shooting of a Palestinian man by Israeli soldiers, according to Palestine’s foreign minister.
Buoyed by accolades from around the world for mediating the truce, Egyptian President Mohamed Mursi assumed sweeping powers, angering his opponents and prompting violent clashes in central Cairo and other cities on Friday.
“Those kinds of potential large-scale conflicts can certainly overwhelm some of the fundamental data here at home,” said U.S. Bank’s Leach.
“We are trying to keep in mind the idea that there are a lot of factors that are probably going to contribute to higher volatility.”
On a brighter note for markets, Greece’s finance minister said the International Monetary Fund has relaxed its debt-cutting target for Greece and a gap of only $13 billion remains to be filled for a vital aid installment to be paid.
Still, a deal has not been struck, and Greece is increasingly frustrated at its lenders, still squabbling over a deal to unlock fresh aid even though Athens has pushed through unpopular austerity cuts.
HOUSING DATA COULD CONFIRM RECOVERY
Next week is heavy on economic data, especially on the housing front. Some of the numbers have been affected by Superstorm Sandy, which hit the U.S. East Coast more than three weeks ago, killing more than 100 people in the United States alone and leaving billions of dollars in damages.
The housing data, though, could continue to confirm a rebound in the sector that is seen as a necessary step to unlock spending and lower the stubbornly high unemployment rate.
Tuesday’s S&P/Case-Shiller home price index for September is expected to show the eighth straight month of increases, extending the longest continuous string of gains since prices were boosted by a homebuyer tax credit in 2009 and 2010.
New home sales for October, due on Wednesday, and October pending home sales data, due on Thursday, are also expected to show a stronger housing market.
Other data highlights next week include durable goods orders for October and consumer confidence for November on Tuesday and the Chicago Purchasing Managers Index on Friday.
At Friday’s close, the S&P 500 wrapped up its second-best week of the year with a 3.6 percent gain. Encouraging economic data next week could confirm that regardless of the ups and downs that the fiscal cliff could bring, the market’s fundamentals are solid.
Jeff Morris, head of U.S. equities at Standard Life Investments in Boston, said that “it’s kind of noise here” in terms of whether the market has spent “a few days up or down. It has made some solid gains over the course of the year as the housing recovery has come into view, and that’s what’s underpinning the market at these levels.
“I would caution against reading too much into the next few days.”
Global stocks and the euro gained on Friday on signs of progress in talks on releasing aid to Greece and after an influential German survey found business sentiment had improved in Europe’s largest economy.
U.S. stocks rose for a fifth day, getting a lift from bellwether technology shares such as Intel and Microsoft, both up about 2 percent. An index of semiconductor stocks gained 1.8 percent, while the S&P information technology sector index rose 1.6 percent.
Trading on Wall Street ended early after markets were closed Thursday for the Thanksgiving holiday. With many investors still on holiday on Friday, volume was low. About 2.8 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT, compared with the daily average for the year to date of 6.5 billion.
The light volume exacerbated moves, and shares of big-cap technology companies climbed as investors took advantage of the day’s upward momentum to add to their positions.
“Anyone that was on the sidelines waiting for a pullback like the one we just had in some of the tech names, they’re looking for any glimpse of strong price action for ‘permission’ to enter into those (stocks),” said Todd Salamone, director of research at Schaeffer’s Investment Research in Cincinnati, Ohio
Microsoft helped lift the Nasdaq, gaining 2.8 percent to $27.70, while Apple Inc rose 1.7 percent to $571.50.
From mid-September to mid-November, the S&P tech sector shed about 13 percent as the broader market also dropped.
Research In Motion surged on optimism about its soon-to-be-launched BlackBerry 10 devices, which will vie against Apple’s iPhone and Android-based smartphones. RIM was up 13.6 percent at $11.66.
Friday also marked the start of the holiday shopping season and gave investors a reason to scoop up retailers’ shares on hopes that consumers will go out to spend en masse.
The Dow Jones industrial average was up 172.79 points, or 1.35 percent, at 13,009.68. The Standard & Poor’s 500 Index was up 18.10 points, or 1.30 percent, at 1,409.13. The Nasdaq Composite Index was up 40.30 points, or 1.38 percent, at 2,966.85.
For the week, the Dow was up 3.3 percent, the S&P 500 rose 3.6 percent, and the Nasdaq gained 4 percent.
European shares posted their best weekly gain so far this year after rising for a fifth day on Friday. The FTSEurofirst-300 index of pan-European shares rose 0.6 percent to end at 1,110.45.
Germany’s BASF and Bayer led a rally in chemical stocks after a German business morale index surprised with its first increase in seven months, raising the prospect that Europe’s largest economy can regain some momentum.
Also helping the market, confidence in the global economic outlook got a big boost from the HSBC flash Manufacturing Purchasing Managers Index for China, which pointed to an expansion in activity after seven consecutive quarters of slowdown.
The Chinese data followed a report on Wednesday showing U.S. manufacturing grew in November at its quickest pace in five months, indicating strong economic growth in the fourth quarter.
The euro rose as high as $1.2943 on Reuters data, breaking above resistance at $1.2910, its 55-day moving average. It was last trading at $1.2941, up 0.5 percent on the day.
Against the yen, the euro also hit a seven-month high of 106.73 yen and was last at 106.65 yen, up 0.4 percent.
MSCI’s world equity index was up 1.1 percent on Friday at 329.92 points. Earlier, MSCI’s broadest index of Asia Pacific shares outside Japan rose 0.7 percent for a weekly gain of 2.6 percent, also its best week for two months.
Optimism about a deal to help Greece, hopes that U.S. lawmakers can agree on a solution to avoid a fiscal crisis, and data showing an improving global economic outlook have driven a rally in riskier asset markets this week.
Greece said the International Monetary Fund had relaxed its debt-cutting target for the country, suggesting lenders were closer to a deal for a vital aid tranche to be paid. But other sources involved in the talks cautioned that the funding gap was far bigger than Greece suggested.
“While we wouldn’t want to understate the challenges of reaching agreement on Greece, news reports have described some of the remaining obstacles as technical and legal, and thus the hurdles to a deal do not seem insurmountable,” said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.
Euro-zone finance ministers, the IMF and the European Central Bank (ECB) failed earlier this week to agree on how to get the country’s debt down to a sustainable level. They will make a third attempt at resolving the issue on Monday.
U.S. government debt prices mostly dipped on Friday in light post Thanksgiving holiday trading. Bonds’ safe-haven allure faded as investors scooped up stocks.
The benchmark 10-year U.S. Treasury note was down 4/32, with the yield at 1.6917 percent.
GOLD AND OIL GAIN
In commodities, gold rose above $1,750 an ounce for the first time in more than a month on Friday, gaining 1.3 percent as dollar weakness and options-related buying triggered a technical breakout.
Oil rose above $111 a barrel on Friday as the better-than-expected German business sentiment data helped ease worries about demand in the euro-zone economies, boosting the euro against the dollar, while fresh protests broke out in Egypt and led to supply concerns.
Brent crude futures were up 85 cents at $111.40 a barrel at 17.34 GMT. U.S. crude was up 92 cents at $88.32. The U.S. market, which was closed on Thursday for the Thanksgiving holiday, will not issue a formal settlement price until later Friday.
On Thursday, Israel began withdrawing its army, which had been poised to invade the Gaza Strip in pursuit of militants that had fired rockets into Israel.
Although the Gaza ceasefire is holding, violence has emerged in Egypt. In Cairo’s Tahrir Square, thousands of people participated in demonstrations against President Mohamed Mursi. Police fired teargas into the crowd in an attempt to disburse it.
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