Broadgate: Market News 28/1
28 January 2013
Stocks have been on a tear in January, moving major indexes within striking distance of all-time highs. The bearish case is a difficult one to make right now.
Earnings have exceeded expectations, the housing and labor markets have strengthened, lawmakers in Washington no longer seem to be the roadblock that they were for most of 2012, and money has returned to stock funds again.
The Standard & Poor’s 500 Index has gained 5.4 percent this year and closed above 1,500 – climbing to the spot where Wall Street strategists expected it to be by mid-year. The Dow Jones industrial average is 2.2 percent away from all-time highs reached in October 2007. The Dow ended Friday’s session at 13,895.98, its highest close since October 31, 2007.
The S&P has risen for four straight weeks and eight consecutive sessions, the longest streak of days since 2004. On Friday, the benchmark S&P 500 ended at 1,502.96 – its first close above 1,500 in more than five years.
“Once we break above a resistance level at 1,510, we dramatically increase the probability that we break the highs of 2007,” said Walter Zimmermann, technical analyst at United-ICAP, in Jersey City, New Jersey. “That may be the start of a rise that could take equities near 1,800 within the next few years.”
The most recent Reuters poll of Wall Street strategists estimated the benchmark index would rise to 1,550 by year-end, a target that is 3.1 percent away from current levels. That would put the S&P 500 a stone’s throw from the index’s all-time intraday high of 1,576.09 reached on October 11, 2007.
The new year has brought a sharp increase in flows into U.S. equity mutual funds, and that has helped stocks rack up four straight weeks of gains, with strength in big- and small-caps alike.
That’s not to say there aren’t concerns. Economic growth has been steady, but not as strong as many had hoped. The household unemployment rate remains high at 7.8 percent. And more than 75 percent of the stocks in the S&P 500 are above their 26-week highs, suggesting the buying has come too far, too fast.
MUTUAL FUND INVESTORS COME BACK
All 10 S&P 500 industry sectors are higher in 2013, in part because of new money flowing into equity funds. Investors in U.S.-based funds committed $3.66 billion to stock mutual funds in the latest week, the third straight week of big gains for the funds, data from Thomson Reuters’ Lipper service showed on Thursday.
Energy shares lead the way with a gain of 6.6 percent, followed by industrials, up 6.3 percent. Telecom, a defensive play that underperforms in periods of growth, is the weakest sector – up 0.1 percent for the year.
More than 350 stocks hit new highs on Friday alone on the New York Stock Exchange. The Dow Jones Transportation Average recently climbed to an all-time high, with stocks in this sector and other economic bellwethers posting strong gains almost daily.
“If you peel back the onion a little bit, you start to look at companies like Precision Castparts, Honeywell, 3M Co and Illinois Tool Works – these are big, broad-based industrial companies in the U.S. and they are all hitting new highs, and doing very well. That is the real story,” said Mike Binger, portfolio manager at Gradient Investments, in Shoreview, Minnesota.
The gains have run across asset sizes as well. The S&P small-cap index has jumped 6.7 percent and the S&P mid-cap index has shot up 7.5 percent so far this year.
Exchange-traded funds have seen year-to-date inflows of $15.6 billion, with fairly even flows across the small-, mid- and large-cap categories, according to Nicholas Colas, chief market strategist at the ConvergEx Group, in New York.
“Investors aren’t really differentiating among asset sizes. They just want broad equity exposure,” Colas said.
The market has shown resilience to weak news. On Thursday, the S&P 500 held steady despite a 12 percent slide in shares of Apple after the iPhone and iPad maker’s results. The tech giant is heavily weighted in both the S&P 500 and Nasdaq 100 and in the past, its drop has suffocated stocks’ broader gains.
JOBS DATA MAY TEST THE RALLY
In the last few days, the ratio of stocks hitting new highs versus those hitting new lows on a daily basis has started to diminish – a potential sign that the rally is narrowing to fewer names – and could be running out of gas.
Investors have also cited sentiment surveys that indicate high levels of bullishness among newsletter writers, a contrarian indicator, and momentum indicators are starting to also suggest the rally has perhaps come too far.
The market’s resilience could be tested next week with Friday’s release of the January non-farm payrolls report. About 155,000 jobs are seen being added in the month and the unemployment rate is expected to hold steady at 7.8 percent.
“Staying over 1,500 sends up a flag of profit taking,” said Jerry Harris, president of asset management at Sterne Agee, in Birmingham, Alabama. “Since recent jobless claims have made us optimistic on payrolls, if that doesn’t come through, it will be a real risk to the rally.”
A number of marquee names will report earnings next week, including bellwether companies such as Caterpillar Inc, Amazon.com Inc, Ford Motor Co and Pfizer Inc.
On a historic basis, valuations remain relatively low – the S&P 500’s current price-to-earnings ratio sits at 15.66, which is just a tad above the historic level of 15.
Worries about the U.S. stock market’s recent strength do not mean the market is in a bubble. Investors clearly don’t feel that way at the moment.
“We’re seeing more interest in equities overall, and a lot of flows from bonds into stocks,” said Paul Zemsky, who helps oversee $445 billion as the New York-based head of asset allocation at ING Investment Management. “We’ve been increasing our exposure to risky assets.”
For the week, the Dow climbed 1.8 percent, the S&P 500 rose 1.1 percent and the Nasdaq advanced 0.5 percent.
The euro rallied broadly on Friday on growing optimism the region’s debt crisis has turned the corner, while the yen was headed for its 11th consecutive week of losses against the dollar.
The euro zone common currency hit an 11-month high versus the dollar and a 21-month peak versus the yen after the European Central Bank said banks would pay back a greater-than-expected 137 billion euros in loans next week, a sign that at least parts of the financial system are on the mend.
“For now, the trade of ‘buy euro, sell yen’ seems to be in play,” said Win Thin, senior currency strategist at Brown Brothers Harriman in New York.
The euro climbed 0.6 percent to $1.3453, after rising to $1.3479, its highest level since late last February. For the week, it gained about 1.2 percent.
A survey showing improvement in business confidence in Germany underpinned the euro strength.
Camilla Sutton, chief currency strategist at Scotiabank in Toronto said the euro is rapidly approaching three major resistance levels. She cited this year’s high of $1.3486, the 50 percent retracement from the high in May 2011 to the low in July 2012 at $1.3492, and the psychologically-important $1.3500 figure, all of which are within reach.
But Sutton cautioned, “We would not position too early for the downside and would instead trade with the trend until it breaks.”
The ECB is the first major central bank to start moving away from unconventional monetary policy measures, unlike the U.S. Federal Reserve and Bank of Japan, which are buying bonds to stimulate growth.
When a central banks purchases assets, effectively expanding its balance sheet, the country’s currency tends to be hurt because it increases the currency’s supply.
Reflecting a dramatic improvement in the euro zone’s funding conditions, the cross currency basis swap, or the relative premium for swapping euro Libor for dollar Libor, on Friday traded at -17.5 basis points on three-month contracts, the lowest premium in 20 months.
A lower swap premium suggests fewer demand for the greenback and diminished funding stress in the euro zone.
Two-year German bond yields jumped to their highest since March 2012 and rose above their U.S. counterparts for the first time in two years, suggesting interest-rate differential is moving in favor of the euro, analysts said.
In the options market, traders reported demand for euro calls, which are bets on more gains, although one-month risk reversals on Friday still showed a minor bias for puts or more euro weakness. However, this was the smallest euro put level since November 2009.
The dollar rose as high as 91.19 yen, the strongest since June, 2010, rising past reported options barrier at 90.75 and 91 yen. It was last up 0.6 percent at 90.88 yen.
On the week, the dollar rose about 1 percent versus the yen, and has gained every week versus the yen since the week ended November 11.
Expectations that Japan’s new prime minister, Shinzo Abe, will force the central bank to aggressive ease monetary policy has caused the yen to lose more than 10 percent of its value against the dollar since mid-November, and many expect more declines.
Japan’s core consumer prices slipped for a second straight month in the year to December, signaling the economy was still in deflation and piling more pressure on the central bank to adopt more stimulus steps to achieve its new inflation target.
The yen’s steep drop has raised eyebrows abroad, with German Chancellor Angela Merkel singling out Japan on Thursday as a source of worry. But Japanese Finance Minister Taro Aso said Friday that monetary easing was aimed at pulling the country out of deflation, not manipulating currencies.
BNP Paribas in a note said the yen’s downside momentum remained strong, but the back-and-forth statements about the currency’s weakness between foreign politicians and Japanese officials should exacerbate volatility.
The euro rose 1.3 percent to 122.40 yen putting it on track for a weekly rise of 2 percent, the seventh straight week of gains. It had earlier touched 122.77, its highest level since mid-April 2011.
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