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Broadgate: Market News 31/1

31 January 2013

Stocks fell on Wednesday after the Federal Reserve said in its latest statement that economic growth had stalled but indicated the pullback was likely temporary.

Stocks were flat for most of the session prior to the Fed statement at the end of a two-day policy meeting. The Fed repeated its pledge to keep purchasing securities until employment improves substantially.

The statement followed data that showed the economy, as measured by gross domestic product, unexpectedly contracted in the fourth quarter. Economists stressed that the 0.1 percent contraction, caused partly by a plunge in government spending and lower business inventories, is not an indicator of recession.

“The unemployment rate is likely to fall below 6.5 percent next year, so the Fed may be raising interest rates as soon as mid-2014. The fiscal drag from the tax increases will be offset this quarter by rebuilding post-Sandy, so real GDP growth should still come in at 2 percent,” said Kurt Karl, chief economist at Swiss Re.

The S&P 500 held above 1,500, seen by technical analysts as an inflection point that will determine the overall direction in the near term. The index is on track to post its best month since October 2011 and its best January since 1997.

“This is a very modest pullback after a steep run,” said Paul Zemsky, head of asset allocation at ING Investment Management in New York.

“It is too soon for the Fed to start talking about the end of (their bond buying program). The economy needs stimulus to sustain this recovery.”

Chesapeake Energy rose 6 percent to $20.11 a day after it said Aubrey McClendon would step down as chief executive. The company has had a tumultuous year in which a series of Reuters investigations triggered civil and criminal probes of the second-largest U.S. natural gas producer.

After the bell, shares of Facebook Inc fell 5.9 percent to $29.40 following the company’s earnings announcement. Facebook said its revenue in the fourth quarter grew 40 percent year-on-year to $1.585 billion.

Both Boeing Co and Amazon.com shares gained after earnings beat expectations, continuing a trend this quarter of high-profile names advancing after results.

Amazon rose 4.8 percent to $272.76 and Boeing rose 1.3 percent to $74.59.

The Dow Jones industrial average was down 44.00 points, or 0.32 percent, at 13,910.42. The Standard & Poor’s 500 Index was down 5.88 points, or 0.39 percent, at 1,501.96. The Nasdaq Composite Index was down 11.35 points, or 0.36 percent, at 3,142.31.

Thomson Reuters data showed that of the 192 companies in the S&P 500 that have reported earnings this season, 68.8 percent have been above analyst expectations, which is a higher proportion than over the past four quarters and above the average since 1994.

Research In Motion shares fell 12 percent to $13.78 after the company, which is changing its name to BlackBerry, unveiled a long-delayed line of smartphones in hopes of a comeback into a market it once dominated.

Giving the market extra support, private sector employment topped forecasts with the ADP National Employment report showing 192,000 jobs were added in January, higher than the 165,000 expectation.

Currencies

The euro held near a 14-month peak against the dollar and a 2-1/2 year high versus the yen on Thursday, having risen solidly as investors expect central banks in both the United States and Japan to keep an aggressive easing stance.

The U.S. Federal Reserve underscored that view by leaving in place its monthly $85 billion bond-buying stimulus plan on Wednesday, arguing the support was needed to lower unemployment.

“The bottom line is that there are no signs of a shift away from QE3,” said Vassili Serebriakov, strategist at BNP Paribas referring to the Fed’s bond-buying program.

The euro held steady at $1.3569. The single currency had climbed to $1.3588 on Wednesday after the Fed’s policy decision, its strongest level since November 2011.

Seeming to support the Fed’s cautious view, data on Wednesday showed the U.S. economy unexpectedly contracted in the fourth quarter. Still, a lot of that weakness came from a plunge in defense spending, suggesting the underlying fundamentals were not as bad as the headline figures indicated.

European data on Wednesday showed economic sentiment improved for a third straight month, a sign the euro zone is emerging from a low point and diminishing the chance of a rate cut from the European Central Bank.

With the euro having breached key resistance at $1.35, analysts say its rally may have more room to run.

“Euro/dollar we now think will rise to $1.37. The euro crosses are also likely to benefit from the return of exiled capital that left the euro zone,” said Gareth Berry, G10 FX strategist for UBS in Singapore.

“Europe is not out of the crisis yet, there is still lots of uncertainty out there, but there has been enough stabilization to encourage some investors to return,” he added.

News last week about euro zone banks’ early repayments of three-year loans to the European Central Bank was seen as a sign that parts of the euro zone banking system may be on the mend.

Still, one reason to be cautious is a contrast between signs of decreasing financial market stress in the euro zone and the region’s still lackluster economic fundamentals, said Daisuke Karakama, market economist for Mizuho Corporate Bank in Tokyo.

“Market-related gauges for the euro zone such as equities, government bond yields and credit default swaps…have shown a broad improvement,” Karakama said.

But some economic indicators such as a record high unemployment rate paint a bleaker picture, he said. Data released earlier this month showed that the euro zone unemployment rate hit a record 11.8 percent in November.

“A rise toward $1.37 or $1.38 can’t be ruled out on the back of the current trend, but I don’t think you should view a move like that as one that is based on a positive view of (economic) fundamentals,” Karakama said, referring to the euro.

The euro has risen nearly 2.9 percent this month, putting it on track for its biggest monthly gain since October 2011.

YEN FIRMER

Against the yen, the single currency slipped 0.2 percent to 123.33 yen. The euro had hit a high of 123.87 yen on Wednesday, its highest level against the Japanese currency since May 2010.

Expectations that new Japanese Prime Minister Shinzo Abe would push the Bank of Japan into more aggressive monetary easing to beat deflation have made selling the yen a one-way bet in the past few weeks.

The dollar fell 0.2 percent to 90.88 yen, having hit a 2-1/2 year high of 91.41 yen on Wednesday, the greenback’s strongest level versus the yen since June 2010.

“Yen depreciation has more room to go, in our view. We now look for the yen to depreciate to 96 and 100 versus the USD in 6 months and 12 months, respectively,” analysts at Barclays Capital wrote in a client note.

Source:  Reuters.com

The information set out herein has been obtained from various public sources and is by way of information only. Broadgate Financial can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

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