Comments by the ECB chairman Mario Draghi caused stocks to spike world wide. The European markets had one of their best days ever, with Spain leading the way. The comments in no way put to rest fears of further bail outs but does renew confidence in ECB leadership.
The comments by Mario Draghi caused US futures to surge more than 1% this morning. The comments were unexpected and sparked a rally in equities, the Euro and gold. The rally is suspect thought because the move came on a single statement and does not yet have the support of other EU central bankers. In his comments, Mr. Draghi said that the ECB would defend the Euro by â€œany means necessaryâ€ and that â€œit would be enoughâ€. While his statements did not reveal what means those might be they did inspire some confidence in traders that steps would be taken sooner rather than later. The ECB is meeting next Wednesday and could announce further stimulus plans as early as then.
Further news from the European sector includes a new prediction by Citi economist Willem Buiten. Mr. Buiten has been handicapping the chances of a Greek exit ( â€œGrexitâ€, a word coined by Buiten) for several months now and has upgraded the chance to 90%. He is expecting continued weakness from the country as well as spillover into the other EU countries. He predicts that the move will occur in the next 2-3 quarters and that Spain will also need increased bail outs. It is not unreasonable to think that there will be the need for additional bail outs but I do not think it is very likely that Greece will be allowed to exit because of the possible global repurcussions.
Another round of unexpected unemployment data helped to lift stocks into the open. Unemployment claims continued to fluctuate wildly this week and fell by 35,000 to a seasonally adjusted 353,000 claims. This is a far cry less than the 378,000 predicted by economists. Of course, the previous weeks data was revised up, no surprise there, to 388,000. A shift in the way the big automakers have approached their seasonal summer layoffs has caused the wild swings and is expected to end soon. The four week moving average of claims, which fell by 8,750 to 367,250, is able to smooth out some of the fluctuations but is still susceptible to these wild weekly swings. Needless to say, the labor market is still not improving.
The unemployment data, like much of the other data and information we have available, continues to be mixed. Continuing claims dropped as well, falling by 30,000 to a total of 3.29 million. This is the lowest level in two months. The total number of Americans filing for unemployment climbed to its highest level in two months, 6 million. Next week be on the lookout for ADP and US employment data. Expectations are for a slight decline in hiring for the month of July.
The Durable Goods numbers did not reveal anything to me. There was a small surprise gain in June of .8% with a reversal in July to a decline of -1.1%. Economists on average had been expecting the data to remain flat so averaging the two months together gives us a flat to slightly negative number, in-line with expectations. Within this number the data was mixed as well. There were declines in most of the metrics but the 8% gain in transportation equipment nearly overcame them.
Market breadth was good at the opening, with advancers leading decliners by 6:1. After opening higher the major indexes seemed to tread water until the Pending Home Sales figures were release around 10:30. Analysts had been expecting a drop to 1%, from the previous months 5.9%, but were surprised by the -1% decline. The drop was due to an apparent lack of available homes for sale, not a lack of interested parties. This could be a good sign for the housing market in the longer term. Pent up demand could lead to higher prices and new sellers entering the marketplace, provided they don't outpace new buyers.
US bond yields rose today on the upbeat unemployment numbers. Despite the small gains the yields on the 30 year bond are still at multi-year lows.
US 30 year bond yield, daily
Gold also climbed on the statements by Mr. Draghi. The statements, combined with weak US data, renewed hopes of QE3 and added upward momentum to the price of gold. The index regained the upper side of a support/resistance level set in 2010 and could be bottoming. Further monetary stimulus from the ECB or the FOMC could help to send gold prices higher.
The Gold Index, daily
The drop in unemployment claims and comments from Mario Draghi also renewed hopes of increased oil demand, causing prices to rise for the third straight day. Trading in oil remained thin, ahead of US GDP numbers due out tomorrow. Geopolitical issues are more to blame for the rise in oil prices this summer than demand but further policy easing from world banking leaders could increase expectations for growth and demand for oil.
Today was a busy day for conference calls as earnings continue to roll in. More than 300 companies reported today with several big names reporting after the bell. The trend of higher earnings on lower revenue also continued. The fact that businesses are able to increase margins and improve profitability is good,this puts them in great position once the economy gets going again. The downside is that business in general is slowing, as evidenced by declining revenue.
3M Corporation made the news early today with their release. The company reported that profits were up while revenue was down and that they would be able to meet their current year end guidance. The stock surged on the news, opening above resistance and moving higher in early trading. By the end of the day the stock had traded about 1.5 times the average daily volume and closed below resistance.
3M Corporation, daily
Zynga was also a hot topic this morning. The online game maker missed earnings and revenue by a steep margin and lowered full year guidance. Zynga announced earnings of $0.01 per share, far below the estimated $0.06 per share investors were expecting. The company also lowered its full year guidance to $0.04-$0.09 per share from $.023-$0.29 per share. The company blames the miss and lowered guidance on the shift by users to mobile platforms and on game launch delays. What was clear in the report is that Zynga is still tied to Facebook and is having a hard time monetizing its services. The stock dropped about 40% today, hitting a new 52 week low.
Facebook, which released earnings after the bell today, felt the sting of Zynga's miss during today's session. Shares of the stock traded down today but remained above the once tested support zone at $27. The report did nothing to help investor confidence and sent the stock plummeting in the after market trading.
Exxon Mobil also reported a disappointing quarter. On the surface, Exxon reported a 49% increase in net income, not surprising for the worlds largest oil company. However, excluding sale of assets revenue and profits both fell short. After excluding one-time divestment of assets Exxon earned $1.80 a share, below the expected $1.96. The decline in revenue is due to a combination of decreased production and low prices. The stock moved upward today but is trading well under resistance with weak momentum.
The Oil Index also climbed today, with 9 out 11 components moving higher. The index also came short of its resistance zone and is divergent with its momentum indicator.
The Oil Index, daily
Sprint was another bright, if tarnished, star in the earnings parade today. The company, which has been struggling with profitability for a long time, reported that its second quarter loss widened. That was not the good news, the good news is that the wider than expected loss was due in part to write-downs of its Nextel network and that revenue was on the rise. Sprints model of offering unlimited data attracted new subscribers, driving the revenue gains. After the news the stock jumped and moved as much as 25% higher during the day with heavy volume. An increase in revenue is good for Sprint but it still has to address the profitability issue. Until this is done Sprint faces heavy resistance going forward. The stock has been range bound since hitting its bottom in 2009 and is currently trading in the middle of that range. A move up to $5.00 would close the window opened last summer when the stock gapped down.
The S&P 500 moved higher throughout the day, eventually surpassing the mornings high. Today's rally was driven more by relief over the attention Mario Draghi seems to be giving the European crisis and less with satisfaction over earnings. Some companies have done well over the last quarter, and certainly many of them have been able to improve earnings but just as many if not more have failed to make improvements. Bottom line performance is suggesting that internal operations are improving while declining revenue underscores the declining state of the global economy. Earnings drive market value and declining world expectations do not give much hope for improvements in the near future. Expectations for 2013 will soon start to influence trade and investment decisions and so far what I have found is not promising. On average, estimates for US GDP growth in the second half of 2012 will pick up slightly, maybe as much as 2.5%. The early estimates for 2013 are very similar. This will be good but will it be enough in light of lowered global growth expectations? The IMF lowered its 2013 global outlook to 3.9% just two weeks ago and so far there is no real sign of stabilization. The weakness in Europe is already blamed for poor results by US corporations, further declines there and in Asia will hurt corporate results and US GDP even more.
S&P 500, one day
On the one day charts the S&P is moving slowly upward toward its resistance zone between 1380 and 1420. The lower end of this range is equal to an important retracement level and has proven significant as resistance over the last few months. Momentum is very weak and does not support a bullish outlook on the index.
S&P 500, daily
Longer term the index is being squeezed by the 200 day moving average and the resistance zone described above. Momentum is weak but bearish. The index seems like a deer in headlights, not knowing which way to go. On the one hand earnings are disappointing, expectations are low and economic signals are pointing to more of the same. On the other hand, today's comment by Mr. Draghi and the growing possibility of QE3 lead us to think that something will be done to stimulate growth. Tomorrow begins a round of important economic indicators that will begin to bring clarity to the upcoming quarters.
S&P 500, weekly
The Nasdaq Composite has much weaker technicals than the S&P. The index's move up today was halted by a convergence of the 30 day moving average and a near term down trend-line.
Tomorrow will be another big day for earnings. Not only is there a new round of reports due out traders will be moving on earnings statements released after the bell today. Amazon and Starbucks delivered high profile misses while Amgen, Coinstar and Expedia beat expectations. The biggest mover tomorrow is likely to be the advance estimate for US 2nd quarter GDP. The consensus estimate is for growth around 1.2%.