MarketView for August 7

Summary

The major equity indexes rose for a third straight day on Tuesday, pushing the S&P 500 index above 1,400 for the first time since early May. A key reason was a growing optimism that the European Central Bank would act soon to contain the euro zone's debt crisis. At the same time, trading was light, which could distort the level of optimism investors truly have that Europe will follow through with adequate measures. ECB President Mario Draghi raised hopes last week when he spoke of restoring calm to the euro zone's troubled bond markets.

Meanwhile, the declines in borrowing costs for Spain and Italy from peaks above 7 percent have kept sentiment positive. The relative calm allowed the S&P to break through the psychologically important 1,400 level after trying unsuccessfully the past couple of sessions.

Summer holidays have added to light trading volume, which has contributed to volatility. Equities cut their gains just before the close on Tuesday, mirroring Monday's late-day action. About 6.39 billion shares have changed hands on the three major equity exchanges, a number that is well below last year's daily average of 7.84 billion shares.

The real tests for markets will likely come in September. The ECB is expected to face decisions about controlling the euro zone debt crisis and the Federal Reserve could take stimulus actions to aid the flagging U.S. economic recovery.

Despite worries over the economies of Europe and the United States, investors have pushed the S&P 500 up more than 11 percent so far this year. Yield-hungry investors have kept buying stocks as U.S. and German government bond prices soar and yields hit historic lows.

Tuesday's advance was led by stocks in cyclical sectors like energy, materials and consumer discretionary, while defensive sectors like telecoms and utilities edged lower. Energy stocks rose, helped by Chesapeake Energy, which rebounded a bit after the Company said it would sell some assets and spend less on new properties.

Chesapeake’s shares ended the day up 9.4 percent at $19.37, making it one of the top percentage gainers in the S&P 500. Banking shares were also higher, with Morgan Stanley ending the day up 2.5 percent to close at $14.50. Fossil ended the day up 32 percent at $91.77 after it forecast growth in Asia and Europe.

With 82 percent of S&P companies having reported quarterly results, 68 percent have beaten profit expectations, according to Thomson Reuter’s data.

Pfizer and Johnson & Johnson dropped further studies of an experimental drug for Alzheimer's disease after the drug failed in a second trial. U.S.-traded shares of their partner, Elan were down 0.9 percent to $11.15. Pfizer fell 2.1 percent to $23.74, while Johnson & Johnson ended the day down 0.8 percent to close at $68.29.

A group of investors rescued Knight Capital Group in a $400 million deal that kept the market maker in business, but existing shareholders were nearly wiped out. Knight closed 0.3 percent lower at $3.06, erasing gains of more than 3 percent from earlier in the session.

Job Openings at Four-Year High

According to a report released by the Labor Department on Tuesday, job openings rose to a four-year high in June, but a slowdown in hiring underscored the recent weakness in the labor market that has been blamed on an uncertain economic outlook. Job openings rose by 105,000 to 3.76 million in June, the highest since July 2008, the Department reported in its monthly "Job Openings and Labor Turnover Survey" report. But hires fell by 100,000 from May.

Rising concerns over government spending cuts and higher taxes scheduled to kick in at the start of 2013, combined with Europe's on-going debt crisis, has made companies hesitant to take on new workers. There are fears that politicians in Washington will be unable to avoid the so-called fiscal cliff, in a repeat of last year's debt ceiling debacle.

Layoffs in June fell by 149,000 to 1.81 million, coming mostly from the government side. In June, job openings rose almost across the board, with noticeable gains in education and health-care services, and at hotels and restaurants. The government continued to see a decrease in job openings, mostly reflecting belt-tightening by state and local governments.

On the hiring side, there were increases only in the construction sector and at hotels and restaurants in June.

Despite the rise in vacancies in June, there are no jobs for more than two out of three unemployed workers, undercutting the argument that much of the unemployment problem afflicting the economy is the result of a skills mismatch. However, a study by the Federal Reserve Bank of Chicago published recently found little evidence to support the argument of a skills shortage driving up unemployment.

The job openings report also showed a drop in the number of people voluntarily quitting their jobs. The report also offered hope that the rebound in employment in July would be sustained. After an increase in new jobs in June of only 64,000 - the third straight month of job gains below 100,000 - employers added 163,000 new jobs to their payrolls last month.

Growth of Consumer Credit Weak

Consumer credit chalked up its weakest growth in eight months in June as Americans reduced credit card debt, a potentially negative sign for an economy that has struggled to create jobs. Consumer credit grew by $6.46 billion in June, the Federal Reserve said on Tuesday. That was well below the $11 billion advance expected. The Fed also said credit climbed slightly less during May than originally thought.

Credit has been expanding since late 2010 as the country recovered from the 2007-09 recession and on Monday the Fed said a number of banks eased loan standards on auto and credit card loans over the last three months. In June, however, the overall expansion of consumer credit was the smallest since October 2011.

In June, revolving credit, which includes credit cards, shrank by $3.7 billion. Credit data can be tricky to interpret because cutting back on debt is not always a sign of pessimism. People might use their credit cards less because they are earning more money.

Non-revolving credit increased by $10.15 billion in June from a month earlier. Part of that increase appeared to be driven by student loans made by the government, which grew 29.9 percent from June 2011, slightly less than the 12-month growth posted in May.

Student debt has soared since the recession, fueling worries these borrowers might get over their heads and could someday struggle to pay their debts. Still, year-over-year growth in student borrowing has been cooling and is no longer nearly as fast as in 2009.

Consumer credit flows -- a relatively new data series that the Fed says is more sensitive to economic trends -- also fell in June. The flow of consumer credit fell to an annual rate of $77.5 billion in June. In May, that rate was $200.4 billion, the Fed said.