MarketView for August 1

 

 

Summary

 

The Dow Jones Industrial Average and S&P 500 indexes reached record territory on Thursday, with the S&P 500 exceeding 1,700 after strong data on factory growth and as major central banks said they would keep monetary stimulus in place, with European Central Bank President Mario Draghi reiterating that the ECB's rates will remain at their present level or lower for an "extended period.

 

Growth-sensitive financials, industrials and consumer discretionary shares chalked up the largest gains. JPMorgan Chase gained 1.5 percent to close at $56.54, while Bank of America chalked up a 2.4 percent gain to close at $14.95.The Dow transportation average rose 3.2 percent, also at a new closing high.

 

Google closed up 1.9 percent at $904.22, and Apple gained 0.9 percent to close at $456.67, and both contributed heavily to the S&P 500.

 

Data on weekly initial jobless claims and national manufacturing came in better than expected. The Institute for Supply Management index of national factory activity for July rose to its highest level since June 2011.

 

On Wednesday, the Federal Reserve, in its latest policy statement, gave no hint that a reduction in the pace of its bond-buying program was imminent, as the economy continues to recover but is still in need of support.

 

The drop in initial jobless claims, coupled with Wednesday's better-than-expected ADP report on private-sector hiring , bodes well for the July payrolls data on Friday.

 

Yelp rose 23.2 percent to $51.50 after the consumer reviews website posted a smaller-than-expected quarterly loss and forecast third-quarter revenue above analysts' expectations.

 

Pioneer Natural Resources was the S&P 500's largest percentage gainer after reporting second-quarter results. The company's shares closed up 12.5 percent to $174.15, after hitting an all-time high of $180.99 earlier.

 

On the downside, Exxon Mobil fell 1.1 percent to $92.73, making it the largest drag on the Dow and the S&P 500. Exxon reported a sharp drop in quarterly profit on lower oil and gas output production and weaker earnings from its refining business.

 

After the bell, shares of LinkedIn rose 6.3 percent to $226.51 after the company reported a large increase in quarterly revenue. Also after the close, shares of Weight Watchers fell 15.5 percent to $39.75 following the release of its results and outlook.

 

Approximately 6.89 billion shares changed hands on the three major equity exchanges, a number that was above the average daily closing volume of about 6.4 billion shares this year.

 

Economic Data Looking Good

 

Factory activity rose to a two-year high in July, while first-time applications for jobless benefits hit a 5-1/2-year low last week, bolstering views economic growth would accelerate in the second half of the year. However, the burst of strength in the economy as the third quarter started keeps on track expectations that the Federal Reserve will start reducing its monetary stimulus later this year.

 

The Institute for Supply Management said on Thursday its index of national factory activity rose to 55.4 last month from 50.9 in June, buoyed by a surge in new orders and production. A reading above 50 indicates expansion in the sector, which hit a soft patch in the spring. The pick-up in manufacturing was also corroborated by financial data firm  Markit, which said its U.S. Manufacturing Purchasing Managers Index rose to a four-month high in its final July reading. Measures of factory jobs rose in both reports, with the ISM employment index reaching its highest since June last year.

 

The improvement in employment dovetailed with a separate report from the Labor Department showing initial claims for state unemployment benefits dropped 19,000 to a seasonally adjusted 326,000 last week, the lowest since January 2008. While claims are usually volatile in July due to auto plant shutdowns, economists who had expected new filings to rise to 345,000 said the general tone of the report was consistent with a pick-up in job growth.

 

The four-week moving average for new claims, which irons out week-to-week volatility, fell 4,500 to 341,250.

 

Automakers traditionally close assembly plants for retooling in July but they have now either shortened the shutdown period or forgone closures altogether, throwing off the model that the government uses to adjust the data for seasonal variations.

 

Last week's claims data has no bearing on Friday's employment report for July as it falls outside the survey period. The government is expected to report nonfarm payrolls increased 184,000 last month after rising 195,000 in June, according to a Reuters survey of economists.

 

The jobless rate is seen ticking down a tenth of a point to 7.5 percent. However, there is a risk payrolls could surprise on the upside after a report on Wednesday showed U.S. private employers maintained a high pace of hiring in July. Overall job gains in the second quarter averaged 196,300 per month.

 

In another report, consultants Challenger, Gray & Christmas said planned layoffs at U.S. firms fell 4.2 percent in July.

 

The factory data and steadily improving labor market conditions suggested the economy got off to a good start in the third quarter. Gross domestic product grew at a 1.7 percent annual rate in the second quarter, up from a pedestrian 1.1 percent pace in the first three months of the year.

 

New orders in the ISM survey touched their highest in two years and a drop in inventories suggested further strength in order books was in the cards.

 

Manufacturing could get a boost from robust demand for trucks, thanks to a strengthening housing market. General Motors Co, Ford Motor Co and Chrysler Group reported strong truck sales in July. However, low inventory of some popular car models slowed automobile sales.

 

While Federal Reserve policy-makers on Wednesday after a two-day meeting offered no indication they planned to reduce the U.S. central bank's monthly $85 billion in bond purchases at their next meeting in September, economists said the silence on that issue was aimed at keeping market-set interest rates tamped down.

 

A sixth report, from the Commerce Department, indicted an unexpected drop in construction spending in June. Economists were little concerned about the decline, however, noting that May and April's construction outlays had been revised higher. Construction spending dropped 0.6 percent to an annual rate of $884 billion, the Commerce Department said.

 

Big Oil is Hurting

 

A number of top oil companies abandoned output targets and missed profit forecasts on Thursday as they promised to clamp down on rising costs that hurt quarterly results.

 

Costs for workers and materials are climbing as the industry scrambles to bring new wells and pipelines into operation.

 

Companies owning refineries, from smaller independents to majors that have operations in all aspects of the oil business, also had profits squeezed by price shocks, maintenance work, and the rising cost of ethanol credits they often buy to comply with cleaner-fuel rules in the United States.

 

In contrast, smaller U.S. producers, which tend to have more of their operations inside the United States and relatively more exposure to shale deposits, reported surging output.

 

Among the quarterly results on Thursday, Royal Dutch Shell and Exxon disappointed Wall Street. The pair are two of the top three investor-controlled oil companies in the world. The third, Chevron, due to report results on Friday.

 

Shell did what several of its peers did some time ago - abandon a promise to increase production growth so that it can meet its financial targets for cash flow growth and spending. The earnings reports followed a profit miss from, BP on Tuesday. Only Total impressed investors with its first quarterly rise in production in three years.

 

Exxon reported a profit of $6.9 billion, down 57 percent from $15.9 billion a year earlier. Its oil and natural gas production fell 1.9 percent. The company is working to put new projects online to replace declining fields.

 

Among smaller firms, ConocoPhillips reported better-than-expected earnings and raised its full-year production forecast. It said output from the Eagle Ford shale field in Texas almost doubled in the second quarter to 121,000 barrels of oil equivalent per day. Conoco's combined oil and gas production in the Eagle Ford shale field, the Bakken shale field in North Dakota, and Permian Basin in Texas rose 47 percent.

 

ConocoPhillips' net income fell 10 percent to $2.05 billion. Year-earlier earnings included $500 million from downstream operations before the company spun off Phillips 66 in May 2012.

 

Apache reported higher quarterly earnings that were in line with Wall Street expectations. It sold its Gulf of Mexico shelf assets last month to focus on onshore production. It said its North American onshore liquids production rose 42 percent to 175,000 barrels per day in the latest quarter.

 

Chesapeake Energy’s new chief executive, Doug Lawler, said the company was reviewing its partnerships and assets as the second-largest U.S. natural gas provider tries to simplify its structure and improve financial discipline. The company, which experienced a severe liquidity crunch in 2012 after spending heavily for years to acquire drilling acreage, reported a better-than-expected quarterly profit as it produced more crude oil than Wall Street targeted. Its shares rose 7 percent to the highest level in more than a year.

 

Among refiners, Marathon Petroleum Corp (MPC.N) and its peers are betting on new pipelines and higher volumes to win back margins that have shrunk as discounts on U.S. crude relative to the more expensive European benchmark have narrowed. That has erased a cost advantage that U.S. refiners had enjoyed for nearly three years.

 

The spreads could widen again as extra pipeline capacity comes on stream to move Texas crude to the Gulf Coast. Higher domestic oil output will also offset crude draws from the crude futures hub at Cushing, Oklahoma.

 

Domestic refiners are also being hurt by the rising cost of ethanol credits, or Renewable Identification Numbers (RINs), which they are required to purchase in order to meet blending targets set by the Environmental Protection Agency.