MarketView for January 31

Summary 

Despite the conflict in Egypt, shares prices moved sharply higher on Monday, the result of another day of better than expected earnings and signs of a strengthening economy, even as a surge in the price of oil highlighted the potential for increased political risk in the Middle East to upset markets.

Egyptian Vice President Omar Suleiman said on Monday that President Hosni Mubarak has asked him to start a dialogue with all political forces, while Egypt's armed forces pledged not to fire on peaceful demonstrators. The latest news calmed markets after stocks suffered their biggest fall in nearly six months on Friday.

Relief over the fact that the turmoil appeared not to be escalating meant that investors could turn their focus on data which indicated stronger spending by consumers and an increase in regional manufacturing. At the same time, better-than-expected earnings from Exxon sent that company's shares up more than 2 percent.

However, the rise in the price of NYMEX crude oil futures suggested ongoing concerns. Crude climbed over 3 percent to $92.19 per barrel on Monday on worries the unrest in Egypt could spread to oil-producing nations or disrupt the flow of oil through the Suez Canal.

The CBOE VIX Volatility index .VIX, known as Wall Street's fear gauge, dipped 2.5 percent to 19.55, after having surged by 24 percent on Friday in the largest single-day percentage gain since May.

On the economic front, the Commerce Department reported on Monday that consumer spending rose in December for a sixth straight month, while a separate report indicated that business activity within the Midwest increased more than expected during the month of January. That data increased optimism ahead of Friday's closely watched monthly non-farm payrolls report, expected to show that the economy is primed to add 145,000 jobs in January.

M&A activity also helped push share prices higher. Massey Energy rose 9.8 percent to $62.86 after Alpha Natural Resources agreed to a $7.1 billion deal to create the second largest U.S. coal miner by market value.

In other M&A action, CNOOC Ltd will pay $1.3 billion in its second shale deal with Chesapeake Energy, the latest move by China's top offshore oil producer in its aggressive drive for overseas acquisitions. Chesapeake advanced 8 percent to close at $29.53.

Exxon closed up 2.1 percent at $80.68 reporting a 53 percent increase in quarterly earnings. Its shares closed up at $80.68 after earlier in the day hitting a two-year high of $80.82. Intel closed flat at $21.07 after cutting its first-quarter revenue forecast by $300 million due to costs for correcting a design flaw in one of its chips.

Trading volume was 7.7 billion shares overall on the three major exchanges, down from last year's estimated daily average of 8.47 billion shares. Trading volume on Friday when stocks skidded on fears over Egypt had hit the highest of the year.

Economic Data Points to Better Times Ahead

Factory activity in the Midwest hit a 22-1/2 year high in January as orders rose sharply and employment prospects brightened, providing once again data that unquestionably pointed to the fact that the economy is on target to produce a pattern on solid growth. Meanwhile, another report on Monday indi9cated consumer spending ended 2010 on a firmer footing, a trend that will likely continue as the labor market continues to gains traction.

The upbeat data, which showed inflation at a minimum and well within Fed guidelines, suggested the economy started the year with strong momentum. Stocks rose as investors set aside concerns over the unrest in Egypt. At the same time, Treasury prices moved lower.

The Institute for Supply Management-Chicago said its barometer of Midwestern business rose to 68.8 in January, the highest since July 1988, from 66.8 in December. The Street had been looking for the index to slip to 65.0. A reading above 50 indicates expansion in the regional economy.

The rise suggests an increase in orders to their highest level in 27 years and the strongest reading in the employment component since May 1984, an encouraging outcome for a labor market whose recovery has lagged economic growth.

It is also likely, based on Monday’s data, that Tuesday will show a surprise rise in the Institute for Supply Management's index of national factory activity, whose expansion economists expected to have leveled off this month after recent strong gains.

Manufacturing has led the economy's recovery from the worst recession since the 1930s, but consumers are stepping up to the plate. They helped push the economy ahead at a 3.2 percent annual rate in the fourth quarter.

A report from the Commerce Department indicated that spending, which accounts for 70 percent of all economic activity, increased 0.7 percent in December. That was the sixth straight monthly gain and added to November's 0.3 percent rise. The higher spending outpaced the 0.4 percent gain in incomes, and savings dropped to $614.1 billion, the lowest level since March.

The spending figures were included in the government's fourth-quarter gross domestic product report on Friday, which showed spending grew at a brisk 4.4 percent pace in the final three months of 2010, the fastest in more than four years.

Look for spending to remain solid in the first quarter, helped by payroll tax reductions that were included in the $858 billion tax package enacted in December. An expected pick-up in the pace of the labor market's recovery and a rise in stock prices are also seen supporting spending.

The firmer spending tone was highlighted by Darden Restaurants, which forecasted earnings for the current quarter and full year, citing improving sales. Bank balance sheets are strengthening as well. A survey of senior loan officers by the Federal Reserve found banks growing more upbeat about the quality of their loan portfolios.

"Expectations were significantly more upbeat than in past years," the Fed said. "Moderate to large net fractions of banks reported that they expected improvements in delinquency and charge-off rates during 2011 in every major loan category.

Even as the economy picks up and commodity prices surge, underlying inflation remains muted, which should help the Federal Reserve complete its $600 billion bond-buying program as intended to foster recovery.

The Fed's preferred measure of consumer inflation, the personal consumption expenditures price index, excluding food and energy, was unchanged in December after moving up 0.1 percent in November. For the 12 months through December, the core PCE index rose 0.7 percent, the smallest increase since records began in 1959, after increasing 0.8 percent in November. Even the headline PCE price index was up only a relatively modest 1.2 percent.