MarketView for July 7

Summary  

Optimism returned to Wall Street in a big way on Wednesday as the major equity indexes chalked up their strongest one performance in about six weeks. One key reason for the rally was a bullish forecast from State Street that had Wall Street suddenly overwhelmingly optimistic with regard to the upcoming earnings season. As a result, the S&P 500 broke through a major resistance level. When of 1,040, which in turn fueled more buying by those who had put on short positions. The 1,040 level was viewed as a resistance level to further gains,

State Street ended the day up 9.9 percent at $36.63 after the asset manager and custody firm said quarterly earnings would far exceed expectations, providing a lifeline to investors after several weeks of dismal economic reports.

Bank stocks led the way, but there was also strong interest in bottom-feeding on beaten-up industrial and technology stocks. It was the indexes' biggest percentage advance since May 27. Industrial and technology stocks were also among the day's gainers with GE up 4.7 percent at $14.62 and Cisco up 5.3 percent at $22.48. The two stocks were the top gainers on the Dow.

European banks also rallied on optimism most would pass the European banking stress tests, giving a boost to the wider market.

The S&P 500 closed around 1,060, the next resistance level that could prevent the index from rising further on Thursday. The index has reached the 23.6 percent retracement of the move from its 2010 high in April to its year low hit last week.

Energy shares were helped out by the rise in crude futures. Domestic sweet crude for August delivery settled up 3.4 percent to $74.43 per barrel. Crude climbed on the expectation that upcoming data would show a drop in inventories, a positive sign for demand, as well as weakness in the U.S. dollar.

In earnings news, Family Dollar Stores fell 8 percent to $36.26 after it forecast fourth-quarter earnings below expectations. Among its peers, Dollar Tree was down 3.1 percent to $41.61, while BJ's Wholesale was off 1.1 percent at $42.72.

BP Chief Executive Tony Hayward met with officials from Abu Dhabi's investment authority as speculation mounted the sovereign fund would make a fresh investment. BP's shares rose 4 percent to $33.12.

Stress Tests for 91 Banks in Europe

Europe listed 91 banks taking part in financial stress tests -- including many regional banks where markets suspect most of the sore spots are -- as it seeks to restore confidence in the sector.

Providing some, but not nearly all, details of so-called stress tests that markets have been clamoring for weeks, a regulatory committee said it would test how banks held up if the economy and financial markets deteriorated.

"The exercise is being conducted on a bank-by-bank basis using commonly agreed macro-economic scenarios," the Committee of European Banking Supervisors (CEBS) said. "It also envisages adverse conditions in financial markets and a shock on interest rates to capture an increase in risk premium," in bond markets, said London-based CEBS.

The scenarios would show a different impact on the various European Union member states, said CEBS, a little-known group of European Union national finance regulators. The banks -- ranging from Germany's Deutsche Bank to Malta's Bank of Valletta -- comprised 65 percent of the European banking sector, the group said.

Most of Europe's large banks that operate in more than one country were on the list, which also showed many German and Spanish regional banks, the so-called landesbanks and cajas respectively, thought to be among the weakest.

The shock to government bonds would assume a deterioration of market conditions similar to the situation observed in early May 2010. Europe's bond markets have been plagued by the fear of a government defaulting.

Results of the tests will be disclosed on July 23. The list covers banks such as BNP Paribas, HSBC, Deutsche Bank, Santander, UniCredit and ING.

Fed’s Fisher Says Enough is Enough

The economic recovery is slowing, but the Federal Reserve does not need to do more to help it along, Dallas Fed President Richard Fisher said on Wednesday. The Fed, the U.S. central bank, has kept short-term interest rates at near zero since December 2008, and has bought more than $1 trillion in mortgage-backed securities to blunt the worst downturn since the Great Depression.

To get banks back to lending and companies back to spending requires more regulatory certainty, not cheaper money, Fisher said in an interview on business news channel CNBC.

"People are uncertain -- they are hoarding cash, they are holding back," Fisher said, citing the complexity of the healthcare bill as a factor in making it difficult for corporations to project future costs.

"This is nothing to do with monetary policy -- we have been as accommodative as possible," he said. While the recovery has slowed, it is unlikely the U.S. will fall back into recession, he said.

The Fed does not need to buy more assets, and should be careful about "going too far," he said, although not because of concerns over inflation, which he said is not an issue. Buying more assets "could do damage by damaging our credibility. There is plenty of liquidity in the system," he said. "It will be utilized only if there's confidence in the future."