MarketView for July 26

 

Summary

 

The Dow Jones industrial average claimed its third consecutive day of triple digit gains on Monday, as an upbeat outlook from FedEx, coupled with encouraging home sales, lifted share prices on Monday, keeping the S&P 500 above 1,100 for a second day and suggesting the rally could last.

 

Monday's gains pushed the Dow up 0.9 percent for the year to date and lifted the Nasdaq 1.2 percent for the year so far, while the S&P 500 closed just shy of break-even, as the indexes have clawed back from declines from late April's closing highs.

 

FedEx raised its outlook, sending its share price up 5.6 percent. The news from the company validates the optimism of those who believe the economic recovery is less fragile than recently thought. FedEx closed at $83.39, helping the Dow Jones Transportation Average .DJT gain 2.6 percent.

 

The S&P 500 closed above the 1,100 level for the second straight session, which some investors feel is of key importance because it represented the top of a trading range the benchmark index had failed to break several times in the past month. In another milestone, the S&P 500 also rose above its 200-day moving average of 1,113.71. The S&P 500 rose 7.8 percent during the three weeks ended Friday, the largest gain in such a period since the first week of August 2009.

 

A surprising 23.6 percent rise in new home sales during June when compared to May, countered some disappointing data in recent weeks that had increased concerns the economy may slip back into recession.

 

Bank stocks received a late boost after the oversight body of the Basel Committee said it will scale back many of its proposals to beef up bank capital and liquidity rules, signaling concessions in the face of lobbying by banks and governments. Bank of America chalked up a 3 percent gain to close at 14.15.

 

Genzyme rose on takeover speculation, after the Wall Street Journal wrote that Britain's GlaxoSmithKline had recently made "a very casual approach," to the company, while Bloomberg reported Genzyme had rebuffed an offer from Sanofi-Aventis. Genzyme ended the day up 7.8 percent to close at $67.38.

 

BP is expected to install Bob Dudley, the current U.S. executive managing the response operation to the spill in the Gulf of Mexico and an American known for diplomacy, as chief executive, replacing Tony Hayward. Hayward has become a major liability as a result of his gaffe-prone handling of the worst oil spill in U.S. history. The move might soften U.S. criticism of the major British oil company. BP ended the day up 4.9 percent at $38.65.

 

Home Sales Rise

 

The Commerce Department reported on Monday that new home sales rebounded strongly during June, rising 23.6 percent to a 330,000 unit annual rate when compared to May's record low, thereby sending the number of houses on the market to the lowest level in nearly 42 years. Still, the sales pace last month was the second lowest since records started in 1963. However, downward revisions to sales estimates for April and May in Monday's report implied a weak housing market and perceptions that economic growth moderated somewhat in the second quarter.

 

The percentage increase last month was the largest since May 1980, and it partially unwound May's historic 36.7 percent drop as the U.S. housing market was roiled by the expiry of a popular tax credit that boosted sales. Analysts polled by Reuters had forecast new home sales rising to a 320,000-unit pace last month from May's previously reported 300,000 units. Keep in mind that new home sales account for only a fraction of the total U.S. housing market.

 

Housing's share of the economy has shrunk in recent years and residential construction accounted for about 2.4 percent of U.S. gross domestic product in the first quarter. The impact of a 10 percent drop in home construction has about one-third the impact now as it did in 2006, according to economists at Bank of America-Merrill Lynch.

 

The Commerce report suggested the housing market may be close to working through the distortions following the end of a popular home-buyer tax credit in April, an incentive that brought forward sales.

 

Last month's surge in sales saw the supply of new homes available for sale dropping to 7.6 months' worth from 9.6 months' worth in May. The number of new homes on the market dropped 1.4 percent to 210,000 units, the lowest level since September 1968.

 

While economists expect weak housing activity to act as a drag on growth for much of the year, they do not believe this would be enough on its own to trigger a double-dip recession.

 

The median sale price for a new home fell 1.4 percent last month to $213,400. In the 12 months to June, prices dipped 0.6 percent, the smallest drop since November 1987. House price have stabilized on a year-ago basis.

 

The Standard & Poor's/Case-Shiller 20-city home price index likely increased 4.0 percent year-over-year in May following a 3.8 percent rise in April, according to a Reuters survey. The report is due on Tuesday.

 

Support Still Needed Says Treasury Department

 

Nations must not pull back too quickly on economic stimulus because the global recovery still needs support, Under Secretary of the Treasury Lael Brainard said on Monday. "The pace of exit strategy has to be carefully calibrated. We have to be careful not to have an overly accelerated withdrawal," Brainard said.

 

Weighing in on a topic that has exposed differences between the United States and Europe, Brainard said that differences in the speed at which countries shifted from stimulus to restraint shouldn't overshadow the broad consensus that existed on fiscal policy.

 

Spending to combat the 2007-2009 financial crisis and prop up teetering economies has left large piles of government debt around the world. Last week, European Central Bank President Jean-Claude Trichet said industrialized countries needed to come up with plans now on how to rein in deficits that could jeopardize their economies.

 

The Obama administration has pushed measures to increase support for the economy in the near term, while vowing to pivot quickly once the recovery is on more solid ground.

 

"Different countries need to make judgments about how steeply to pull back stimulus based on national circumstances as well as global conditions," Brainard, the Treasury's point person for international affairs, said. "And that provides ample fodder for talk of division and divergence."

 

"Precisely at what juncture the balance (from stimulus to restraint) shifts from one to the other will vary depending upon the different economies," she said.

 

Asked repeatedly to assess the European bank stress tests that were published last week, Brainard said they had provided "very detailed information bank by bank on exposure" to risk and said that will help stabilize financial markets by increasing transparency about the sector's health.

 

The test results had offered "a materially greater level of coverage and disclosure than previously", she said.

 

Brainard also told the group that the U.S. Treasury still considered China's yuan currency to be undervalued, but she declined to estimate by how much.

 

Brainard said Beijing's recent move to end a peg between the yuan and the dollar showed China was letting market forces play a greater role. But she emphasized that the U.S. Treasury was closely monitoring how much it appreciated.

 

"What matters to us is how far and how fast" it rises against the dollar, she added, echoing language Treasury Secretary Timothy Geithner has used. The yuan has climbed 0.69 percent against the dollar since Beijing announced it was unshackling it from a peg on June 19.

 

Brainard also said the United States wants to see its trade partners enact standards for financial market regulation that are comparable to those signed into law last week by President Barack Obama.

 

She said convergence of global rules was vital for some issues, like setting capital standards and dealing with derivatives markets. But in other areas it was possible to work out common principles to guide different approaches among nations, she added. Tougher global capital standards for banks was crucial, Brainard said.

 

"More and higher quality capital must be at the core of our efforts to ensure a more resilient financial system," she said. "And the new standards must be harmonized internationally to be effective domestically."