MarketView for October 6

Summary   

Stock prices rose sharply on Tuesday amid signs the global economy was recovering and optimism that corporate earnings reports will exceed expectations. The economic optimism spurred gains in energy and other commodities, lifting shares of oil and resource companies. Shares of Exxon Mobil rose 1.6 percent to $68.66 and were among the top gainers on the Dow.

Australia became the first G20 country to raise interest rates since the onset of the financial crisis, saying that the worst danger for the economy had passed, which underscored for many that the global economy was on the mend. The hike in a key lending rate by the Australian central bank could be a key barometer as to the outlook for the global economy going forward.

Expectations of a rebound in revenue and earnings for the recently ended third quarter fed the day’s optimism. Quarterly earnings are due to kick off late Wednesday, with results from Alcoa, whose shares were up 3.5 percent to $13.89.

Third-quarter earnings for S&P 500 companies are still expected to have declined 24.8 percent from a year ago, according to data from Thomson Reuters.

After the close, shares of Yum Brands, the parent of Taco Bell and other fast-food chains, rose 3.9 percent to $36.20 after it reported a profit that beat expectations and raised its full-year earnings forecast.

Benchmark U.S. gold futures scaled an all-time high at $1,045 an ounce on Tuesday, adding to gains in commodity-related shares. Freeport-McMoRan Copper & Gold Inc (FCX.N) advanced 3.4 percent at $69.61.

Shares of industrial companies sensitive to the economy's cycles also rose. Shares of United Technologies, the world's largest manufacturer of elevators and air conditioners, were up1.8 percent to close at $61.49.

Microsoft rose 1.9 percent to $25.11 after introducing new software for mobile phones to compete with Apple's iPhone. Apple closed up 2.1 percent at $190.01.

Crude Higher on Hope

The price of crude oil moved higher on Tuesday as a hedge against a weaker dollar and a. government forecast of an increase in world oil demand. The Energy Information Administration raised its outlook for world oil demand during the fourth quarter by 170,000 barrels a day and by 1.1 million bpd in 2010, on expectations of economic recovery in Asia.

Domestic sweet crude for November delivery settled up 47 cents per barrel at $70.88. In London, Brent crude settled up 52 cents per barrel at $68.56.

Retail gasoline demand last week rose by 7 percent from the same period a year ago and was up 0.6 percent from the previous week, according to a MasterCard SpendingPulse report released on Tuesday.

Further support came as the dollar fell on news that Australia's Central Bank unexpectedly raised interest rates, a move investors took as a signal world economies may recover soon, potentially boosting fuel demand.

The dollar also weakened after Britain's Independent newspaper reported that major oil exporters were in secret talks to abandon the dollar as the currency they use to price oil, citing anonymous sources. Major oil producers, including top exporters Saudi Arabia and Russia, immediately denied the report, however.

Oil and other commodities denominated in dollars for global trading tend to rise when the dollar falls as they become cheaper for holders of other currencies. A move away from dollar-based pricing of the world's leading commodity could further weaken the dollar. Iran moved away from pricing oil in dollars this year.

Optimism that fuel demand will recover is helping boost oil prices. However, the data is likely to show that domestic crude oil inventories rose last week. The EIA data will likely show that feedstock usage dipped on poor refining margins. The EIA will publish its supply data on Wednesday.

Gold Hits Record High

Gold held below its record high in early Asian trading on Wednesday, but could be set for another spike up as the dollar continues to struggle and inflation concerns grow. Spot gold was quoted at $1,039.50 at 2245 GMT, after retreating from an all-time peak of $1.043.45 set on Tuesday.

Gold has gained about 18 percent in the year to date. Spot gold and U.S. gold futures have benefited from a convergence of factors, particularly a hobbled U.S. dollar, as well as technical buying and concerns over inflation.

Blackrock Has A Positive Outlook

BlackRock remains bullish on stocks, particularly in the United States and in emerging markets, forecasting that U.S. equity markets will offer annual returns of 6 to 8 percent over the next several years. However, in a report released on Tuesday, the firm warned of an imminent correction in prices, following year-to-date gains of 17 percent on the S&P 500 and of more than 60 percent on the benchmark MSCI index for emerging equity markets.

It also expressed confidence that low growth rates and low inflation will let central banks keep accommodative monetary policies that will feed the equities bull market for several years while "healing" the bond market at the same time.

"We would not be surprised to see some sort of correction that could take the S&P back down to the 950 level, but we remain confident in our beginning-of-year prediction of 1,000 to 1,050," BlackRock's vice chairman Bob Doll and managing director Curtis Arledge said in the report.

Volatility will remain high, BlackRock predicted, as stocks may be overbought and the economic outlook is still somewhat uncertain, but a great deal of cash remains on the sidelines awaiting an opportunity to enter the markets.

The fund manager currently favors U.S. and emerging stock markets. It says the higher-risk assets should outperform in the next several years, underpinned by the low growth, low interest rates environment. While BlackRock believes stocks offer more value than bonds, it also sees "an attractive discount" in lower-quality, higher-risk fixed-income assets, which should be selected carefully.

"They are pricing in an economic environment more dire than we expect, particularly given that the spread sectors of the market will remain heavily supported by government programs for some time," the fund manager said.

Non-agency mortgages and commercial mortgage-backed securities are the most attractive sectors of this market, BlackRock said.

"The headline risk associated with real estate-related investments has caused an extreme risk aversion to these sectors of the market, which has meant that these asset classes have not recovered as strongly as the rest of the market and, therefore, are cheap on a relative basis," it added.

On the other extreme, the fund manager recommends investors to underweight Treasuries and U.S. agency paper, as well as emerging market global bonds, after their recent strong performance.