MarketView for October 13

Summary 

The major equity indexes hit their highest level in five months on Wednesday as stronger-than-expected earnings and ongoing weakness in the dollar increased demand for equities. Shares in the industrials and materials sectors led the way while commodity prices soared as China's month-on-month import growth hit a record high.

Completing a bullish trifecta, the S&P 500 broke a short-term technical barrier and triggered more buying of stocks as money managers chased performance. The S&P 500 is up 12.3 percent since September 1. The S&P 500 broke a key short-term technical resistance level when it moved above 1,173.57, the highest point it had hit since the market's "flash crash" on May 6. The next technical barrier for the S&P 500 is at the 2010 high, near 1,220.

Despite posting strong results that helped lift sentiment, JPMorgan Chase & Co and Intel saw their shares slide on Wednesday. JPMorgan closed down 1.4 percent to $39.84 as its weak revenue highlighted poor loan demand and declining trading volumes. Intel closed down 2.7 percent to $19.24, breaking a trend of gains over the past six sessions. Meanwhile, CSX rose 4.2 percent to $59.66 after it reported stronger-than-expected quarterly profits late Tuesday.

Aiding the gains on Wall Street were the details from the Federal Reserve's latest meeting indicating that the Fed may once again add liquidity in the form of cash to economy "before long."

Industrials and materials were the S&P 500's leading sectors. Caterpillar rose 1.2 percent to $80.29 and Freeport-McMoRan Copper & Gold closed up 4.2 percent at $99.08. Apple moved above $300 for the first time in anticipation of another strong earnings report from the company next week. The stock closed at a record $300.14, up 0.5 percent, after earlier hitting an all-time intraday high of $301.96.

S&P 500 companies' earnings are expected to rise 23.6 percent from a year ago, which would represent a fourth straight quarter of year-over-year earnings increases. Although the earnings period has just begun, results from 81 percent of S&P 500 companies have surpassed expectations.

The Fed Will Do What It Feels Is Necessary

The Fed is pretty much ignoring foreign concerns regarding their easy money policy and there is little indication that those foreign concerns will be an impediment to the addition by the Fed of additional dollars into the economy. U.S. officials have received criticism from other nations who feel they are suffering from the Fed's largesse. The expectation of a further easing in U.S. monetary policy has weakened the dollar, inflated asset prices overseas and made it harder for other countries to manage their own economies.

But a few nods to the global ramifications of their policies aside, the Fed appears set to do what it feels it must do to fight stubbornly high unemployment and low inflation. In fact, the word "global" was used just once in the central bank's latest meeting minutes, released on Tuesday, and only a handful of times in minutes from the last three years.

The Fed likes to stress it is not the world's central bank, and that other countries should use their own tools to deal with what Poland's central bank chief Marek Belka called "an ocean of liquidity". "We are worried that capital inflows will amplify our problems, will derail our monetary policy," Belka said on Saturday.

In answer to a question on Tuesday, Kansas City Federal Reserve Bank President Thomas Hoenig -- who has dissented against the Fed's easy money policy at every chance this year, said the United States "is not an island" and the central bank needs to be aware its actions could "come back to us."

"We affect, and we are affected: this is a global economy and we can't forget that," he said.

But the Fed has a legal mandate to pursue price stability and full employment in the United States, and Hoenig was quick to point out that domestic considerations would come first. However, the Fed's aim is not to drive down the dollar. Nonetheless, the dollar's decline is an undeniable side-effect of its actions as investors are attracted to higher-yielding assets overseas.

This has presented other central banks with a dilemma. Normally they would raise interest rates to stem rising prices, but that would just suck more capital in, strengthening their currencies further and making their exports uncompetitive.

Bank of England Governor Mervyn King warned that rich countries cannot afford to be insular in their thinking. "It's not enough anymore to pretend that merely pursuing a sensible domestic policy framework will guarantee that you can generate stability," King told a panel in Washington on Monday.

Brazil has likened international exchange rate policy to a "currency war," and together with countries from South Korea to Thailand, the South American giant has set up capital controls to limit inflows of money.