MarketView for October 14

Summary

The major equity indexes chalked up their first back-to-back weekly gains since early July on Friday, in part because of strong Google earnings. In addition, investors and traders alike continue to take a ride on the train of optimism as the EU continued to search for a solution to the euro zone's debt crisis. Nonetheless, the end result was that the Dow Jones Industrial Average and the Nasdaq were both back in positive territory for the year, marking a dramatic reversal from two weeks ago, when the threat of a Greek default and sour U.S. data had buyers running from the market.

The benchmark S&P index has climbed 14 percent from the October 4th intraday low of 1,074.77, which had temporarily tipped it into bear market territory. Now the question is whether the S&P 500 index can sustain a move above the 1,215-1,220 area that has been upper end of the index's range since early August. For the week, the Dow rose 4.9 percent, while the S&P 500 jumped 6 percent and the Nasdaq climbed 7.6 percent.

Google led the Nasdaq higher on Friday as the company’s shares rose 5.9 percent to $591.68, a day after its results sailed past Wall Street's expectations, helped by strong advertising sales and cost controls.

Next week third-quarter earnings kick into high gear, with reports coming from Goldman Sachs, Bank of America, Apple and other prominent companies. Apple rose 3.3 percent to $422, just below its intraday lifetime high of $422.86 set on September 20, as the newest version of its iPhone went on sale across the country.

The CBOE Volatility Index fell 8 percent to end at 28.24, and closed lower for the ninth day in a row, a pattern suggesting more gains could be in store as investors find less need for protection against losses.

French and German officials are trying to put flesh on the bones of a crisis resolution plan in time for a European Union summit on October 23, overshadowing Standard and Poor's cut of Spain's credit rating, a move that underlined the challenges facing Europe's finance ministers.

Stronger-than-expected retail sales data added to the upbeat mood Friday. Retail sales rose 1.1 percent in September from a month earlier. Sales growth during August was revised upward to 0.3 percent.

About 6.6 billion shares changed hands on major equity exchanges, a number that was still well below the year's daily average so far of about 8 billion.

Retail Sales Up

The Commerce Department reported on Friday that retail sales rose 1.1 percent in September, with strong auto purchases providing much of the increase. Sales for August and July were revised higher as well as consumers shook off concerns about a weak stock market and political gridlock, giving a bit more momentum to the economic recovery.

The data eased concerns the country would slip back into recession, overshadowed a separate report showing a surprise drop in consumer confidence in early October. Consumer spending accounts for about two thirds of all of our economic activity and the report revealed that the economy appears to have greater strength than had previously thought.

According to Macroeconomic Advisers, economic output or GDP likely grew at a 2.7 percent annual rate in the third quarter, six-tenths of a point more than its previous view. Nonetheless, the positive signs that the economy is strengthening -- growth averaged under a 1 percent pace in the first half of the year -- have not dispelled recession risks. A slowdown in Europe, where debt-laden countries are enacting austerity measures, could still weigh heavily on the United States.

Consumer confidence fell sharply over the summer as a bruising battle over the U.S. budget slammed stock prices and pushed the nation to the brink of default. After a modest reprieve in September, consumer sentiment for October sagged to 57.5 in the preliminary Thomson Reuters/University of Michigan survey for October, with expectations dropping to its weakest level in more than 30 years.

However, September's reasonable spending pace showed the crisis of confidence might not keep shoppers out of stores. For example, Americans lined up on Friday to buy Apple's latest iPhone as it went on sale.

Within the retail report, sales of motor vehicles and parts rose 3.6 percent last month, the largest gain since March 2010. Earlier this month, data showed U.S. auto sales rose to an annual rate of 13.1 million vehicles in September, a five-month high.

While car sales are recovering, even excluding autos, retail sales increased 0.6 percent in September, above forecasts for a 0.3 percent gain. There were also reports on Friday indicating higher growth in business inventories during August -- which also helps growth -- as well as an unexpected rise in import prices in September.

Sharp Increase in Gold Prices

Gold rose on Friday, posting its largest weekly gain in six weeks, as optimism about European plans to contain the region's debt crisis and a dollar drop lifted bullion with riskier assets in a broad rally.

Bullion tracked U.S. stocks and industrial commodities such as copper and oil higher, as French and German officials are trying to finalize a crisis resolution plan at this weekend's G20 meeting in Paris. Also supporting was news that China's inflation dipped, easing worries of further tightening.

Optimism over plans to tackle the debilitating euro zone debt crisis, as well as strong U.S. retail sales and corporate earnings, helped prompt the traditionally safe-haven metal to move in tandem with equities..

The metal rose 2.5 percent for the week for a second weekly gain. Gold futures for December delivery settled up $14.50 at $1,683 an ounce.

Trading volume has been sharply below the norm all week long. The turnover of gold futures has topped the average daily volume of 17.5 million ounces of gold on just one trading day so far this month.

Decreasing liquidity tends to result in elevated volatility, which in gold hit a 2-1/2 year high in the early part of this month before subsiding.

The 30-day correlation between gold and world equities turned positive for the first time in three months. And the inverse link between gold and the dollar was at its tightest since July, indicating lack of clear direction.

Gold ended above its 20-day moving average for the first time in a month, and technical analysts said bullion could retest its bearish double top set between late August and early September should prices rise above $1,700 an ounce.

Gold rose in lock-step with the S&P 500 for the week on hopes about progress to tackle the euro zone debt crisis, in spite of a downgrade to Spain's sovereign debt and a decision to grant Greece its agreed bailout money.

Gold-backed exchange-traded funds showed no major changes in the metals they held, suggesting strong investment demand.