The Overnight Report: A Good Friday Shove

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By Andrew Nelson

The Dow Jones industrial average gained 155.91 points, or 1.7%, while the 1.9% run on the S&P 500 to 1026.13 saw it blow past its previous 2009 closing high of 1012 and the Nasdaq was no slouch either, jumping 1.6%.

Stocks surged in New York last night, with a market wide rally making it four straight up days in a row. All three major stock indices hit new intraday peaks for 2009 and then went on to post their highest closes of the year. A report that showed the biggest jump in US existing home sales in years got the market off to its positive start. Then upbeat comments from Ben Bernanke added fuel to the Friday fire after the Federal Reserve Chairman suggested the US economy is nearing a recovery.

For the week, the Dow was up 2%, the S&P 500 gained 2.2% and the Nasdaq rose 1.8%. In an interesting aside, an article on the CNN website pointed out that since hitting a more than 12-year low in early March, the S&P 500 has gained more than 50% since as investors switch from panic mode into a steady, if still cautious stance of optimism

Gains were broad-based, with 29 of 30 Dow shares advancing on the day. Some of the notable leaders included industrials like 3M, Boeing and Caterpillar, tech giants like IBM and United Technologies, consumer goods makers like Johnson & Johnson and the oil majors Chevron and Exxon Mobil after a near 5% surge in crude prices.

But it wasn’t just the big stocks that were on the move, the small-stock Russell 2000, which has been the best of the 4 major indices of late, shot up about 2.2%. The index, which is comprised of the smaller to mid-sized companies that fuel the national economy, tends to provide a good indicator for the early stages of an economic recovery (so they say).

Traders were also busy settling expiring options positions on Friday, which not only added to volumes, but also had short investors buying to cover their positions, giving the market a little expiry-shove. The Chicago Board Options Exchange’s Volatility Index, or VIX, which uses options prices to gauge investors’ level of nervousness, was down 1.1% and trading in comfortable territory below 25.

It all started with news from the National Association of Realtors, which reported US home resales had increased by a stunning 7.2% in July. It was the largest monthly increase in at least 10 years, and was driven by first-time buyers rushing to take advantage of a tax credit that expires this fall. The news took all by surprise, as the size of July’s increase in sales was more than triple the expectations of the market, dragging quite a few fence sitters back into the market. The word “bottom” was bandied about quite a bit.

Then uncle Ben came to the party and it wasn’t just rice he was bringing. The Fed chief said in a speech at the annual Fed conference in Jackson Hole that the US economy is on the mend. Still, his tone was at least somewhat reserved and he did warn that the recovery that is coming will likely be slow in the making and that risks still certainly remain.

Bernanke also made a point of saying that unemployment will remain high, which isn’t surprising given yesterday’s worse than expected jobs data. Yet while not a weighty finding, the day also brought news that the number of states showing a drop in the unemployment rate tripled in July from June levels, according to a government report. While the news fell short of dispelling the data released yesterday, it seems that every little bit of good news is helping to build this case for recovery.

After a surprise loss and a punishing sell-down for Sears yesterday, clothing retailer Gap did a service for the retail sector. The company reported higher quarterly earnings that topped forecasts and while confirming that sales had fallen from a year ago, shares still gained 3% on the beat. Elsewhere in the sector, Ann Taylor beat expectations and teen chain Aeropostale reported a rise in same-store sales. Stocks were up 6% and 10% respectively.

AIG continued on with its winning ways, and after yesterday rallying 25% following a strategy speech from its new CEO, shares rose another 5% today after the troubled insurer won the dismissal of a US$1bn workers’ compensation lawsuit.

The US banking sector was also on a bender, helped by news that Morgan Stanley is planning a hiring spree. The company is looking to add up to 400 traders and salespeople as the investment bank looks to pull out of its string of quarterly losses. Bank of America and Citigroup also joined the party, with shares up 2%-3%.

The exuberance wasn’t just limited to stocks, with crude future once again linking back up with general market optimism to rise above US$74, buoyed also by weakness in the US dollar and by positive European economic data as well. Talk on the street posits that more and more speculative buyers are returning to oil at the same time as they buy back into stocks. This is seeing a seemingly correlated move in both markets. NYMEX light sweet crude climbed US98c to US$73.89 a barrel, just off its intraday high and a new closing peak for 2009.

Copper, grains and lumber also pushed higher in US trade as fears of weakening demand fade slowly into memory. At least for now. One thing that didn’t get any help from the upbeat economic news was the US dollar, which fell versus the euro and Aussie, but it did manage gains against the Japanese yen. Much of the dollar’s downside can be attributed to some strong PMI reads out of Europe, which did more to boost the euro than it did to take anything away from the greenback.

The good economic news from Europe and New York and the ensuing run in stocks, plus a weakening US dollar, meant it was always going to be a good day for base metals in London. Copper jumped almost 4%, although the gains across the rest of the complex were a little more sedate, with other metals closing between one and two percent firmer.

As far as the local reaction goes, the SPI thankfully reacted like you’d expect it to, shooting up 69 points, or 1.6%. The move gives pretty good insight into what should happen Monday morning in Sydney, but let’s not forget that we’re in the midst of the full-year reporting season, so Australian investors will have plenty of domestic news to digest on top of what happens on Wall Street.

Monday’s earnings watch stocks include Austereo ((AEO)), Fairfax ((FXJ)) and WorleyParsons ((WOR)).

For the full list of reporting dates and major economic data releases please check the FNArena calendar.

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