SmartUpdate Market News – Week Ending 1/20/12
In the headlines
A look at some of the market movers from the week:
- Sumitomo Mitsui Financial Group and Sumitomo Corp agreed to buy Royal Bank of Scotland’s aircraft-leasing business for $7.3 billion
- China’s GDP growth slowed in the fourth quarter, but was still 8.9% and ahead of expectations
- Shares of Carnival plummeted after its Costa Concordia cruise ship capsized
- Pembina Pipeline agreed to buy Provident Energy for $3.2 billion
- Founder Jerry Yang stepped down at Yahoo
- The International Monetary Fund is looking to raise $600 billion in new capital
- On Friday, Greece was closing in on a deal with creditors
- Wikipedia shut down for 24 hours to protest the Stop Online Piracy Act
- The World Bank lowered its global growth expectations
- Eastman Kodak declared bankruptcy
- President Obama rejected the plans for the controversial Keystone XL pipeline
- Intel reported better-than-expected earnings and shook up its management team
- Microsoft topped expectations, but highlighted falling PC sales
- Strong results from Bank of America and Morgan Stanley helped lift financial stocks
- Google shares slipped as results missed targets
- The market cheered strong results from IBM
- New York area manufacturing showed gains
- Initial unemployment claims fell to the lowest level in almost four years
Commentary
The 2012 surge continued over the past week, racking up another 2% gain by the close of trading on Friday. It was another holiday-shortened week, but following the Martin Luther King Jr. holiday on Monday, the S&P 500 managed to post four straight positive trading sessions, with a particularly strong 1.1% gain on Wednesday. The index has now tacked on 4.6% so far this year.
The week’s biggest gain on Wednesday came as the International Monetary Fund proposed raising $600 billion and Goldman Sachs reported better-than-expected earnings. The IMF may target raising $500 billion in new funds to increase its lending capacity, while taking in another $100 billion as a capital buffer. The organization has been focused on the Eurozone and its need for capital as it faces a crippling debt crisis.
Markets rallied as the move would provide some further firepower to help the Eurozone find its way out of its current rut. However, the plan could face significant hurdles as many of the G20 nations are averse to pumping more money into the Eurozone bailout. In particular, the U.S. has expressed that it has no plans to offer additional funding to the IMF.
Meanwhile, Goldman Sachs’ fourth-quarter earnings soared past analysts’ estimates and encouraged investors on the financial sector in general. Goldman’s earnings were down significantly from last year as it dealt with an increasingly inhospitable environment for both trading and capital raising, but cost cutting helped the investment bank report more profit than expected. Later in the week, Bank of America and Morgan Stanley underscored the stronger-than-expected results from Goldman by reporting better-than-expected earnings of their own.
As investors cheered the IMF’s capital-raising proposal, Greece worked to come to an agreement with its creditors that would pave the way for its next round of bailout funds. At week’s end, reports on the progress suggested that a deal may be close and could be struck over the weekend. In the deal being discussed, private bondholders may lose 65% to 70% of their investment, but it would avert a nasty default by the struggling country.
Other good news from outside the U.S. borders came from China as fourth-quarter GDP growth was higher than expected. Economic growth for the quarter clocked in at 8.9%, which was the weakest showing in two and a half years, but topped the anticipated 8.7% rate. As a high-growth giant on the global stage, the fate of China’s economy looms large for other major economies including the U.S. and European Union.
Balancing out some of the positive news from overseas was a dour global growth forecast from the World Bank. The bank cut its outlook for world economic growth from 3.6% per year in both 2012 and 2013 to just 2.5% in 2012 and 3.1% in 2013. While the World Bank said that the crisis in Europe appears to be contained, it noted that if it is allowed to get out of control there’s the potential for a wider crisis to drag down global growth by as much as 4%.
Back in the U.S., earnings season surged ahead. As with Goldman, B of A, and Morgan Stanley, there were quite a number of expectation-topping announcements that helped drive the market forward. Tech played a particularly prominent role, with eBay, IBM, Intel, and Microsoft all positing earnings beats. Other notable estimate-topping reports included BB&T, Southwest Airlines, Unitedhealth, American Express, and Freeport McMoRan.
On the other hand, there was a significant number of earnings disappointments including Citigroup, PNC Financial, Google, and Capital One. Thus far through earnings season, 60% of S&P 500 companies have topped analysts’ estimates. While that may sound good, it’s actually notably lower than the share of S&P companies that topped estimates in recent quarters. To be sure, the fact that companies aren’t topping estimates as often as they have could simply mean that Wall Street has gotten more optimistic and raised the bar for reporting companies. The data is based on just 14% of the index’s constituents having reported thus far, but is definitely a trend to watch.
Looking ahead
Starting off the week next week, the progress — or lack thereof — on the Greek debt talks may be what investors are most focused on. If an agreement is reached, there’s good reason to expect stocks to rally. If, however, bondholders balk at the terms of the proposal, global markets could end up fretting about the potential for a Greek default.
While Greece and Europe may play a prominent role in market movements next week, they’ll have to compete with a flood of earnings reports in the U.S. Fourth-quarter earnings season will be in full swing and there will be plenty of reports for the market to react to. Early in the week, significant reports will include Halliburton, Texas Instruments, Apple, EMC, Johnson & Johnson, McDonalds, Verizon, Yahoo, Abbott Laboratories, Boeing, United Technologies, and WellPoint. In the final two days of the week major announcements will come from 3M, AT&T, Bristol Myers Squibb, Caterpillar, Colgate-Palmolive, Lockheed Martin, Starbucks, Chevron, Ford, and Procter & Gamble.
The economic calendar will add a few additional events for investors to keep their eyes on. The Federal Reserve will make its rate decision on Wednesday. That will offer little surprise as far as where the central bank targets its key rate, but the commentary from the Open Market Committee will be closely watched. After a big surprise to the downside last week, it will be worth watching the weekly reveal of initial unemployment claims. Finally, we’ll get a very important first read on fourth-quarter GDP. Current estimates expect the quarterly growth to clock in at 3.1% after a lackluster 1.8% in the prior quarter.
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