Market Analysis

Beyond the Numbers

BoJ’s Benevolence May Help Markets Extend Rally
10/31/2014 9:15 AM

The major U.S. index futures are pointing to a sharply higher opening on Friday, with sentiment reflecting optimism over accommodative central bank stance after the Bank of Japan surprised the markets with an unexpected easing. The message seems to be going out loud and clear that central banks will not abandon the global economy which is recovering in fits and starts. Data released earlier in the day showed that U.S. personal income unexpectedly fell, while euro zone inflation quickened, although remaining well below the 2 percent target-all giving enough reasons for traders to remain invested in stocks.

U.S. stocks advanced solidly on Thursday in the wake of positive U.S. GDP data and some encouraging earnings. The major averages showed tentativeness at the open, but the Dow Industrials advanced steadily before consolidating in the afternoon and ending up 221.11 points or 1.30 percent at 17,195.

The S&P 500 Index moved into positive territory in late morning trading and hovered above the unchanged line for the rest of the session, closing 12.35 points or 0.62 percent higher at 1,995. Meanwhile, the Nasdaq Composite languished below the unchanged line for much of the morning before staging a volatile recovery in the afternoon. Nevertheless, the index ended up 16.91 points or 0.37 percent at 4,566.

Twenty-five of the thirty Dow components closed higher, with Visa (V) leading the upside with a more than 10 percent rally in reaction to its results. DuPont (DD), Home Depot (HD), Johnson & Johnson (JNJ), Coca-Cola (KO), Merck (MRK), Nike (NKE), Pfizer (PFE) and UnitedHealth (UNH) also rose notably. On the other hand, Intel (INTC) slumped 3.95 percent and Microsoft (MSFT) lost 1.22 percent.

Among the sectors, networking, airline, biotechnology, utility and retail stocks gained ground, while gold, semiconductor and natural gas stocks moved firmly to the downside.

On the economic front, the Labor Department reported that jobless claims rose to 287,000 in the week ended October 25th from 284,000 in the previous week. Nevertheless, the four-week average edged down to 281,000, the lowest level in 14 years. Continuing claims calculated with a week’s lag rose by 29,000 to 2.384 million in the week ended October 18th.

The Commerce Department reported that U.S. GDP rose 3.5 percent quarter-over-quarter in the third quarter following a 4.6 percent increase in the second quarter. Net trade added 1.3 percentage points to growth, while inventories deducted 0.6 percentage points from growth. Personal consumption rose 1.8 percent, while gross private investment was up merely 1 percent.

Currency, Commodity Markets

Crude oil futures are sliding $0.94 to $80.18 a barrel after falling by $1.08 to $81.12 a barrel on Thursday. An ounce of gold is currently trading at $1,168.90, down $29.70 from the previous session’s close of $1,198.60. On Thursday, gold slumped $26.30.

Among currencies, the U.S. dollar is trading at 111.89 yen compared to the 109.21 yen it fetched at the close of New York trading on Thursday. Against the euro, the dollar is valued at $1.2549 compared to yesterday’s $1.2613.


The major Asian markets advanced solidly, encouraged by the Bank of Japan’s decision to ease monetary policy further and the positive close on Wall Street overnight.

The Japanese market, which was moving sideways above the unchanged line till late afternoon trading, jumped on the Bank of Japan announcement and ended up 755.56 points or 4.83 percent at 16,414, its highest level in about 7 years.

The yen weakened to its lowest level since 2008, sending export stocks higher. All but 6 of the 225 index components ended the session higher.

Australia’s All Ordinaries hovered above the unchanged line throughout the session before closing up 47.90 points or 0.88 percent at 5,505. The market witnessed a broad based rally.

Hong Kong’s Hang Seng Index closed at 23,998, up 296.02 points or 1.25 percent, and China’s Shanghai Composite Index closed 29.10 points or 1.22 percent higher at 2,420.

On the economic front, the Bank of Japan unexpectedly expanded its stimulus program following the conclusion of its two-day Monetary Policy Board meeting. By a 5-4 vote, the board decided to raise the monetary base at an annual pace of about 80 trillion yen. The earlier plan was to increase it by about 60 to 70 trillion yen.

Core Japanese inflation that excludes volatile prices of fresh food eased to 3 percent in September from 3.1 percent in August, according to a report released by the Ministry of Internal Affairs and Communications.

A separate report showed that the Japanese unemployment rate came in line with expectations at 3.6 percent in September, but up from 3.5 percent in August. Meanwhile, average household spending in Japan fell 5.6 percent year-over-year in September compared to expectations for a 4.3 percent drop.

Japan’s Ministry of Land, Infrastructure, Transport and Tourism also released a report showing a 14.3 percent year-over-year drop in housing starts. However, the decline was not as steep as the 17.2 percent drop expected by economists.


European stocks opened notably higher and are advancing amid optimism concerning global growth set in motion by the Bank of Japan’s monetary policy decision. The gains come despite the release of some disappointing economic reports.

In corporate news, BNP Paribas reported higher third quarter net profits. IAG reported a 30 percent jump in third quarter profits and also raised its guidance.

Brewer Anheuser-Busch InBev (BUD), known as AB InBev, reported a small increase in its third quarter profits. RBS (RBS) reversed to a profit in its third quarter, with the bottom line results exceeding expectations.

On the economic front, a report released by GfK showed that U.K. consumer confidence weakened in October. The consumer confidence index slid to –2 in October from –1 in September.

German retail sales declined at the fastest pace since May 2007 in September, data from the German Federal Statistical Office showed. Retail sales were down 3.2 percent in September from August, while economists forecast a 0.9 percent drop.

Flash estimates released by Eurostat released two showed that euro area inflation rose to 0.3 percent annually in October from 0.2 percent in September, in line with estimates. The region’s jobless rate remained unchanged at 11.5 percent in September, according to a separate report.

U.S. Economic Reports

Personal spending in the U.S. unexpectedly decreased in the month of September, according to a report released by the Commerce Department, with the drop in spending accompanied by weaker than expected personal income growth.

The report said personal spending dipped by 0.2 percent in September after climbing by 0.5 percent in August. The modest decrease came as a surprise to economists, who had expected spending to inch up by 0.1 percent.

Additionally, the Commerce Department said personal income edged up by 0.2 percent in September following a 0.3 percent increase in the previous month. Economists had expected income to rise by another 0.3 percent.

The employment cost index released by the Labor Department showed a 0.7 percent sequential increase in the third quarter, more than the 0.5 percent increase expected by economists.

San Francisco Federal Reserve Bank President John Williams will take part in a panel discussion at the South African Reserve Bank in Pretoria at 9 am ET.

MNI Indicators is scheduled to release the results of its business survey for the Chicago region at 9:45 am ET. The consensus estimate calls for the Chicago business barometer to remain steady at 60.5.

The business barometer fell to 60.5 in September from 64.3 in August. The inventories index rose to 70.8 from 61.2, indicating the fastest pace of growth since February 1973. The production, new orders and order backlogs indexes remained elevated despite declining from the previous month.

Reuters and the University of Michigan are due to release the final results of their consumer sentiment survey for October at 9:55 am ET. Economists expect the index to remain unchanged from the mid-month reading of 86.4.

Stocks in Focus

Among oil companies, Exxon Mobil (XOM) and Chevron (CVX) reported better than expected results

Starbucks (SBUX) reported fourth quarter earnings that came in line, while its revenues missed expectations. The company’s full year earnings guidance was weak.

LinkedIn (LNKD) reported better than expected third quarter results and raised its outlook for the full year. Groupon (GRPN) reported third earnings and revenues exceeding estimates, while its fourth quarter guidance was weak.

Citigroup (C) said it is downwardly adjusting its previously published third quarter results due to a $600 million increase in legal accruals. Accordingly, the company’s net income is now 88 cents per share as opposed to the $1.07 per share reported earlier.

Western Union (WU) reported third quarter earnings and revenues that exceeded estimates. Mylan (MYL) also reported better than expected results and raised its earnings guidance for the full year.

Live Nation’s (LYV) third quarter results also exceeded expectations. While Fluor (FLR) reported better than expected earnings, its revenues trailed expectations.

Mohawk’s (MHK) third quarter earnings beat estimates, while its revenues were shy of expectations. Expedia’s (EXPE) third quarter results were better than expected.

Public Storage (PSA) reported better than expected third quarter funds from operations and revenues. Newmont Mining’s (NEM) third quarter adjusted earnings and revenues were also ahead of expectations.

Microchip Technology (MCHP) reported in line second quarter results, while its revenues were shy of estimates. The company’s third quarter guidance was in line.

Fred’s (FRED) announced the appointment of Jerry Shore as its CEO after incumbent Bruce Efird announced his intention to leave the company following the expiration of his employment contract.

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