Despite a very rocky start, U.S. equity markets managed to push higher and finish the week on a high note, extending the weekly winning streak for the Dow and the S&P to seven. The Dow finished ahead by 55 points while both the Nasdaq and the S&P 500 rose by 0.7%, capping off another solid week for the Street. Commodity markets were not as lucky, however, as gold tumbled by almost 1.9% and soft commodities– such as cotton and sugar– declined significantly as well. Nevertheless, oil managed to continue its recent surge finishing the day ahead by almost 30 cents a barrel. The news was equally mixed for the Treasury market where bond prices wavered in the long-dated issues but remained firm in the shorter maturity securities which finished flat for the day.
Markets were buoyed in Friday trading thanks to a solid earnings report from JP Morgan which helped to lift the entire financial sector heading into the Holiday-shortened week. The banking giant posted a 47% jump in fourth-quarter profits, handily beating analyst expectations thanks to strong revenues and a reduction in loan-loss reserves. While this report pained a rosy picture for the American economy, resource and energy firms were mostly weaker thanks to increased concern over the situation in China. Many believe that the Chinese government will be forced to raise rates in order to stop inflation in its tracks, a situation which looks likely to curb demand for a variety of commodities should the economy tumble from its current impressive growth levels. This gloom was further matched by more worries in the consumer sector of the market as traders reacted to a weaker-than-expected increase for retail sales in December of 0.6% suggesting that the American consumer is still struggling in this economic environment. “It’s one of those tales of two markets,” said Margie Patel, senior portfolio manager of the Wells Fargo Advantage Diversified Income Builder Fund. “The business sector is a pillar of strength. Consumers are still relatively weak.”
One of the biggest gainers in the ETFdb 60 was the Vanguard European ETF (VGK) which surged by 1.4% in Friday trading. The fund was a beneficiary of solid bond auctions throughout the week in a number of prepherial euo zone countries. These auctions helped to cool market fears that the euro was on the verge of collapse and it sent investors back into a number of financial companies on the continent. “The first test of the ability of the euro-area peripheral countries to secure financing on the market has been passed,” a team of economists at Intesa Sanpaolo SpA, including Luca Mezzomo and Paolo Mameli, wrote in a report today. “The fears over the outcome of the January auctions in Portugal, Spain and Italy proved unfounded.” Markets also rose on news that the EU may be considering adding to its already massive bailout fund in order to help struggling economies back up their debt and receive funding at a reasonable rate. Some reports suggest that the current program could see its effective lending capacity rise to 440 billion euros, enough to holdover even the biggest European economies [see more charts of VGK here].
One of the biggest losers on the day was the Market Vectors Gold Miners ETF (GDX) which sank by 2.1% to close out the week. These losses were largely the result of two key foreign factors which helped to curb the appeal of the safe-haven metal. First, an improving situation in Europe has given many renewed optimism that the embattled euro zone will be able to find a way out of its current mess and thrive as a common currency. This has reduced demand for gold as a form of protection against this collapse which has pushed prices lower over the past few trading sessions. Meanwhile, China appears to be on the brink of raising banks’ reserve-requirement ratio by half a percent in order to help stop inflation, a move that could help to limit the demand for the metal in the emerging market since the yellow metal is often considered a great hedge against inflation. Together, these two stories helped to keep gold prices subdued pushing the metal down to the lowest level in nearly two months. “The market needs some fresh, scary news to drive it higher,” said Ralph Preston, market analyst with Heritage West Financial. “All the bad news has already been baked into the cake.” [see holdings of GDX here].
Disclosure: No positions at time of writing.