Wall Street continued to build on the previous day’s late rally following a jump in housing starts and encouraging results from major US retailers.
Home construction in the US jumped to 672,000 units in April, according to data released by the US Department of Commerce. This represents a 5.8% improvement on the previous month and is ahead of the 650,000 median estimate shown in a Bloomberg survey. The figures suggest that the embattled US housing market has continued to recover on the back of the government’s incentive scheme for new homeowners.
With the incentive now expired, it would be interesting to see if the US housing market has obtained enough momentum to continue recovering on its own. The likelihood is that it won’t continue to accelerate without policy incentives. A stubbornly high unemployment rate, rising inventories of unsold homes and elevated building material costs, due to the stronger US dollar, are likely to exert pressure on US housing activity. As a matter of fact, building permits, a gauge of future construction activity, dropped to the lowest level in six months, tumbling 12% to a 606,000 annual pace in April.
US equities were also supported by data pointing to subdued inflationary pressures, an indication that the Fed is likely to keep interest rates on hold. Producer prices in April remained relatively flat, falling 0.1% on the month, while prices excluding food and energy rose 0.2%, according to data also released by the Department of Labor today.
By 3.30pm (London time) the Dow Jones Industrial Average had advanced 55.92 points (0.52%) to 10681.75, while the broader S&P 500 index gained 6.39 points (0.56%) to 1143.33. The tech-heavy NASDAQ 100 was a marginally higher by 0.16 points (0.01%) to 1915.61.
There was a string of results from heavyweight retailers in the US today. Firstly Wal-Mart, the world’s largest retailer, exceeded analysts’ expectations by reporting first-quarter profits of $3.32 billion, or 88 cents a share. According to Thomson Reuters, expectations were for 85 cents a share, and the better-than-expected result saw the shares advance 2.28% to $53.93. However, sales from US stores were lower than expected. This was primarily due to Wal-Mart’s chain of discount stores underperforming, suggesting consumers are switching their purchases to more discretionary items rather than focussing on bargain products.
This echoes comments from Home Depot, which also topped analysts’ forecasts after unveiling a 41% surge in first-quarter profits. The world’s largest home improvement retailer benefited from customers purchasing big ticket items such as riding mowers and carpet installations. ‘Our solid start to the year was driven by great performance in seasonal categories and strong growth in customer transactions,’ said Frank Blake, chairman & CEO of Home Depot. The results prompted the retailer to raise its full-year outlook, sending the shares higher 1.15% to $36. The sentiment is in contrast to yesterday’s comments from rival Lowe’s, which issued a more cautious outlook for 2010, suggesting it would have to wait until 2011 until significant growth is achieved.
Teen apparel retailer Abercrombie & Fitch was also able to report better-than-expected results. The company did report a loss for the quarter, but it was on par with expectations polled from Thomson Reuters, with a loss per share of 13 cents as opposed to a loss of 68 cents per share one year earlier. The company is planning to expand its international presence to mitigate dwindling US demand, with flagship stores to be opened in Madrid, Copenhagen, Denmark and Fukuoka. Stocks in the company rose 1.20% today to $41.27.
Bank of America saw its shares increase 1.16% to $16.54 after a Bloomberg article indicated that 56 investment groups had bought into the bank in the last quarter, including infamous Paulson & Co., the hedge fund led by John Paulson, who made a fortune betting against the US mortgage market. Confidence is also returning to the banking sector after talks were held yesterday among EU officials in Brussels over details of how the €750 billion rescue funds will be administered. Citibank added 1.30%, JPMorgan gained 0.53% and Morgan Stanley was up 0.48%.
Resource stocks also benefited from a rebound in commodity prices with Alcoa 1.07% higher, Chevron up 0.78% while Exxon Mobil made a gain of 0.61%.
In contrast to yesterdays swathe of fresh M&A deals, today saw a series of potential deals collapse. A consortium led by Blackstone group has dropped their bid for Fidelity National Information Services, in what would have been the largest leveraged buyout in almost three years. Talks stumbled as a fair price could not be settled between the parties. As a result Fidelity fell to the bottom of the S&P 500, slumping 6.48% to $27.01.
Another bid to fall through came in Australia after Macarthur Coal rejected US-based Peabody Energy’s latest bid. The bid was revised downward, in part, due to the proposed super-tax cutting into profits. Shares in Macarthur slumped 15.73% on the ASX 200, while Peabody gained 3.84% to $41.13.
