Investors gave a sigh of relief and equity markets charged forward after the US Census Bureau reported a surprise jump in new US home sales last month.
US equity markets started the trading session relatively flat, unsure as to which direction to move following weak leads from European markets. That changed once the US Census Bureau announced a surprise jump in the number of new homes sold in the US last month. According to the report, 330,000 new homes were sold in June, a 23.6% increase on the previous month’s sales which was downwardly revised to 267,000. Economists surveyed by Bloomberg had forecasted a 3.3% increase over the previous month.
While the result provides a much needed boost for the fledgling US housing sector, we should keep in mind that the result comes off an incredibly low base, where new home sales plunged 36.7% in May (upwardly revised from 32.7%) following the expiry of the government’s incentive scheme. Nonetheless, investors will be relieved, as there were concerns that if the number of new home sales had come in weaker-than-expected then it could have derailed the recent rally in equities.
By 4.15pm (London time) the Dow Jones Industrial Average had gained 50.41 points (+0.48%), the S&P 500 Index was 6.83 points higher (+0.62%) at 1109.49, while the Nasdaq 100 edged forward 5.60 points (+0.30%) to 1880.98.
In a push to show that the US is serious about bringing down its massive fiscal debt, US Treasury Secretary Timothy Geithner announced yesterday that the government should allow tax cuts for the highest earning Americans to be lapsed later this year. The tax cuts were implemented during the Bush administration and Mr Geithner is suggesting that the cuts lapse only for the wealthiest Americans who earn over $250,000 a year, while extending the tax cuts for everyone else. Individuals earning over $250,000 only account for 2-3% of Americans – not enough to have a negative effect on growth in Mr Geithner’s view.
Adding to the positive momentum in equities this afternoon was an upbeat outlook from FedEx. The delivery specialist boosted its outlook for the remainder of the year on better-than-anticipated growth in their FedEx Express and FedEx Ground volumes. Earnings for the current quarter are expected to come in at $1.05 to $1.25 a share, up from a previous $0.85 to $1.05. Full-year earnings were revised upward to $5.20 a share, ahead of median forecasts of $4.96, according to analysts surveyed by Bloomberg. FedEx shares jumped 4.74% on the open to $82.70.
Banks were broadly higher this afternoon as the results of the European bank stress tests helped ease concerns over the eurozone debt crisis. Bank of America and Citigroup advanced 1.16% and 1.62% respectively, while JPMorgan edged a modest 0.35%.
Goldman Sachs bucked the trend and was trading lower this afternoon after a Bloomberg report showed that the investment bank may have had a higher exposure to insurance giant AIG than previously realised. If the US government had not bailed out AIG, then Goldman would have had to rely on the credit default swaps it held against AIG to protect its capital, with some of the major sellers of the credit default swaps being Citigroup and Lehman Brothers. Goldman would have had a lot of trouble cashing in the credit default swaps considering Citigroup was the beneficiary of the most bailout funds among all the US banks, and of course Lehman Brothers collapsed. Shares in Goldman Sachs retreated 0.79% to $146.21.
IBM was under the spotlight this afternoon over allegations by the European Union that it violated antitrust laws. The computer services giant is claimed to have abused its dominant position in the market by delaying access to spare parts for which only IBM had access to. IBM has hit back saying ‘Certain IBM competitors which have been unable to win in the marketplace through investments in fundamental innovations now want regulators to create for them a market position that they have not earned.’ IBM shares were down 0.55% to $127.68.
Sterling was broadly stronger against most currencies today and was trading near $1.5465 against the US dollar by 4pm (London time). Sterling is still being bolstered by last Friday’s GDP data which showed an unexpected jump in UK domestic growth of 1.1% in the second quarter. This has added to the recent confidence surrounding UK economic recovery and has seen a FTSE and sterling rally over the last few weeks. The euro has also edged higher against the US dollar as the European bank stress test removes a level of uncertainty over the region. The euro was trading near $1.2940 against the US dollar, up from its open of $1.2900, but struggling to break through the $1.3000 level.
Tomorrow the earnings season continues with DuPont, United States Steel, Office Depot and Lockheed Martin reporting. On the economic front, German retail sales will be published in the morning, while in the US the S&P/Case-Schiller Home Price Indices, Richmond Fed Manufacturing Index and consumer confidence levels for July are scheduled for release.
