Hopium Lifts Equities As Budget Talks Are Still Alive; Europe Turns Lower On Cliff Worries

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

Led by gains in financial stocks, US equity indexes pushed higher with the S&P 500 logging its biggest gain in about a month, as markets weighed news of progress on budget negotiations in Washington to avoid tax hikes and spending cuts that may tip the economy back in recession.

With about two week weeks remaining to avert going over the fiscal cliff, House Speaker John Boehner met President Obama for about 45 minutes at the White House. Boehner has suggested over the weekend, he was open to higher tax rates for wealthiest Americans while, according to Bloomberg, Obama is considering concessions on Social Security benefit increases in return. Boehner has also offered to extend the debt ceiling for a year in order to help reduce the budget deficit, reported CNN.

Separately, manufacturing in the New York region shrank more than forecast in December with the Empire State manufacturing index falling to minus 8.1 from minus 5.2 in November. The New York Fed’s benchmark is in the negative territory for the fifth straight month now, but at this point the markets chose to ignore bad fundamental news.

The Dow Jones Industrial Average (DJIA) zoomed 100 points, logging its first gain in four sessions. Banks, led by Bank of America and JP Morgan Chase, were among the day’s biggest gainers.

The S&P 500 Index (SPX) jumped 1.2 percent, capping its biggest gain since November 23.  All the 10 business groups rose for the day with financials fronting the gains and consumer staples lagging.

Treasury prices declined, pushing yields up for the fourth-session in five as optimism over a budget deal in Washington grew, easing demand for safer assets.

The dollar strengthened against the yen Monday, touching its highest level since April 2011 after Shinzo Abe-led Liberal Democratic Party won a landslide mandate in elections, reinforcing expectations of further monetary easing in Japan.

European stock markets turned lower in choppy trading on Monday, as investors remained cautious amid ongoing budget negotiations in the US. The pan-European Stoxx Europe 600 index shed 0.1 percent to end at 279.18 in London as investors turned risk-averse ahead of the holidays.

The DAX 30 index rose 0.1 percent in Frankfurt, lifted by Infineon Technologies while the CAC 40 index fell 0.2 percent in Paris, dragged lower by banks BNP Paribas SA and Credit Agricole SA.

In the ETF space, the Global X Uranium (URA) rose 5.79 percent after the victory of pro-business and pro-nuclear Liberal Democratic Party in Japan.  The LDP is expected to introduce new measures that will provide a major boost to the global uranium sector.

The Select Sector SPDR-Financial (XLF) also jumped, adding 2.06 percent on the day.

Our Trend Tracking Indexes (TTIs) moved higher with the Domestic TTI now positioned at +1.63% above its long-term trend line, while the International TTI has zoomed to a very lofty +7.03%.

A budget deal is assumed to be made, but you can never be sure. If it does not materialize, we may see a new meaning of the term market pullback. If it does happen, I have to wonder what driver will support these lofty index levels.

Disclosure: No holdings in ETFs discussed

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