19.07.13 Friday Evening

The Dow Jones and SPX 500 are trading at record levels as the week comes to a close with Federal Reserve stimulus and better-than-forecast earnings driving the rally. The Dow Jones is trading over 20 percent higher than this time last year.

Ben Bernanke has made some significant steps this week towards clarifying the timing and pace of the inevitable stimulus withdrawal. The Fed has reiterated that high unemployment and low inflation are two major areas that need to be corrected before aggressive scaling back can be considered.

Whilst Bernanke emphasised that the central bank’s asset purchases are not on a pre-set course, the continuous stream of strong U.S. earnings is helping to aid the belief that the U.S. economy is on the path to recovery, reversing the trend of “bad news is good news” seen earlier this year.

Heavyweight U.S. equities such as Goldman Sachs, Bank of America and Morgan Stanley all reported better-than-expected earnings. Goldman Sachs has reported a surprise doubling of profits in its latest quarterly results. Its earnings were lifted by big returns on its own investments in shares and debts, which generated $1.4bn in net revenues, up from $200m a year ago.

Meanwhile over in the UK, banking and supermarket shares have led the way with Barclays, RBS, M&S, Tesco and Sainsbury’s rising between 4.15%-9.85%. The FTSE 100 has not been quite as strong as the Dow Jones but is still posting a 1.3 percent weekly gain.

Gains in banking shares have been driven by the Fed’s reassurances that its stance on monetary policy will remain as accommodative as necessary.

Additionally, new BoE governor Mark Carney has decided to keep bond purchases on hold, reversing the progress made by certain policymakers who were attempting to get reductions in motion. A vote of 9-0 to keep both interest rates and bond purchases on hold has sent a clear message

Supermarket shares have benefited from a bigger-than-expected rise in British retail sales. Posting a rise of 0.2 percent, this is now the second consecutive month of gains. The recent spell of sunny weather has no doubt contributed to a strong month for retail.

China will remove the floor on lending rates offered by the nation’s financial institutions as economic growth slows and authorities push forward with measures giving its banks more freedom to set borrowing costs.

Raising the deposit-rate ceiling would improve household incomes and reduce the attractiveness of non-traditional wealth management products while threatening banks’ profit margins.

Seeing as the Dow and SPX 500 are at all-time highs and the FTSE 100 is approaching its own, market participants will be hesitant to take up any long positions in the fear that resistance levels will prevent any further gains. It may take something significant to push past levels were currently seeing.

Stock of the Week:

International Consolidated Airlines – Seen 7.3% higher from the week open at 288. Have had their overweight rating reaffirmed at Morgan Stanley. This comes after Deutsche Bank reiterated their buy rating on shares of IAG, Price target of $4.98.

Next Week’s Notable UK Earnings:

Tuesday –

• Provident Financial Interim 2013 Earnings Release
• Carpetright Q1 Interim Management Statement
• PZ Cussons Preliminary 2012 Earnings Release

Wednesday –

• Renishaw Preliminary 2013/13 Earnings Release
• Kingfisher Q2 Pre-Close Update
• ARM Holdings Q” 2013 Earnings Release
• Talktalk Telecom Group Q1 2013 Interim Management Statement
• Close Brothers Group Pre-Close Trading Update
• J D Wetherspoon Q4 Interim Management Statement
• GlaxoSmithKline Q2 2013 Earnings Statement
• IQE Trading Update
• National Express Half Year 2013 Earnings Release
• British Land Company Q1 2013/14 Interim Management Statement

Thursday –

• SAB Miller Q1 2014 Trading Statement
• Bodycote Interim 2013 Earnings Release
• Rolls-Royce Holdings Interim 2013 Earnings Release
• Cable & Wireless Communications Q1 2013/14 Interim Management Statement
• BT Group Q1 2013/14 Earnings Release
• Reed Elsevier Interim 2013 Management Statement
• Travis Perkins Interim 2013 Earnings Release

Next Week’s Notable Economic Data:

Monday –

• USD – Existing Homes Sales

Tuesday –

• CAD – Core Retail Sales
• NZD – Trade Balance

Wednesday –

• AUD – CPI q/q
• CNY – HSBC Flash Manufacturing PMI
• EUR – French Flash Manufacturing PMI
• EUR – German Flash Manufacturing PMI
• USD – New Homes Sales

Thursday –

• EUR – German Ifo Business Climate
• GBP – Prelim GDP q/q
• USD – Core Durable Goods Orders m/m
• USD – Unemployment Claims