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While you were sleeping Wall Street off to good start

Tuesday 7th August 2012

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Stocks advanced on both sides of the Atlantic as most US companies seem to have escaped the latest quarterly earnings season relatively unscathed, while there are reasons to be optimistic that Europe's sovereign debt crisis is being kept in check.

In late afternoon trading in New York, the Dow Jones Industrial Average rose 0.56 percent, the Standard & Poor's 500 Index gained 0.55 percent and the Nasdaq Composite Index climbed 1.04 percent. In Europe, the Stoxx 600 Index finished the session with 0.5 percent advance on the previous close.

German Chancellor Angela Merkel's government backed the European Central Bank's bond-buying plan, Bloomberg News reported, citing a government spokesman. ECB President Mario Draghi has said the central bank will purchase short-dated bonds of Italy and Spain to help ease their borrowing costs if and when needed.

The yield on Spain's two-year note sunk 48 basis points to 3.48 percent, while the yield on Italian two-year notes fell eight basis points to 3.05 percent.

The commitment to help both countries is a welcome sign for investors as the strains of the euro zone crisis has hampered the recovery of the world's largest economy. Still, with lowered expectations, the most recent round of American quarterly earnings has managed to by and large surpass these estimates.

"The earnings season has again surprised primarily because expectations were so low," James Paulsen, the chief investment strategist at Minneapolis-based Wells Capital Management, told Bloomberg. The prospect for bond purchases by the ECB "has also boosted bullish attitudes among investors."

To be sure, Federal Reserve Chairman Ben Bernanke told a research conference that many Americans are still struggling amid signs of recovery.

"Even though some key aggregate metrics -- including consumer spending, disposable income, household net worth, and debt service payments -- have moved in the direction of recovery, it is clear that many individuals and households continue to struggle with difficult economic and financial conditions," Bernanke said in a prepared text.

The US Treasury will sell US$32 billion of three-year notes tomorrow, US$24 billion of 10-year notes on August 8 and US$16 billion of 30-year bonds the following day.

"On a relatively slow day, the back and forth of competing European headlines may once again drive Treasury prices," Ian Lyngen, a government-bond strategist at CRT Capital Group in Stamford, Connecticut, told Bloomberg. "We'll probably look for supply to create a concession."

Investors were pleased with the plans of Best Buy's founder and former chairman, Richard Schulze, to buy the shares he does not already own in the electronics retailer for US$24 to US$26 each. Shares of Best Buy soared 14 percent to US$20.10.

A group of investors rescued Knight Capital Group in a US$400 million deal that keeps the embattled leader in US equities market-making in business, but comes at a huge cost to existing shareholders.

Chief Executive Tom "TJ" Joyce told Reuters the new investors supported him and his management team, but it was too early to tell whether the firm would shrink or keep the same strategy it had before last week's losses.

BusinessDesk.co.nz

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