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While you were sleeping: US banks deliver

Friday 20th January 2012

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Better-than-expected results from more US banks and solid demand for French and Spanish debt underpinned expectations that the outlook for growth in the global economy and corporate profits is improving.

Fourth-quarter results by Bank of America and Morgan Stanley surpassed expectations, a day after Goldman Sachs Group's earnings bettered forecasts too.

In early afternoon trading in New York, the Dow Jones Industrial Average rose 0.16 percent, the Standard & Poor's 500 Index gained 0.39 percent and the Nasdaq Composite Index advanced 0.75 percent.

"There has been some relief that financials might be along for the ride,” Brian Jacobsen, chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin, told Bloomberg.  “A lot of the pessimism has been baked into the cake. We’re more likely to see positive surprises.”

Investors are closely watching the tech companies reporting results after the close of trading today including Google, International Business Machines, Intel and Microsoft. EBay reported solid earnings after yesterday's close.

In Europe, the Stoxx 600 Index ended the session with a 1.2 percent gain. Here, financial stocks also had a good day. Shares of Commerzbank jumped 15 percent after the company outlined measures to bolster capital.

Meanwhile, debt sales by cash-strapped European Union nations continued to garner healthy demand, pushing borrowing costs lower. France and Spain, who each had their credit ratings cut by Standard & Poor's last week, auctioned debt.

France sold 7.97 billion euros of notes, just short of its maximum target, with the average yield on the benchmark two-year notes sliding to 1.05 percent from 1.58 percent in October, according to Bloomberg, while Spain sold 6.61 billion euros in bonds maturing in 2022, 2019 and 2016, more than its maximum target of 4.5 billion euros. It issued debt due 2022 at an average of 5.403 percent, down from 6.975 percent in November.

“Investors all heave a sigh of relief as the bond auctions are taking a successful course,” Peter Braendle, who helps manage US$60 billion at Swisscanto Asset Management in Zurich, told Bloomberg. “The market has developed rather pleasingly, despite France’s downgrade.”

There's little doubt that Europe's fiscal crisis is weighing on the global economy, though few expect major troubles ahead. Talks continue in Greece with the nation's major private creditors.

The world economy will lose momentum in 2012 but it will keep moving in the right direction, according to Reuters polls of about 600 economists. A Reuters poll that covers all of the top 20 developed and emerging economies, as well as some others in Asia, suggests global economic growth will slow to about 3.3 percent this year from an estimated 3.7 percent in 2011.

"We're fairly optimistic on the US, and we're in the soft-landing rather than the hard-landing camp for China," Investec economist Victoria Cadman, whose forecast for global growth in the high-three percent range is slightly more optimistic than the consensus, told Reuters. "[That's] notwithstanding the huge risks that the euro crisis poses if a more disorderly fallout results."

Data released today underpinned the optimism that the world's largest economy keeps slowly but surely gathering momentum. The number of Americans filing for new jobless benefits fell to a near four-year low last week and factory activity in the Mid-Atlantic increased. Even so, new home building dropped in December, reminding investors that the American real estate market is still struggling.

To be sure, some investors see enough reason to remain cautious.

"No question we've seen some encouraging news with earnings and Europe, but the question is whether we're getting ahead of fundamentals," Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, Ohio, told Reuters.

"Clearly things have improved, but it remains to be seen if there really has been a turn, or if this is just a January thaw ahead of more winter storms," he said. "There are still a lot of parts of the world with significant problems and concerning trends."


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