U.S. stocks rallied as the S&P 500 booked its best one-day move since March.  Equities got a lift from tech-sector earnings and were then driven higher on news that Congress and the White House have come closer to compromise on the debt ceiling (as if a deal wasn’t going to get done before the August 2 deadline; this one may not be it, but something will get done).  The gains erased a good deal of last week’s losses.

But it was just stocks that showed optimism as the long-end of the Treasury curve rallied – up in price, down in yield is hardly a “risk-on” situation.  Frankly, stocks up/bonds up (and bonds up from currently super-hot price levels) has more of an additional-QE-is-coming look to it than anything else.  The afternoon rally was clearly driven by the debt-ceiling news but I’m just saying for yields to go even lower on this event makes no sense to me. 

Strong earnings reports out of Coca-Cola and IBM (on Monday we explained that tech earnings were rockin’, although we may be coming to the final innings of that cycle) offset a really bad earnings release from Bank of America, which amounted to the largest all-in quarterly loss in the bank’s history as they booked more costs related to defective mortgage securities.

Tech, consumer discretionary and energy shares led the rally.  Telecoms and consumer staples were the laggards but even these groups closed higher. 

Regarding the European scene, the financial markets (in most part) were able to ignore the issue for a day.  This was evident by the rise in equity markets and the narrowing in most euro-zone credit spreads – Italy and Spain in particular saw spreads narrow.  However, Greek spreads blew out wider as there is talk (I’m not saying there’s much to this story in the very short term, but there is talk) of a temporary removal of Greece from the zone as they allow for a temporary default.  How they manage a temporary expulsion is beyond me, let alone doing so without invoking a major run on peripheral-economy banks, but there were people talking about the event -- such as a member of the ECB -- so I bring it to your attention. 

Market Activity for July 19, 2011

Sector Activity for July 19, 2011

Housing Starts

Builders broke ground on 629,000 new homes at a seasonally-adjusted annual rate (SAAR) in June, up 14.6% from the 549K for May (a number that was revised down from the 560K initially reported) – the expectation was for 575K in June. 

So housing starts have increased for two-straight months, but for the quarter activity is slightly less than what we saw in the first three months of the year.  But even if the result were higher for Q2, it wouldn’t add much to overall economic growth anyway as housing is so beaten down that it accounts for less than 2.5% of GDP at this point – it hit 7% of GDP at the height of the housing bubble. 

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Have a great day!

Brent Vondera, Senior Analyst