Reinvigorated Wall Street flirts with records again

18 Jun, 2007

After a brief scare on inflation and interest rates, Wall Street has regained momentum and is flirting with new record highs as the market prepares for the upcoming corporate earnings season. The market posted solid gains in the week to Friday, recovering from a bruising in the prior week when investors were roiled by a spike in bond yields.
The Dow Jones Industrial Average rallied 1.60 percent in the week to 13,639.48, within 40 points of its all-time high hit earlier this month.
The broad-market Standard & Poor's 500 advanced 1.67 percent to 1,532.91, approaching its all-time high of 1,539.18 on June 4.
The tech-dominated Nasdaq composite lifted 2.07 percent to end the week at 2,626.71.
Investors appeared to recover from the recent rout on the bond market that sent yields up to their highest levels in five years. Avery Shenfeld, economist at CIBC World Markets, said markets have come to the realisation the rise in bond yields was linked to stronger economic growth and not resurgent inflation.
Although this means the Federal Reserve is unlikely to cut interest rates, Shenfeld said a hike in rates is not on the cards in the United States.
"The reason yields have risen around the world is that global economic growth has surprised to the upside, extending the tightening rounds underway in Europe, the UK, Australia and elsewhere, and quelling talk of a Fed ease," he said.
"Stronger growth carries with it the prospect of related earnings gains, particularly for globally levered multinationals or resource producers." Shenfeld said the market is now poised for an acceleration of US economic growth to as high as a 3.5 percent pace after the weak 0.6 percent rate in the first quarter.
Data over the past week appeared to comfort investors worried about inflation. Although price indexes were high, "core" inflation excluding food and energy was tame, suggesting easing price pressures ahead.
"Consumer spending - the economy's leading edge - seems to be navigating the short-term squeeze from higher energy costs, while underlying inflation pressures continue to cool," said Citibank economist Robert DiClemente in a note to clients.
"The latter is critical, as easing price pressures are a stabilising force on the outlook." In the coming week, investors will examine data on housing starts to determine if the property market slump is easing. More significantly, the market gears up for the second quarter earnings season as companies prepare their balance sheets for the period to June 30.
"The recent focus on inflation and interest rates masked the fact that there have been relatively few earnings warnings," said Gregory Drahuschak, analyst at Janney Montgomery Scott.
"Another solid earnings report period could propel the Dow and S&P 500 significantly above their recently set all-time highs. How much potential above these peaks the major average can go is a key question, which the upcoming earnings season likely will answer."
The bond market steadied somewhat after the worst rout in years, which pushed the 10-year Treasury yield above five percent. The yield on the 10-year Treasury bond increased to 5.171 percent from 5.118 percent a week earlier while the 30-year bond yield increased to 5.263 percent from 5.220 percent. Bond yields and prices move in opposite directions.

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