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Europe and the USA get thumbs up

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by Peter Switzer

There are three reasons why stocks could go up or down in the final quarter of the year — a quarter historically prone to a nice rise for stock markets. Those three are Europe, the USA and China and two of these key determinants for share prices got it right overnight.

As a consequence, the Dow was up 80.75 points or 0.6 per cent to 13,575.36 while the S&P 500 index added 10.41 points or 0.72 per cent to finish at 1461.4.

The markets are doing well despite technical readings suggesting current levels of key indexes could be tested. The charts can be baffled by left-field events and we got one from Europe with the European Central Bank (ECB) boss, Mario Draghi, saying the bond-buying program had reduced borrowing costs of the likes of Italy and Spain and that the Bank is ready to move when it has to. This was a strong hint that when Spain asks for its bailout assistance, the ECB is ready to help. The markets liked this as it reduced fears about Europe and any future mess, but the response would be better if Spain gave in and faced up to its predicament.

The ECB kept interest rates at 0.75 per cent, which means it still has three shots left in its locker, which most hope won’t have to be fired.

On Wall Street

Meanwhile the Yanks liked Mitt Romney’s stronger than expected showing in the first presidential debates and while factory orders showed a big drop, it was less than experts tipped.

Also jobless claims as well as planned layoff data, which was at a 20-month low, added to a slowly improving economic picture in the USA. The Yanks could really do with a great jobs number tomorrow and if it happens that way, stocks could soar. However, the opposite could be the case.

The key number for tomorrow is 113,000 — that’s what the experts have speculated about — and so if it’s better, markets could get even more positive.

Helping the bulls believe in a US recovery was BlackRock’s CEO — Larry Fink — who told CNBC that the US fundamentals were “quite strong” and the housing sector was “inching closer to a compete rebound”.

Though he thinks there’s a year to go for a “full rebound”, this positivity from someone who runs the world’s greatest funds business, effectively managing more money than the Federal Reserve, as CNBC pointed out, is a nice prop for anyone who believes the worst of the GFC issues are gradually getting behind us. We’re not there yet, but it’s an improving picture and that’s why stocks are up.

Doll’s view

Fink’s head of equities, Bob Doll, thinks stocks will have another year of gains over 10 per cent next year and he has proved to be a good predictor of share price movements.

However, he thinks the ECB has got it right but worries about European politicians.

On the fiscal cliff, he says it’s a big negative holding back US companies but if it gets resolved he sees a “huge rally”. But obviously, if Fink is right, and I think he is, if this fiscal cliff proves to be a big problem for Congress to settle, then stocks could be trashed.

In summary, both Europe and the USA are giving me positive vibes — at least for the moment — but the new question mark is China and whether it can start producing something that adds to my positive picture.

I will be watching the Shanghai Composite index and sweating on some overdue rises.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, October 05, 2012