Market Drivers: Earnings, Metals Market, Fed Speaks

Coach Rick Pitino

Coach Rick Pitino (Photo credit: bradjward)

The market started the week on the heels of 13 straight weeks of alternating gains and losses for the S&P 500, with the streak being broken by consecutive gains as the week progressed. The surge has been fueled by optimism about continuing Fed stimulus, and could also be a result of some shorts recognizing that this a tough market to bet against! Here are three things that have been driving the market this week:

Earnings Kickoff

Initial forecasts for Q1 earnings appear to be on the low end, or as Dan Burrows from InvestorPlace puts it, “The bar has been set so low that companies should be able to trip over it." With such weak expectations, there will be pressure for companies to significantly beat numbers in order to get a reaction from investors. As always, forward looking guidance will again be keenly watched by investors for clues about future growth. Alcoa kicked off the “official” start to earnings season Monday night, beating on earnings, but the company's revenue saw a 2.9% year-over-year decline as they continue to deal with low aluminum prices. AA shares fluctuated between the plus and minus side throughout Tuesday’s morning session, ending the day unchanged.

Metal Demand

The production and demand of base metals is often seen as the building block of industrial growth and a proxy for a strong economy. These base metals are needed to build houses (copper), factories (steel), planes (aluminum), etc., so strong demand means people are building, buying, and spending! With hopes that the U.S. and global recovery is firming, base metal producers have ramped up production in order to meet anticipated demand both in the U.S. and abroad. This has led to an increase in inventories, but unfortunately inventory growth has increased faster than demand. The excess supply overhang is having downward pressure on pricing. Take copper for example, which recently fell to an eight month low on the London Metal Exchange. While lower metals prices could be viewed as a positive force, the underlying drivers for the decreasing demand could be a warning about current growth trends in the market.

Fed Minutes Release

The minutes from the latest Federal Open Markets Committee Meeting were released at 9:00 am on Wednesday instead of the anticipated 2:00 pm release, following a report that transcripts were inadvertently sent out to about 100 congressional staffers, and lobbyists the prior afternoon. There were no obvious signs that the information was traded on, but there will surely be a thorough review. As far as the report, it shows that a “majority of Federal Reserve policymakers want to continue extraordinary bond purchases to help boost the U.S. economy at least through the middle of the year." However many members have indicated they would like to slow the program by year end, as long as the economy continues to show sustained improvement(keep in mind, the meeting occurred prior to the relatively poor economic data last week).  The big takeaway here is that these purchases will be winding down only against the backdrop of solid economic improvement. The Fed is basically removing some of the uncertainty from the market with regards to when the stimulus will be removed. Equity markets responded to the news with a rally that indicates investors do not believe it will be happening any time soon.

Weekly Bonus – A Loyal Coach

As an added motivation, to an already very strong Louisville Cardinals men’s basketball team, coach Rick Pitino gave the players some added incentive to win a national championship. Earlier in the season, the 60 year old coach agreed to get a permanent tattoo if the team achieved their goal. So after the team’s 82-76 victory over Michigan, the coach is standing by his promise. Now, the only questions left to be addressed are what it will look like, as well as where it should be placed.  To voice your opinions on the topic, please feel free to tweet them with hashtags #PitinoTattoo and #RickPitinoTattooIdeas.   

Enhanced by Zemanta