Stock Market Shows No Taper Fear

Despite three solid economic reports, the stock market failed to demonstrate taperphobia with the FOMC meeting set for Tuesday and Wednesday.
 
Although Monday morning brought three strong economic reports, the stock market had a great day, with the major stock indices advancing by more than 0.5 percent. After seeing the stock market respond negatively to positive economic reports just before FOMC meetings, many investors were expecting to see some red numbers today.
 
The Federal Reserve reported that industrial production increased 1.1 percent in November. The Fed was obviously proud that its monetary policy had helped the economic recovery:
 
At 101.3 percent of its 2007 average, total industrial production was 3.2 percent above its year-earlier level. In November, industrial production surpassed for the first time its pre-recession peak of December 2007 and was 21 percent above its trough of June 2009.
 
The headline general business conditions index of the New York Fed’s Empire State Manufacturing Survey rose to positive 1.0 from November’s negative 2. On the other hand, a reading of 1 simply indicates stable business conditions. The labor market conditions index remained at zero from November.
 
The December Flash U.S. Manufacturing PMI report from Markit Economics indicated a slight dip in its headline index to 54.4 from November’s 54.7. Nevertheless, the report’s Commentary by chief economist Chris Williamson went beyond characterizing this as a strong report – to actually pointing out that this result could motivate the Fed to begin tapering its bond purchases:
 
“The flash PMI remained surprisingly high in December, suggesting strong growth momentum in the goods producing sector. The PMI fell just short of the November reading, which had been buoyed by a rebound after a disrupted October.
 
“Over the fourth quarter as a whole, manufacturing has enjoyed its best performance since the start of the year. Growth of output looks to have accelerated to an annualised rate of approximately 4% or more, and is driving greater job creation. The survey’s Employment Index rose to its highest since March, adding to indications that the manufacturing workforce is growing at a reasonable rate again.
 
“The survey is yet another indication that the U.S. economy has shown greater than expected resilience to the headwinds of the uncertainty caused by the government shutdown and debt crisis, and will add to the likelihood of the Fed tapering its huge stimulus of $85bn per month asset purchases sooner rather than later.”
 
The Dow Jones Industrial Average (DIA) picked up 129 points to finish Monday’s trading session at 15,884 for an 0.82 percent advance. The S&P 500 (SPY) surged 0.63 percent to close at 1,786.
 
The Nasdaq 100 (QQQ) climbed 0.56 percent to finish at 3,475. The Russell 2000 (IWM) jumped 1.16 percent to end the day at 1,119.
 
In other major markets, oil (USO) climbed 0.87 percent to close at $34.94.
 
On London’s ICE Futures Europe Exchange, February futures for Brent crude oil advanced 85 cents (0.78 percent) to $109.17/bbl. (BNO).
 
February gold futures advanced $5.50 (0.45 percent) to $1,240.10 per ounce (GLD).
 
Transports were in position to repair the Space Station’s cooling system on Monday, as the Dow Jones Transportation Average (IYT) climbed 0.78 percent.
 
In Japan, the exchange rate for the yen continued to be the dominant factor in stock market activity. Japanese stocks declined, despite a better-than expected Tankan Survey from the Bank of Japan. Sentiment among large manufacturing enterprises climbed to 16 from last quarter’s 12, beating economists’ expectations for a rise to 15. Despite the good news, stocks fell as the yen strengthened to 102.76 per dollar during the last hour of Monday’s trading session in Tokyo. A stronger yen causes Japanese exports to be less competitively priced in foreign markets (FXY). The Nikkei 225 Stock Average sank 1.62 percent to 15,152 (EWJ).
 
Stocks took a hard fall in China after the HSBC Flash China Manufacturing PMI for December declined to 50.5 from November’s 50.8. A reading above 50 indicates expansion. The HSBC Flash China Manufacturing Output Index dropped to 51.8 from November’s 52.2. The Shanghai Composite Index sank 1.60 percent to 2,160 (FXI). Hong Kong’s Hang Seng Index declined 0.56 percent to end the day at 23,114 (EWH).
 
In Europe, stocks skyrocketed after the Markit Flash Eurozone Manufacturing PMI jumped to a 31-month high of 52.7 from November’s 51.6. The Markit Flash Eurozone Composite PMI climbed to 52.1 from November’s 51.7. The Flash Eurozone Services PMI reading declined to a four-month low of 51.0 from November’s 51.2.
 
The Euro STOXX 50 Index finished Monday’s session with a 1.95 percent jump to 2,978 – which was not enough to reach its 50-day moving average of 3,021. Its Relative Strength Index is 45.58 (FEZ).
 
Technical indicators revealed that the S&P 500 climbed further above its 50-day moving average of 1,763 after surging 0.63 percent to finish Monday’s session at 1,786. Its Relative Strength Index climbed from 45.85 to 51.38. The MACD is on a downward trajectory, which would suggest that the S&P could resume its decline during the immediate future.
 
On Monday, all sectors advanced except for the consumer staples sector, which dipped 0.02 percent.
 
Consumer Discretionary (XLY):  +0.65%
 
Technology:  (XLK):  +0.99%
 
Industrials (XLI):  +0.94%
 
Materials: (XLB):  +0.41%
 
Energy (XLE):  +0.87%
 
Financials: (XLF):  +0.62%
 
Utilities (XLU):  +0.53%
 
Health Care: (XLV):  +0.19%
 
Consumer Staples (XLP):  -0.02%
 
Bottom line:  Investors failed to run scared after Monday brought three upbeat economic reports on the eve of the FOMC monetary policy conference. Even though Chris Williamson expressed his opinion in the Markit Flash PMI report, that the strong readings could motivate the Fed to begin the taper “sooner rather than later”, investors showed no fear.
                                                                                                                                                                                           
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