Markets enjoyed substantive gains as debt related negotiations progressed on either side of the Atlantic, boosting investor sentiment. The Dow fell shy of its best intra-day rally of this year amid positive manufacturing data from the U.S. mid-Atlantic region and stellar corporate results.
The Dow Jones Industrial Average (DJIA) gained 152 points or 1.2% to settle at 12,724.41. The blue-chip index fell short of the year’s intra-day high by less than 100 points. The Standard & Poor 500 (S&P 500) surged 1.4% to finish the day at 1,343.80. The tech-laden Nasdaq Composite Index was up 0.7% and closed at 2,834.43. The fear-gauge CBOE Volatility Index (VIX) slipped to trade below 18. After posting low volumes over several of the past trading sessions, consolidated volumes jumped to 8.22 billion shares on the New York Stock Exchange, NYSE Amex and Nasdaq, and was well above the daily average of 7.49 billion. On the NYSE, advancers outnumbered the declining stocks by a ratio of 2,418 to 581.
Among the S&P sectors, financials posted solid gains lifted by Morgan Stanley (NYSE:MS) that soared 11.42%. Among other banking stocks, Citigroup, Inc. (NYSE:C), Bank of America Corporation (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM), UBS AG (NYSE:UBS), Deutsche Bank AG (NYSE:DB) and Barclays PLC (NYSE:BCS) jumped 4.4%, 3.9%, 3.3%, 4.2%, 4.5% and 9.7%, respectively.
The markets had been anxiously awaiting a resolution to the issue of raising the debt-ceiling, which will take the country’s rating down from the current ‘AAA’ rating if negotiations fail. Thankfully, there were hints of progress being made between the White House and the Republicans about sealing the deal that would slash the government’s deficit and lift the debt ceiling. This immediately led the markets higher after an impasse over the debt-ceiling talks had dampened the mood since last week.
Democrats and Republicans have been facing an onerous task as they have struggled to reach a consensus over raising the multi-trillion dollar debt-ceiling. On Thursday last week, Moody's Investors Services had put the US’ AAA rating under review for a possible downgrade, citing "the rising possibility" that Congress will fail to pass the debt ceiling by August 2. If Congress does not raise its $14.3 trillion debt ceiling by August 2, the Treasury Department may fail to pay at least 40% of its bills. Additionally, on Monday, Fitch Ratings reiterated that it plans to downgrade the US sovereign debt rating to negative if the federal government fails to meet the August 2 deadline.
Markets also received the necessary impetus from the other side of the Atlantic as European officials worked on ways to reduce Greece’s debt woes and also attempted to limit the ‘contagion’ to help Italy and Spain avoid a crisis. According to the draft of an emergency summit, the European Financial Stability Facility (EFSF) fund is to be strengthened, making it more effective and flexible. After the proposed reforms, the EFSF will help states with precautionary loans, recapitalize banks and may also intervene in the secondary bond market.
Coming to economic reports, The Philadelphia Federal Reserve Bank’s business outlook survey reported a rebound in business activity as the diffusion index of current activity jump of 3.2% in July from a negative 7.7 last month. The demand for manufactured goods, as measured by the current new orders index also jumped from last month and increased by 8 points to a reading of 0.
In another development, data on initial claims came in higher than expected last week, but investors shrugged off the report and focused only on the positives. According to the U.S. Department of Labor: “In the week ending July 16, the advance figure for seasonally adjusted initial claims was 418,000, an increase of 10,000 from the previous week's revised figure of 408,000. The 4-week moving average was 421,250, a decrease of 2,750 from the previous week's revised average of 424,000.