Stocks rebound on Alcoa earnings, tighter Europe spreads

A rebound in Europe and Alcoa’s better-than-expected Q1 earnings report, released after Tuesday’s market close, ended the five-day drop in U.S. stock prices on Wednesday. The NASDAQ index rose 0.8%, while the S&P 500 and the Dow each gained 0.7%. Alcoa, a Dow 30 component and the first major company to announce earnings for the March quarter, jumped more than 6% on Wednesday after it reported better-than-expected revenue growth and an unexpected profit for the first quarter. Since Alcoa’s import to the economy is relatively minor, today’s market rebound suggests that the sell-off seen since Friday’s weak jobs report may have been overdone.

U.S. stocks also got a boost from Europe, where stocks gained back a portion – ranging from one-fifth in the case of France to two-thirds for Spain – of what they lost in Tuesday’s rout. The German DAX index rose 1%, while the Stoxx Europe 600 rose 0.7%. Concerns about Europe eased somewhat as yield spreads narrowed between bellwether German bonds and those of Italy and Spain, the two countries now of the most immediate concern to markets. Yields on 10-year Italian bonds dropped roughly 15 basis points and Spanish bond yields fell 10 bps after Benoit Coeure, a member of the European Central Bank’s executive board, suggested that the bank might start buying Spanish government bonds.

Meanwhile, yields on German 10-year bonds rose 14 bps from Tuesday’s lows (which means spreads with Italian bonds narrowed by nearly 30 bps). In stock trading, the FTSE MIB index, which tracks the biggest stocks in Italy, gained 1.6%, while the IBEX 35, which tracks the most liquid Spanish stocks, jumped nearly 2%. The euro gained 0.2% against the dollar today.

The Federal Reserve released its “Beige Book” on Wednesday, which described the economy as continuing to expand at a modest to moderate pace” in the past six weeks. The report, which summarizes business activity in all 12 Fed districts, also said “hiring was steady or showed a modest increase across many districts.” However, the report cautioned that “while the near-term outlook for household spending was encouraging, contacts in several Districts expressed concerns that rising gas prices could limit discretionary spending in the months to come.” Down five cents a gallon Tuesday, unleaded gasoline futures prices regained four cents today. The Fed added in the report that “overall price inflation was modest.”

Crude futures prices jumped 1.5% on Wednesday, but natural gas prices plunged more than 2%, falling below $2 for the first time since January 2002. Prices have fallen more than 50% over the past year due to a combination of increased supply and weak demand fueled by warm weather. In U.S. bond trading, the 30-year Treasury bond dropped over a point in price, raising its yield seven bps to 3.20%, while the 10-year yield rose six bps to 2.04%.

Reports/dates/facts/links worth paying attention to over the next week:

  1. April 12: Producer Price Index for March; weekly jobless claims.
  2. April 13: Consumer Price Index for March; Reuters/University of Michigan’s Consumer Sentiment for April.
  3. Late Breaking: The Department of Labor announced increased security measures to prevent leaks of monthly employment report:

Copyright © 2012 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.

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