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Stocks in the U.S. closed higher in thin trading Friday, but snapped a two-week rally amid ongoing uncertainty over the government's ability to reach a debt-reduction deal and some growing concerns over the economy. The Dow Jones Industrial Average gained 42.61 points, or 0.34 percent, to finish at 12,479.73, after see-sawing for most of the session. The S&P500 rose 7.27 points, or 0.56 percent, to close at 1,316.14 and the tech-heavy Nasdaq climbed 27.13, or 0.98 percent, to end at 2,789.80.

By ·
18 Jul 2011

Stocks in the U.S. closed higher in thin trading Friday, but snapped a two-week rally amid ongoing uncertainty over the government's ability to reach a debt-reduction deal and some growing concerns over the economy. The Dow Jones Industrial Average gained 42.61 points, or 0.34 percent, to finish at 12,479.73, after see-sawing for most of the session. The S&P500 rose 7.27 points, or 0.56 percent, to close at 1,316.14 and the tech-heavy Nasdaq climbed 27.13, or 0.98 percent, to end at 2,789.80.

GOP lawmakers said the House of Representatives is to vote this week on a plan to raise debt ceiling with equal cuts. Five rounds of talks this week still produced no agreement with the talks likely to resume over the weekend. "Show me a plan of what you're doing in terms of debt and deficit reduction.” President Obama said during a White House press conference. “If they show me a serious plan I'm ready to move, even if it requires me to make some tough decisions."

Meanwhile, eight banks—including two Greek banks, five Spanish and one Austrian bank—have failed the European Banking Authority's EBA stress tests, and Standard & Poor's put a broad range of financial firms on negative credit watch, warning they could all be downgraded if the U.S. has its credit rating cut.

Gold reached an all time high last week, soaring $48.60, or 3.15 percent, to settle at $1589.80 an ounce, while silver added 3% to US$39.27/oz. Base metals again traded sideways, weighing up supply tightness against weakening global demand and the fragile macro outlook. Movements were mixed on Friday of around 1%. Brent oil was steady at US$118.34/bbl, allowing the spread to close in a bit on a US$1.80 rally for West Texas to US$97.49/bbl.

The Aussie dollar was slammed late on Friday after a report was issued by Westpac's economists explaining a complete reversal in their monetary policy expectations. Westpac now predicts the next RBA move won't be till December and what's more, it won't be up.

The keepers of the monthly consumer confidence index are simply astonished at how weak the reading has become, and they are also expecting fear arising from the European debt crisis to linger for a long while yet. At 4.75%, the RBA has described its current setting as “mildly restrictive”. While recognising weakness in household spending and other parts of the economy, the central bank has remained steadfast in its expectations of surging resource sector profits and subsequent inflation.

Westpac now suggests the weakness in the rest of the economy will outweigh any resource boom positive, and that the RBA will be forced to cut by 25bps in December and to continue to cut in 2012 for a total of 100bps. The interest rate futures markets had already begun to factor in such a view.

On the back of this release, the Australian dollar has dropped to 0.8% to US$1.0639.

This week represents one of the busiest in the US quarterly result calendar, with 14 out of 30 Dow stocks reporting and 130 of the S&P 500. Banks such as Goldman Sachs and Bank of America are in there, along with techs such as Apple and Intel, telcos such as Verizon, and staples such as Coke.

On the economic front, it's housing week in the US with the housing sentiment index out tonight, housing starts tomorrow night, existing home sales on Wednesday and the FHFA house price index on Thursday. Thursday also sees the Philadelphia Fed manufacturing index and the Conference Board leading index.

It's a quieter economic week in Australia, with vehicle sales out today, the Westpac leading index out on Wednesday and NAB's June quarter business confidence measure on Thursday. Tomorrow the RBA will release the minutes of its July policy meeting – the one that at least had economists suggesting 2011 may not even see a rate rise. But the meeting was held before last week's release of June business confidence and consumer confidence, both of which were very weak, and the big profit downgrade from retail bellwether David Jones (DJS).

The resource sector quarterly production reports continue this week, with Western Areas (WSA) reporting today, OZ Minerals (OZL) and Woodside (WPL) tomorrow, BHP (BHP) on Wednesday and Newcrest (NCM), Santos (STO) and PanAust (PNA) on Thursday.

Elsewhere in the world, markets will be watching the two important eurozone monthly surveys, being the ZEW on Tuesday and the IFO on Friday, while on Thursday HSBC will release its “flash” estimate for China's July manufacturing PMI.

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