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Will Factory Data Gum the Gears, Spoil Oil-Led Rally?

February 3, 2015

No shortage of early drivers for U.S. stocks. That includes potential newsmakers on your front porch and way Down Under. Greek developments, an Australian interest-rate change, oil’s bounce, office-supply deal buzz, and domestic earnings combine to yank Wall Street in several directions. In fact, volatility is evident in the average daily moves of the S&P 500 (SPX). Its top-to-bottom move had averaged about 20 points per day before January 9; since then, more than 30 points every session. But today’s tone may well come down to the market's reaction to December factory orders. They fell 3.4%, worse than Street economists expected and on the heels of a downwardly revised 1.7% fall in November. This makes a fifth straight monthly drop, a streak not seen since 2008 (you’ll remember that year; we were in the middle of a financial crisis). Watch for auto sales to filter in today, too. Investors are anxious to see if there’s a straight line drawn from improving jobs data to big-ticket buying.

FIGURE 1: Crude Clears $50. Both U.S.-traded crude futures (shown here) and London-traded Brent are back above $50 a barrel as investors expect an eventual supply correction. Data source: NYMEX. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Energy Sector Out in Front. Energy shares led the late-day snapback for stocks on Monday (SPX’s ability to hold 1980 and slap on a late bounce of that magnitude is notable). Oil, all commodities really, are counted on the short list of factors driving early trade today. U.S.-traded crude futures are up some 3%, crossing over $51 a barrel in electronic action (see figure 1). London-traded Brent futures are above $56 a barrel. Over three sessions, oil has restored about 11% to 13% to multi-year low prices, driven there on market assumptions to slower U.S. drilling activity (execs have said they’ve cut capital expenditures) will result in a supply cut. Eventually. It takes some time to work down the big build up that’s driven supplies to multi-year highs. We’ll get the American Petroleum Institute’s initial oil-inventory data later Tuesday, followed by U.S. Energy Information Administration figures on Wednesday. Just to be clear: investors expect another weekly increase in U.S. oil stockpiles to record levels.

A Little Help From Our Friends? Sure, we inherit global economic issues and freely unload ours around the world, too. But, today, a little good news from abroad may be just what U.S. stock bulls ordered. Encouraging Greek news (it hit late yesterday to boost U.S. stock futures overnight and in early action) and surprise interest-rate action in Australia are helping to set the tone in U.S. markets. First, Greek Finance Minister Yanis Varoufakis has floated the idea to swap Greek debt for new bonds linked to economic growth in a bid to end a eurozone debt standoff, the Financial Times reported. Varoufakis said the new Greek government would no longer call on creditors to write off part of Greece's 315 billion euros in foreign debt, but would instead ask for a "menu of debt swaps" to ease the burden, including two types of new bonds, the report said. Greek and broader European stock markets rallied on the news. For its part, Australia’s leading stock average hit a seven-year high after the Reserve Bank of Australia surprised markets by cutting rates to a record low as economic data clearly indicate a slowdown there.

UPS Fails to Deliver. UPS (UPS) was hit with charges in its latest quarter but clear of the special accounting, it earned $1.25 a share in Q4. Revenue came to $15.895 billion, up from $14.976 billion a year earlier. That missed the FactSet consensus for EPS of $1.28 on revenue of $15.768 billion. Since “Brown” eased the impact of a potential bombshell with an earnings warning last month, it’s hard to gauge the Street reaction today (shares are down some 5% over the last three months). Management was quick to keep focus on the longer term, arguing “our growth strategy is sound and we reaffirm our long-term target of 9%-to-13% earnings per share growth." Now, I like this earnings report (among others) for its economic-indicator potential. UPS said it delivered 1.3 billion packages during the quarter, up 8.1% over the year-ago period. The company is still expecting 2015 adjusted per-share earnings of $5.05 to $5.30. Tonight after the close: A peak into the small world of Disney (DIS) earnings. Chipotle (CMG) serves up its quarterly results, too.

Good trading,

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