What's Fueling the Rally?

AUGUST 02, 2010
Micheal A. Doran
The Dow Jones Industrial Average saw the best close since May on Monday. Positive data and bank earnings out of Europe set the tone for strong buying, sending the major U.S. indices to gains of between 1.8 percent and 2.2 percent. Increasing confidence in Europe's economy and financial system were bolstered by solid purchasing managers’ index (PMI) readings throughout the continent and strong income growth by France’s BNP Paribas SA and the U.K.’s HSBC Holdings PLC. The continent's major bourses climbed between 2 percent and 3 percent in response.

In other overseas action, China's Shanghai Composite Index and Hong Kong's Hang Seng Index each rallied more than 1 percent overnight. In contrast to Europe, their gains came amid a weaker-than-expected PMI reading. The difference in response was largely because it is widely accepted that China's economy remains robust and will help lead a global recovery, but there are concerns that such growth could lead to a tighter policy intended to curb the inflation risk.

The positive tone among global traders helped domestic averages gap up at the open. Early action was both strong and broad. The mood improved further still after the ISM Manufacturing Index for July came in at 55.5. That may have marked a pullback from the 56.2 of June, but it exceeded the 54.2 that had been widely expected. (A reading above “50” indicates an expansion in the sector.) Additionally, construction spending for June increased a surprising 0.1 percent after a 1.0 percent decline in the prior month.  Technically, the major indexes have reclaimed their respective 200-day moving averages on light volume.

Looking ahead, investors will be focused on jobs data, including Wednesday's ADP payroll report and Friday's June unemployment data. Any sign of firming in the labor market should help stocks sustain this momentum.

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