Weekly Market Recap: Standard & Poor’s Sovereign Downgrades, J.P. Morgan Dampens Alcoa’s Announcement

DJIA 12,422 S&P500 1,289 Nasdaq 2,710 Gold 1,640 Oil 98

The  Dow Jones Industrial Average (NYSEARCA:DIA), Nasdaq (NASDAQ:QQQ), and S&P 500 (NYSEARCA:SPY) all moved a bit higher this week as earnings season officially started. On the commodities front, Oil (NYSEARCA:USO) pulled back $3 after last week’s Iran threats, and Gold (NYSEARCA:GLD) rose a bit despite renewed QE3 rhetoric.

Trending Now: Global Factors Boost Gold and Silver Demand.

Now, for our analysis of the 15 reasons markets moved this week:

Monday

Today’s markets were up because:

1) Earnings. Though the three major indexed finished positive, markets were relatively flat today as investors awaited the next big driver: earnings season. Alcoa (NYSE:AA) kicks off the quarterly reports season after the closing bell, with analysts expecting the company to report big drop in profits. Overall, earnings for S&P 500 companies are expected to be up 7.5 percent in the final three months of 2011.

2) Europe. Though earnings are expected to have increased last quarter as the U.S. economic recovery picked up and unemployment declined, investors remain nervous about the debt crisis in Europe. After meeting on Monday, German Chancellor Angela Merkel and French President Nicolas Sarkozy said that progress has been made on a so-called “fiscal compact” that would enforce stricter budget discipline in the euro zone.

3) Economy. Though the euro remained near a two-month low today, the correlation between U.S. stocks and the euro seems to be breaking down as investors focus more on economic fundamentals. Consumer credit increased at an annual rate of $9.9 billion in November to $20.4 billion, the Federal Reserve reported today.

Tuesday

1) Europe. Fitch Ratings said today that Europe is on the right path toward solving its debt problems, while reiterating the agency’s December stance that it does not plan to downgraded AAA-rated France this year. The ratings agency will give a decision on all European countries it currently has on negative watch by the end of the month, but though the company indicated there’s a “significant chance” that Italy will be downgraded, Italian Prime Minister Mario Monti was in the news today saying he would unveil a package of measures meant to encourage competition and expansion and stimulate economic growth at a meeting of European Union finance ministers later this month.

2) Earnings. An upbeat report from Alcoa (NYSE:AA) kicked off earnings season after the bell on Monday, with investors brushing off the company’s fourth-quarter loss, instead focusing on the fact that the nation’s largest aluminum producer topped sales estimates and issued a positive outlook for aluminum demand in 2012. Though no major corporate reports are scheduled for today, Lennar (NYSE:LEN) and JPMorgan (NYSE:JPM) are on deck for this week.

3) Banks. Financial stocks led today’s rally, with Bank of America (NYSE:BAC) surging 6 percent, making it the best performer on the Dow. Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) were both up around 4 percent, while Citigroup (NYSE:C) and JPMorgan (NYSE:JPM) each rose more than 2 percent.

Wednesday

1) Germany. Reports showing the German economy — the biggest in the European Union — to have contracted 0.25 percent in the last quarter raised concern that the single shining beacon of stability left in the euro zone might be backsliding into the mild recession plaguing most of Europe. The euro slid as much as 0.8 percent during the day to a 16-month low of $1.26. Now investors eagerly await key auctions of Italian and Spanish bonds on Thursday and Friday.

2) Companies. Urban Outfitters (NASDAQ:URBN) shares plunged after the clothing retail announced late Tuesday that CEO Glen Senk had resigned, prompting Citigroup (NYSE:C) to downgrade the company’s stock from “buy” to “sell” and cut its price target from $34 to $20. Lennar (NYSE:LEN) shares rose even though the homebuilder announced earnings that fell short of estimates, as revenue was better than expected. Crocs (NASDAQ:CROX) popped 16 percent after the company said it expected fourth-quarter revenue to come in at the high end of its forecast and full-year sales to top $1 billion.

3) Financial. Banks continued their climb today as positive economic data encouraged investors. Despite being targeted in an insurance probe by New York State’s Department of Financial Services, Bank of America (NYSE:BAC), Citigroup (NYSE:C), JPMorgan (NYSE:JPM), and Wells Fargo (NYSE:WFC) all continued Tuesday’s rally.

Thursday

1) Bonds. Spain and Italy both had successful debt auctions today that saw borrowing costs fall sharply in the first test of euro-zone bond markets in 2012. The Spanish Treasury raised 10 billion euros, double its target, as it auctioned three kinds of bonds, while Italy paid less than half what it did a month ago to sell one-year bills. Spain and Italy both saw the spread between yields on their benchmark 10-year notes and Germany’s benchmark bunds narrow as banks took advantage of cheap three-year loans from the European Central Bank to invest in sovereign debt. Ultimately, the success of today’s European bond auctions, and the expectation of continued success, was enough to outweigh a host of negative economic data today, allowing markets to close slightly up. The euro climbed to $1.2822.

2) Data. Jobless claims rose more than expected last week, the first week of the New Year, signaling that improvement seen in the job market in November and December may have largely been the result of higher temporary holiday hiring than in previous years. As the holiday shopping season winds down, unemployment could tick upward as retailers let go of temporary hires. In another bad sign for employment and the economy as a whole, retail sales rose just 0.1 percent in December as lower gas prices and heavy holiday discounts weighed down the value of goods sold. Purchases excluding automobiles fell 0.2 percent in their first decline since May 2010.

3) Oil. The U.S. won Japanese support today for sanctions on Iranian oil that not only threaten the flow of world oil supplies, but also the possibility of war. Iran has refused to terminate a nuclear program it says is entirely peaceful, but Western superpowers suspect the country to be developing nuclear weapons. In response to what it deems to be unjust sanctions, Iran has threatened to block access to the Strait of Hormuz, through which roughly one-fifth of the world’s oil supply is transported. In what could be another upset to global supply, Nigeria’s main oil union, which has been on strike over the last four days, has threatened to shut down output completely, beginning Sunday, if the government does not reinstate a petrol subsidy that ended January 1, doubling oil prices for Nigerians 150 naira ($0.93) per liter. Nigeria is Africa’s largest oil producer, and exports largely to the U.S., Europe, and Asia.

Friday

1) Downgrades. Standard & Poor’s stripped France, the euro zone’s second-largest economy, of its top credit rating on Friday, lowering it by one notch to AA+, the same rating the United States has had since the ratings company downgraded its debt in August. Though S&P has not yet issued a formal statement, French Finance Minister Francois Baroin confirmed the downgrade, which leaves Germany as the only major economy in the 17-nation euro zone with an AAA credit rating. A credit downgrade threatens to increase borrowing costs for sovereigns already weighed down by heavy debt loads and stagnating growth. Earlier reports had S&P downgrading Austria as well, but so far, no other downgrades have been confirmed.

2) Trade. The U.S. trade deficit widened in November as an increase in imports weighed on economic growth, Commerce Department data showed on Friday. Imports rose 1.3 percent as exports fell 0.9 percent. But though a wider trade deficit subtracts from gross domestic product, higher imports are a sign of increased consumer demand within the country. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment rose in January, suggesting a stronger consumer spending outlook consistent with the growth in imports. However, as the cooling global economy causes exports to taper off, it will soon have a negative effect on the U.S. recovery.

3) Banks. JPMorgan (NYSE:JPM) led banks stocks lower, falling as much as 3 percent after the bank announced it earned just 90 cents per share in the fourth quarter, down from $1.12 a year earlier. Citigroup (NYSE:C), Morgan Stanley (NYSE:MS), Bank of America (NYSE:BAC), and Goldman Sachs (NYSE:GS) all declined around 3 percent as well, while Wells Fargo’s (NYSE:WFC), scheduled to report earnings on Tuesday, managed to close the day only slightly in the red. Citigroup is also set to report earnings next Tuesday, while Goldman will report on Wednesday and Bank of America and Morgan Stanley will report on Thursday.

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com