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Portugal Bailout Boosts Markets; S&P 500 Sustains Oversold Bounce


Today's financial recap and tomorrow's financial outlook.

The US stock market traded in a mostly sideways, but volatile range for much of the day. Market participants grappled with a breakout above or below the S&P 500 (SPX) 1915-1930 range that was established during Friday's session. The early rally was faded about an hour after the open, but a late day breakout above 1930 was followed by continued strength, capping a +0.78% day. High yield bonds, which have been a major catalyst behind the weakness in equity markets, were noticeably absent from the rally. The utility sector, which have been a notable underperformer in the recent selloff, managed to muster a bounce from its 200dma. Tech stocks such as Baidu (BIDU), Facebook (FB), (PCLN), and Amazon (AMZN) performed strongly and led the market. Apple (AAPL) trailed as it had been a lone area of strength last week.

There were no major economic reports to influence markets today. Earnings reports, the majority of which came from the energy sector, were almost all better than expected.

Overnight, the Bank of Portugal took over the ailing lender Banco Espirito Santo (BES) through a $6.6 billion bailout. In the deal, the central bank would take the good assets and deposits from the bank and form a new entity called Novo Banco. The existing shareholders and junior subordinated debt holders would receive the nonperforming assets, mostly loans made to BES' holding group. In that scenario, they would likely receive little to no value from their investment. The central bank expects to earn its purchase back through an eventual sale of the company's assets. Risk markets viewed this event as positive, but remained skeptical that other sour deals were still out in the marketplace.

The People's Bank of China (PBoC) extended a three year, $162 billion loan to the State Development Bank over the weekend, according to media reports. The loan was made to further infrastructure projects in China and is similar to the government's move to ease its loan-to-deposit ratio, ease reserve requirements, and loosen property lending standards. This was another catalyst that helped spur further gains in global stocks overnight.

Tomorrow's Financial Outlook

One major economic report scheduled for tomorrow is the July ISM non-manufacturing index. Because it comes after the nonfarm payrolls report, an infrequent occurrence, its importance is diminished. Usually the index's employment component is highly correlated with the government jobs reports. Economists are expecting the index to rise to 56.5 from 56.0 in the previous month. The other report scheduled for tomorrow is June factory orders, expected to rise 0.6% from the prior month. Any serious deviation will second quarter GDP to be revised by a corresponding amount.

The main catalyst for overnight risk markets is the Reserve Bank of Australia (RBA) rate decision. Recently, the central bank has taken a more dovish tone, which has caused a mild depreciation in the currency. At the end of the day, it is boxed in by a currency that is too strong, coupled with an economy that is running hot. Also scheduled for tomorrow is Australia's trade balance, and the private services PMI for Japan, China, and the UK.

There are 46 major US companies scheduled to report earnings tomorrow. Although, of those scheduled, as a whole their notoriety is not as high as a given week earlier in the reporting season. Notables include Coach (COH), Cablevision (CVC), Regeneron (REGN), MGM Resorts (MGM), CVS Caremark (CVS), Zillow (Z), Office Depot (ODP), FireEye (FEYE), Rocket Fuel (FUEL), Groupon (GRPN), Walt Disney (DIS), EOG Resources (EOG), and Liberty Media (LMCA).

Twitter: @Minyanville

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