For the week ended October 28, 2011

Week in Review: Eurozone bailout deal, U.S. growth lift market’s mood

• Progress made on eurozone bailout
• U.S. gross domestic product rebounds
• U.S. economic data encouraging overall
• Oil giants' profit flows
• Ford, Volkswagen drive home solid results

Global markets reacted enthusiastically to the long-awaited European debt plan that was agreed to late Wednesday, as stocks surged globally, the euro rallied, and bond yields rose. Adding to the upbeat mood, the U.S. economy grew in the third quarter at twice the pace it had in the second quarter, underscoring its resilience and dispelling fears of a double-dip recession.

Numerous reports of robust corporate profits, from big oil companies to large financial firms to automakers, provided further fuel to a rebound that capped off one of the best months ever for the U.S. stock market. With just one trading day left in October, the Dow Jones Industrial Average and the Standard & Poor's 500 Stock Index were headed for their largest monthly percentage gains since January 1987, and the NASDAQ Composite and the Russell 2000 indices were en route to their best months in a decade. All four benchmarks have posted double-digit advances so far in October.

U.S. and global economic news
Eurozone bailout deal struck
The eurozone bailout deal brokered by European leaders is designed to ease a number of concerns related to Greece’s debt load and the economic vulnerability of the eurozone’s weakest nations. As part of the broad package, private banks will voluntarily accept a 50% reduction in the face value of Greek bonds; the European Financial Stability Facility, the eurozone’s bailout fund, will be expanded to provide guarantees of around €1 trillion ($1.4 trillion); and European banks with significant exposure to sovereign debt will receive an injection of new capital. Some details must still be worked out, but the accord sharply changed the mood in global financial markets.

Recession worries rise in Europe
The prospects for a eurozone recession have grown, based on the October purchasing managers index (PMI) released Monday by data services firm Markit. The PMI fell nearly two points in October to 47.2, its lowest level since mid-2009. Readings below 50 indicate a decrease in business activity.

U.S. gross domestic product (GDP) growth picks up
The U.S. economy grew at an inflation-adjusted 2.5% annual rate in the third quarter, up from the 0.4% and 1.5% annualized rates recorded in the first and second quarters, respectively. Federal government spending and rising exports contributed to economic growth, while declining state and local government spending and inventory investment held back growth.

Rising yen concerns Japan
With the yen hitting record highs against the U.S. dollar with each new day, Japanese government officials are becoming more concerned and indicate that they might intervene soon to weaken their currency. A strong yen makes Japanese exports less competitive overseas.

U.S. durable goods orders rise
Orders for U.S. durable goods, other than transportation equipment, rose 1.7% in September, the fastest growth rate in six months, the U.S. Department of Commerce reported. The median forecast in a survey of economists was 0.4%. The Institute for Supply Management’s factory index rose to 51.6% last month, from 50.6 in August.

U.S. consumer spending grows in September
U.S. consumers spent 0.6% more in September than in August, despite their income rising only 0.1%, according to the U.S. Commerce Department. The savings rate fell to 3.6%, its lowest level since December 2007.

U.S. new home sales rise; existing home sales decline
Purchases of new homes exceeded forecasts in September, rising 5.7%, according to the Commerce Department. However, the median price of new homes fell 10% from September 2010, the largest price drop in two years. Sales of existing homes, which make up 94% of the housing market, fell 3% in September, and the median price fell 3.5% from a year earlier, the National Association of Realtors reported.

Fewer weekly jobless claims
Initial claims for U.S. unemployment insurance benefits dipped by 2,000 to a seasonally adjusted 402,000 for the week ended October 22, the U.S. Department of Labor reported. The four-week average of new claims rose slightly, to 405,500.

U.S. consumer confidence drops
Confidence among U.S. consumers fell back to recessionary levels in October, dipping to 39.8 from 46.4 in September, the Conference Board reported. Economists surveyed by Dow Jones Newswires had expected a reading of 46.0.

U.S. and global corporate news
Big oil profits surge
Exxon Mobil had a 41% surge in third-quarter profits compared with a year earlier, benefiting from high oil prices and robust refining margins.

Anglo-Dutch energy company Royal Dutch Shell more than doubled its quarterly net profits as investment in infrastructure in its oil and natural gas businesses is paying off.

ConocoPhillips posted a 54% increase in quarterly earnings, excluding the impact of special items. However, after taking charges for asset-sale losses and other items, the firm posted a 14% decline in its third-quarter net income.

Chevron’s third-quarter earnings more than doubled, while its revenue rose 30%.

UK energy giant BP almost tripled its quarterly profit from a year earlier when it took a $7.66 billion pretax charge as a result of the Gulf of Mexico oil spill in the summer of 2010. The firm is working to expand its asset sale program to help cover the cost of the oil spill and to boost distributions to shareholders.

Ford has flat quarter, posts $6 billion profit in nine months
Ford Motor posted a 2% decline in third-quarter net income, as strong results in North America were offset by much higher commodities-related costs and losses in its European and Asian operations. For the first nine months of 2011, Ford has earned $6.38 billion. The automaker has slashed its debt to $12.7 billion from $33 billion at year-end 2009.

Volkswagen profit nearly triples
German automaker Volkswagen's third-quarter net profits almost tripled, as its revenue rose 25% and it benefited from a large book gain on its options to acquire Porsche’s sports car business.

Merck has healthy earnings
German chemical and pharmaceutical firm Merck surpassed third-quarter earnings expectations. However, it lowered its revenue forecast because of slowing demand.

Amazon earnings tumble on infrastructure buildup
Online retailer Amazon.com recorded a sharp 73% decline in third-quarter earnings and a dramatic drop in its operating margins because of a heavy investment in infrastructure, including warehouses and data centers.

Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; msnbc.com. The Wall Street Journal Digital News

This is not a loan commitment. Programs are subject to change without notice and are only available to qualified borrowers. Underwriting terms and some restrictions may apply.

The week ahead

• Marathon Oil and Pfizer report earnings next week.
• Chicago PMI to be released on Monday, October 31.
• The European Monetary Union releases its unemployment report on Monday, October 31.
• The ADP monthly employment report is released on Wednesday, November 2.
• The U.S. nonfarm payroll report is released on Friday, November 4.

Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; msnbc.com.

This is not a loan commitment. Programs are subject to change without notice and are only available to qualified borrowers. Underwriting terms and some restrictions may apply.