29/01/10 – 16:00

Wall Street rebounded off a near three-month low today, after official figures revealed that the US economy expanded at the fastest rate in six years.

Investors went into a euphoric state at the start of today’s trading session, after the Commerce Department indicated that the US economy grew at an annualised rate of 5.7% in the fourth quarter following a surge in business spending.

The rise was substantially ahead of the 4.7% annualised gain shown in a Bloomberg survey and helped instil more confidence in the US economic recovery story.

A closer look at the report indicates that inventory restocking contributed 3.4 percentage points to GDP, the most in two decades, while purchases of equipment and software increased at a 13% annual pace in the fourth quarter. In addition, US consumer spending, which makes up around 70% of the American economy, exceeded expectations with an annualised gain of 2% in the fourth quarter.

Without a doubt these are really fantastic figures – it validates the view that ‘pent-up’ demand really does exist in the US economy and this suggests that certain stimulus measures may be safely removed without threatening the US economic recovery.

The Chicago Purchasing Managers Index (PMI) and the Reuters/Michigan Consumer Sentiment survey also led the market to believe that the US economic recovery will sustainable.

The regional business barometer climbed to a reading of 61.5 in January, the highest since November 2005, from 58.7 the prior month, suggesting that business activity in Chicago has continued to expand. In addition, the index for US consumer sentiment rose to 74.4 in January from 72.5 the month before. PMI and confidence data also surpassed expectations.

Unsurprisingly, the Dow Jones Industrial Average had climbed 98.32 points (+0.97%) to 10218.78 by around 3:50pm (London time). In the meantime, the broader S&P 500 rose 9.64 points (+0.89%) to 1094.17 and the Nasdaq 100 advanced 9.72 points (+0.55%) to 1780.82.

The data also sparked a broad US dollar rally, predominantly on heightened expectations for an interest rate hike. The dollar’s ascent weighed on gold, silver, and high grade copper, but didn’t seem to weigh too much on palladium and platinum, which were trading between 0.5% and 1.5% higher by around 3:50pm (London time). The inverse relationship between the US dollar and crude oil also seemed to break down, with March Brent and Light Sweet (WTI) crude oil futures up by over 0.70%.

The stronger dollar and weakness across copper and gold didn’t seem to affect miners either, with Freeport-McMoRan Copper & Gold rallying 2.2% to $70.31 and Southern Copper up 2% to $28.18. 

Investors should be careful in my opinion – further strengthening of the dollar is likely to continue exerting pressure on metal prices and that could eventually weigh on the heavyweight mining sector – so in all fairness we may, as ironic as it may sound, see some profit-taking across miners, which could in turn, end up weighing on indices.

The above comments do not constitute investment advice and IG Markets accepts no responsibility for any use that may be made of them.

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