U.S. equities surged again on Friday — capping a powerful two-day rally — after the People’s Bank of China announced an interest rate cut for the sixth time this year cutting its one-year benchmark rate 25 basis points to 1.5% while also cutting the reserve-deposit ratio required of banks by 0.5%. The last rate cuts were in August. The action was spurred by weakness in inflation and downside risks to the economy.
This follows hints from the European Central Bank on Thursday that more monetary policy stimulus could be forthcoming, including potentially pushing the deposit rate deeper into negative territory.
The combination of all this, along with better-than-expected Big Tech earnings after the close on Thursday and ongoing hopes the Federal Reserve will delay its first interest rate hike since 2006 until early 2016, has the bulls in full “foaming at the mouth” mode.
In the end, the Dow Jones Industrial Average gained 0.9% to jump back over its 200-day moving average, the S&P 500 gained 1.1%, the Nasdaq Composite shot up 2.3% and the Russell 2000 ended the day 0.9% higher. Treasury bonds were weaker, the dollar was stronger, gold lost a touch and crude oil lost 1.7% to close at $44.63 a barrel.
Tech stocks led the way with a 3% gain followed by healthcare, up 2%. While precious metals didn’t do much, the pro-inflation benefits of fresh monetary policy efforts helped gold and silver stocks: The Market Vector Gold Miners ETF (NYSEARCA:GDX) gained 2.5% for Edge subscribers.
To recap the earnings news from yesterday: Microsoft Corporation (NASDAQ:MSFT) beat estimates on strength from its cloud and enterprise units; Alphabet Inc. (NASDSAQ:GOOG, NASDAQ:GOOGL), the company formerly known as Google, cited strong ad click growth to beat top- and bottom-line estimates; and Amazon.com Inc. (NASDAQ:AMZN) posted its second consecutive surprise quarterly profit — and its third-straight revenue surprise and fourth-straight earnings per share beat — as its cloud-services business continues to impress.
It was a trifecta of good news. As a result, all three gapped higher with shares gaining 10.4%, 5.6% and 6.2% respectively.
Music streaming service Pandora Media Inc. (NYSE:P) couldn’t be helped, however, falling 35.4% on misses of key metrics including active listeners and listening hours. For the first time, management blamed competing subscription music offerings (such as Apple Inc.’s (NASDAQ:AAPL) Apple Music), while cutting its fiscal 2015 outlook. Multiple analysts issued downgrades. Ugly.
The gains started overnight with the STOXX Europe 600 jumping 2.1% to cap its third weekly gain in a row. The Shanghai Composite gained 1.3%.
Adding to the good news out of China, home prices are showing signs of stabilization. The all-70 city new home price index rose for the fifth month in a row at a 0.3% monthly rate. The annual price decline slowed dramatically to 0.9% from a 2.3% drop in the previous month.
Looking ahead, in order to keep the stimulus hype train steaming down the rails, focus now turns to the Bank of Japan policy meeting next week. The whispers are that given the decline back into deflation, the BoJ could expand its asset purchase program (which already includes real estate investment trusts, among other things) as it revises its projections for economic growth and inflation.
It’s being reported that policymakers will cut its fiscal 2015/2016 consumer price inflation rate forecast from 0.7% to below 0.5%, and GDP growth from 1.7% to around 1%.
Here at home, the meat of the third-quarter earnings season will continue as the Federal Reserve makes its October policy announcement (no rate hike expected, but watch for clues about the odds of action at its December meeting), while the government will release the advance estimate of Q3 GDP growth.
Earnings reporters to watch include E I Du Pont De Nemours And Co (NYSE:DD), Ford Motor Company (NYSE:F), United Parcel Service (NYSE:UPS), Apple and GoPro Inc. (NASDAQ:GPRO), as well as Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM).
The action in Big Tech stocks lifted AAPL in sympathy, rising 3.1% to punch out of a multi-month consolidation range, lifting the November $115 calls recommended to Edge Pro subscribers to a one-day gain of more than 70%.
I’ll be looking to trim profits heading into the company’s earnings report where iPhone sales and China results will be closely scrutinized once more.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to Investorplace readers.
