The Dow and S&P 500 opened higher today, after a better-than-expected quarterly report from Ford Motors and encouraging economic data from the US and China lured investors back to equities.
Ford Motors surprised the market by posting a bigger-than-expected third-quarter net profit of $997 million, thanks to cost cutting, increased market share and government incentives for the auto industry.
Ford, the only major US automaker to avoid bankruptcy also raised its 2011 outlook and unveiled positive automotive cash flows of $1.3 billion in the third quarter.
This was the first positive cash flow since the second quarter of 2007 and compares with a cash burn of $1 billion in the prior quarter. ‘We now expect to return to a strong profit in 2011 and positive cash flow,’ Ford’s chief financial officer Lewis Booth told reporters. [1]
Mr Booth went on to explain that the US government’s ‘Cash for Clunkers’ incentive program, although beneficial, was not the only driving force behind the group’s improved bottom line. He said that Ford’s North American division was, after four-and-a-half years, now trading profitability and earnings at Ford’s credit division had also improved.
Ford’s shares rallied 9.3% to $7.67 following the quarterly results.
Also boding well for market sentiment, particularly resource shares, were upbeat economic reports from the United States and China.
The US Institute of Supply Management’s report provided further evidence of a recovery in the US manufacturing sector today. The ISM factory index rose more than anticipated to 55.7 in October, the highest level since April 2006, from 52.6 in month before. Readings above 50 indicate the sector is expanding.
A separate American report from the National Association of Realtors revealed that the number of contracts to purchase previously owned homes, pending home sales, surprisingly rose 6.1% in September following a 6.4% gain the month before. This was substantially ahead of Bloomberg’s median estimates of a flat reading.
The rise may have been driven by buyers who wanted to take advantage of the $8,000 tax homebuyer credit, which is due to expire at the end of this month.
Also released today was HSBC’s Purchasing Managers’ Index for China, which rose to a seasonally adjusted reading of 55.4 in October from 55 the prior month. This suggests that the Chinese manufacturing industry has continued to expand. It also indicates that China’s demand for raw materials is likely to strengthen further.
Not surprisingly, shares of Freeport-McMoRan Copper & Gold rallied 3.2% to $75.71 and Newmont Mining 2.5% climbed to $44.51. Energy majors Chevron and Exxon were trading more than 1% above their previous closing prices at $77.32 and $72.64 respectively.
Denbury Resources bucked the sector’s positive trend, however, plunging 9.3% to $13.24, after announcing that it is to acquire Encore Acquisition for $3.2 billion. The acquisition will create one of the largest oil production and exploration companies in North America.
Banks were trading marginally higher as well today, despite CIT Group’s Chapter 11 bankruptcy announcement, which sent its shares tumbling by 60% to $0.289 a share.
Citigroup was trading 1.4% lower at $4.04, while Bank of America was 3.5% higher at $15.09. Wells Fargo climbed 1.7% to $28.
Elsewhere, auto insurer Progressive climbed 1.75% to $16.28 after financial news provider Barron’s said the company was poised to expand its revenue and earnings for the first time in several years.
By 3:35pm (London time), the Dow Jones Industrial Average was 122.21 points (+1.26%) 9834.94 while the broader S&P 500 was 13.58 points (+1.31%) above its previous close at 1049.77.
Source: [1] Bloomberg News (2 November 2009)
By Anthony Grech, Research Analyst, IG Index.
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