US stocks had a lacklustre start on Tuesday as some better-than-expected durable goods orders were offset by a record fall in US house prices and a sharp decline in consumer confidence.
Meanwhile the latest batch of corporate earnings offered a mixed outlook for the US economy as the Federal Reserve Open Market Committee convened for its two-day policy meeting.
Less than an hour after the opening bell the S&P500 was up 0.3 per cent at 1,358.57, the Dow Jones Industrial Average gained 0.4 per cent to 12,435.76 but the Nasdaq Composite fell 0.1 per cent to 2,346.54.
Many analysts remain cautious on the near term outlook for stocks with volatility elevated amid fears of a US recession, further write-downs in the financial sector and continued uncertainty surrounding bond insurers.
"We are still to be convinced that the strategic case for equities has improved sufficiently," said David Shairp, global strategist at JPMorgan Asset Management.
In order to make a strong case for the strategic rebuilding of risk, Mr Shairp says the market needs to see a resolution of the credit crunch and "global central banks ease, the banking system recapitalises itself, equity valuations are compelling and technical indicators are supportive."
But others have pointed to signs of improvement in the equities environment in recent trading with the S&P avoiding late-session sell-offs in three of the last four trading days.
"The market has shown a little bit of stability over the last few sessions," Richard Sparks, senior equities analyst at Schaeffer's Investment Research, said. "The Fed holds a big wild card - they have the power to make or break the market."
The Federal Open Market Committee meets on Tuesday with the futures market all but fully pricing in a 50bp cut when the meeting concludes on Wednesday.
In spite of enacting an unprecedented 75bp cut last week, the Fed is expected to continue in an easing pattern. Traders have warned that any deviation from this line could spark more selling pressure in equity markets.
"We are looking for 25 basis points on both the discount and Fed fund rates based on some sense of stability in stocks as well as credit conditions," said Tom di Galoma, head of Treasury trading at Jefferies & Co. "We think this will be followed up by at least two if not three cuts over the next two to three FOMC meetings."
Tuesday's economic news was dominated by a larger-than-expected rise in durable goods orders. Orders for big ticket items rose 5.2 per cent in December, well above a forecast gain of 2.1 per cent. Durables for November were revised up to 0.5 per cent from a prior estimate of a 0.1 per cent decline.
Excluding transportation orders, durables rose 2.6 per cent in December after a fall of 0.4 per cent in November. Orders for non-defence capital goods excluding aircraft, a measure of business spending on equipment, rose 4.4 per cent last month after falling 0.2 per cent in November.
"The durables orders data were far stronger than expected," said Alan Ruskin, chief international strategist at RBS Greenwich Capital. "There is no doubting the strength of the December data, but there is plenty of doubting how sustainable this is, and what this says about future trends
Other analysts were more upbeat. TJ Marta, fixed income strategist at RBC Capital Markets said: "We are witnessing the positive impact of the cheap US dollar on the economy, and the reason we only believe the economy will flirt with recession rather than falling into a full fledged one."
There was little sign of optimism in the housing market after the S&P/Case-Shiller 20-city home price Index fell a record 8.4 per cent in the year through November, much more than the 7.1 per cent decline forecast by economists.
Meanwhile the latest reading of the Conference Board's U.S. consumer confidence index fell to 87.9 in January from an upwardly revised 90.6 in December.
Earnings news was led by a wider-than-expected $422m loss at Countrywide Financial (NYSE:CFC), the mortgage lender being acquired by Bank of America. Countrywide set aside $924m to cover loan losses and took a $831m charge linked to securities backed by home equity loans. In spite of the loss the beaten down shares rose 5.4 per cent to $6.27.
Also in the financial sector, American Express (NYSE:AXP) posted a 10 per cent decline in net income after the closing bell on Monday as it set aside a previously announced $438m charge to cover bad loans.
AmEx's problems reinforced fears that credit delinquencies are spreading from subprime borrowers to more affluent consumers. The shares fell 1.4 per cent to $46.74.
In industrials Dow Chemical (NYSE:DOW) said fourth quarter earnings fell 52 per cent to $472m because of restructuring and a $1.7bn increase in materials and energy costs. However, the results beat estimates and the shares rose 4.5 per cent to $39.28.
Meanwhile, 3M (NYSE:MMM), the diversified manufacturer, reported a decline in earnings from the same period last year when results benefited from one-time gains. However, its adjusted profit beat Wall Street estimates as sales climbed 7 per cent. The shares slipped 0.5 per cent to $77.03.
Valero Energy (NYSE:VLO), up 9.7 per cent at $60.25, also posted a significant decline as the oil refiner's fourth quarter earnings dropped from $1.11bn to $567m amid tighter margins from gasoline production. However, its results also beat Wall Street forecasts.
Lexmark (NYSE:LXK), the printer maker, provided a welcome boost to sentiment in the technology sector after it fiscal first quarter outlook pleased investors. The shares shot up 8.2 per cent to $31.75.
Yahoo fell 3.2 per cent to $20.12 ahead of its quarterly results, due later on Tuesday.
In Europe, the FTSE Eurofirst 300 was higher by 1.3 per cent and in London the FTSE 100 was up 1 per cent.
In Asia, Japan's Nikkei 225 index rallied 3 per cent overnight, while stocks in Hong Kong rose 1 per cent
The yield on the policy sensitive two-year Treasury note was 6 basis points higher at 2.25 per cent, with the market pressured after much stronger-than-anticipated economic data.
The dollar was mixed against major currencies early in New York. In overnight trade the dollar put on 0.1 per cent against the euro to $1.4766 and 0.2 per cent to Y107.1300 against the yen but slipped 0.1 per cent against the pound to $1.9868.
US crude prices slipped 0.2 per cent to $91.25 early in New York, while gold spot prices shed 0.3 per cent to $930.40.
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