Stocks Tread Water Despite Solid Employment Data

Stocks in the US consolidated after a large run higher during most of the week.  Better than expected employment data, helped equities get off to a strong start, but a downgrade by Fitch of Italian debt, created a cloud over US trading action.

Fitch cut Italy by one notch to A+ from AA- with a negative outlook.   Italy showed remarkable stability in its credit standing during the early part of the crisis and stayed at an implied A+/A1/A+ for quite some time.  However, it has succumbed in recent quarters.  Earlier this month, Moody’s cut Italy three notches to A2 and last month, S&P cut Italy by one notch to A from A+.  All three agencies have a negative outlook, so further downgrades appear likely.

On the economic front, the employment report surprised to the upside, giving investors a glimmer of hope that monetary policy is helping the economy to get back on track.  Nonfarm payrolls rose by 103,000 in September as the private sector added 137,000 jobs, according to the Labor Department. Expectations were for an increase of 60,000 jobs.  Payrolls data for the previous two months were revised up by a total 99,000 to show 57,000 jobs were added in August and 127,000 jobs in July.

The banking sector was the largest drag on the major indexes after Moody’s Investors Service Friday downgraded 12 U.K. banks and building societies.  Concluding a review it began in May, Moody’s cut Royal Bank of Scotland PLC and Nationwide Building Society two notches to A2, from Aa3. Lloyds TSB Bank PLC and Santander UK PLC were cut one notch, to A1 from Aa3. Lloyds TSB, RBS and Santander UK are on negative outlook. Co-Operative Bank PLC was also cut one notch, to A3 from A2. Seven smaller building societies were cut by between one and five notches.

Moody’s said the downgrades reflect the fact that U.K. government support for financial institutions is less certain. While systemically important lenders, including RBS and Lloyds, can still count on some support, smaller lenders might be allowed to fail if they get into difficulties.

sp-100711For the week, the S&P 500 tested support at 1177, near the 50-day moving average.  For the week the large cap index climbed close to 2%, and is poised to test resistance near the 200-day moving average.  Volatility on the large cap index continued to decline with the VIX testing the 50-day moving average near 37%.