China & JP Morgan Clear – What’s Next?

As market trade got underway Friday, the drivers of the ship were clear. The closing bookend of the week, following a disappointing opening driver from the Federal Reserve FOMC meeting minutes, was composed of China and its second quarter GDP report and J.P. Morgan Chase (NYSE: JPM) and its second quarter EPS report. It seems that after the big build up, it’s time to buy the news after selling the rumor on these two. The SPDR S&P 500 (NYSE: SPY) is looking up a point on the relief rally tied to the two key data points. The SPDR Dow Jones Industrials Index (NYSE: DIA) is higher by the same, benefiting from J.P. Morgan and other components’ moves. That despite more data from the June Producer Price Index indicating the price of crude goods fell 3.6%. The PowerShares QQQ (NYSE: QQQ) is gaining as well, after a recent scare about the semiconductor sector.

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After JP Morgan & China - What's Next?

Report after report hinted at the demise of the Chinese economy, but the measurement mavens in Beijing managed 7.6% growth in Q2. In doing so, they precisely met the economists’ consensus view for economic growth. Still, the expansion was lower than the first quarter’s 8.1% gain. For now, the market will focus on the lack of a disaster. The iShares FTSE China 25 ETF (NYSE: FXI) is upward of 1% this morning after the Hang Seng gained 0.35%. Still, the skeptical Shanghai Shenzhen CSI 300 was about unchanged.

China’s Industrial Output increased 9.5% year-to-year, slightly short of the 9.8% increase expected by the consensus, but concern was somewhat mitigated by an offsetting Retail Sales rise of 13.7%, versus economists’ expectations for 13.5%. China Petroleum & Chemical (NYSE: SNP) benefited from the still solid industrial data, rising 1.1% and the E-Commerce China Dangdang (Nasdaq: DANG) gained 1.2% on the retail surge. But China was not alone in its provision of positive surprise.

JP Morgan Chase (NYSE: JPM) beat analysts’ expectations, earning $1.21 per share against the analysts’ consensus for $0.76. JPM said its infamous bad trade cost it about $5.8 billion, much more than the company’s iconic CEO had initially reported ($2 billion). However, Jamie Dimon indicated it was contained now, and JPM shares recovered 3.8% in early trading Friday. Add to that, Wells Fargo’s (NYSE: WFC) penny beating of the Street’s $0.81 expectation, and you have a 1.6% gain in the Financial Select Sector SPDR (NYSE: XLF) this morning.

But where will the market go from here? Next week’s full earnings schedule will have a lot to say about that, with reports due from Citigroup (NYSE: C), Bank of America (NYSE: BAC), United Rentals (NYSE: URI), Yahoo (Nasdaq: YHOO), Yum! Brands (NYSE: YUM), Honeywell (NYSE: HON), Xilinx (Nasdaq: XLNX), Microsoft (Nasdaq: MSFT), Nucor (NYSE: NUE) and Schlumberger (NYSE: SLB). The mix might offer some answers to questions about key sectors of market interest, including China, financials, industrials, construction, technology, semiconductors and energy. Next week, we’ll also receive new manufacturing and housing data, retail sales and the Fed’s Beige Book. Ben Bernanke will also provide important congressional testimony. In other words, there’ll be plenty of news to trade and opportunity for the market to find direction. So, for now, I expect stocks to settle in as they anticipate that full slate. However, I think the direction is clearly higher for gold.

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