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Tuesday Look Ahead: Car Sales Could be the Driver for Markets

Monday, 2 Aug 2010 | 10:21 PM ET

July auto sales could help drive stocks Tuesday.

Car dealership
Car dealership

The monthly sales reports will be issued by car makers throughout the day and are expected to show an annualized selling rate of 11.4 million vehicles, up from 11.1 million last month. Some forecasts are as high as a 12 million annualized sales rate for July.

Car sales are expected to top one million in July and are being watched this month for more than just a read on the industry, but also as a barometer for the manufacturing recovery, which has been sputtering.

The latest sign of that slow down was in the ISM manufacturing index, which showed a third monthly decline Monday. Yet, the dip to 55.5 still showed growth and was better than expected. It also helped add fuel to a stock market rally that took the Dow 208 points higher.

The Dow finished the day at 10,674, up nearly 2 percent, while the S&P 500 was up 24 at 1125, a gain of 2.2 percent.

Monday's rally spilled over from Europe, where better-than-expected earnings from HSBC and BNP Paribas gave markets more confidence about the health of the European banking system, after last month's European bank stress tests.

"European banks just came in much better-than-expected, and nobody looked back since early this morning," said Keefe Bruyette's Pete McCorry Monday afternoon.

The S&P 500 was back above its 200-day moving average of 1114, and closed well above it. "That's always a very positive sign," McCorry said. "The technicals can mean a lot if they have volume confirmation but we're not seeing that right now."

Steve Massocca of Wedbush Securities also commented on the low volume. "You've got the bulls saying everything's okay. ..it's like everyone's a spectator. Look at the volume. It's a very weird market. It's a very quiet market, which is the classic definition of a bear market rally," he said.

"I won't really believe this rally until we see some money coming into mutual funds. If we start to see individuals buying stocks again that will make it sustainable. I don't see that happening right now," he said.

The rally that took stocks higher also pushed the euro to a three-month high and sent commodities higher.Oil, helped by the stronger manufacturing data, gained 3 percent to $81.34 per barrel. As oil rose, so did energy stocks and the S&P energy sector was the best performer, up 3.6 percent. Gold gained $1.70 per ounce to $1183.40.

The dollar lost a full percent against the euro Monday, to $1.3171, and fell 1.2 percent against the pound. "Why is the dollar selling off? One reason is the euro zone is not going away," said Marc Chandler, chief currency strategist at Brown Brothers Harriman.

Chandler said a much better view of the euro zone, highlighted by the bank earnings, has been pushing the euro higher, and helping risk assets. During the height of the sovereign debt crisis, there were plenty of dire forecasts that the failure of the euro zone was on the horizon and the union sharing the single currency would break apart.

Chandler said the dollar is no longer being sought for the safe haven status investors wanted, when they were worried about Europe. Interest rate differentials are also a factor. "Short-term interest rate differentials have been moving in Germany's favor. I'm watching for that to turn. I'm going to be more bullish the dollar when that turns," he said.

Treasurys were also losers in Monday's market. As investors sold the 10-year note, its yield rose to 2.963 percent, and the 2-year yield rose to 0.57 percent.

What Else to Watch

Tuesday's data includes personal income and consumer spending at 8:30 a.m. Pending home sales and factory orders are reported at 10 a.m.

Market focus will also be on a report in the Wall Street Journal, which said the Fed will consider adding to its mortgage or Treasury holdings as the bonds it holds now mature. The report said the Fed will discuss the idea at its meeting next week. It also follows on a suggestion by St. Louis Fed President James Bullard last week that the Fed may have to renew its asset purchase program if the economy deteriorates further.

There is a heavy calendar of earnings reports, including Procter and Gamble, Pfizer, Archer Daniels,Coach, Duke Energy, MasterCard, DR Horton, Marathon Oil, Molson Coors, NYSE Euronext and Baker Hughes. CBS, Anadarko Petroleum, Chesapeake Energy, Dendreon, Whole foodsand Hertz report after the bell.

The corporate bond market is also worth watching Tuesday. Thomson Reuters IFR expects another heavy day of corporate issuance, after $11.5 billion in investment grade deals Monday, the third highest daily volume this year.

IFR said Monday's action stood out for another reason. IBM came to market with a 3-year issue that priced the lowest coupon yield ever, 1.139 percent.

"There's so much demand that the spreads on the new deals are actually coming in at lower levels than the deals outstanding," said Joel Levington, managing director at Brookfield Investment Management. "One strategy to think about is to look at companies that have debt maturing in the near term that might be coming to market... That might be an opportunity to buy the old bonds."

"It's kind of the complete opposite of when we were in the credit crunch. When you're in a crisis period, you've got a lot of incentive for people to buy the (newly issued) debt," he said.

Levington said he expects a rash of companies to tap the corporate debt market after reporting earnings. "I've definitely seen that as a strategy. You saw Morgan Stanley, Citigroup, Goldman Sachs, a lot of names within minutes of reporting earnings, they're issuing debt," he said. "When rates are so low, you'd be silly not to consider it if you're a Treasurer."

Some of Monday's issuers included Altria, Omnicom, Credit Suisse NY, Citigroup, Arcelor Mittal,Expedia, and Newell Rubbermaid.

"Met Life will be the next big deal to think about this week," said Levington, who is managing director of corporate credit. Met Life, which priced a secondary share offer late Monday, is raising funds for its acquisition of the AIG Alico unit.

The corporate calendar heated up last month, resulting in the best volume ever for July. There was a record $57.19 billion issued. There was about $12.35 billion issued last week, down from $15.12 billion the week earlier. Corporate issuance, active earlier in the year, was sluggish during the peak of worries about the European sovereign crisis this spring.

- Follow me on Twitter @pattidomm.

Questions? Comments? Email us at marketinsider@cnbc.com

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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