Wall Street Week Ahead: Earnings, money flows to push stocks higher

NEW YORK (Reuters) - With earnings momentum on the rise, the S&P 500 seems to have few hurdles ahead as it continues to power higher, its all-time high a not-so-distant goal.

The U.S. equity benchmark closed the week at a fresh five-year high on strong housing and labor market data and a string of earnings that beat lowered expectations.

Sector indexes in transportation <.djt>, banks <.bkx> and housing <.hgx> this week hit historic or multiyear highs as well.

Michael Yoshikami, chief executive at Destination Wealth Management in Walnut Creek, California, said the key earnings to watch for next week will come from cyclical companies. United Technologies reports on Wednesday while Honeywell is due to report Friday.

"Those kind of numbers will tell you the trajectory the economy is taking," Yoshikami said.

Major technology companies also report next week, but the bar for the sector has been lowered even further.

Chipmakers like Advanced Micro Devices , which is due Tuesday, are expected to underperform as PC sales shrink. AMD shares fell more than 10 percent Friday after disappointing results from its larger competitor, Intel . Still, a chipmaker sector index <.sox> posted its highest weekly close since last April.

Following a recent underperformance, an upside surprise from Apple on Wednesday could trigger a return to the stock from many investors who had abandoned ship.

Other major companies reporting next week include Google , IBM , Johnson & Johnson and DuPont on Tuesday, Microsoft and 3M on Thursday and Procter & Gamble on Friday.

CASH POURING IN, HOUSING DATA COULD HELP

Perhaps the strongest support for equities will come from the flow of cash from fixed income funds to stocks.

The recent piling into stock funds -- $11.3 billion in the past two weeks, the most since 2000 -- indicates a riskier approach to investing from retail investors looking for yield.

"From a yield perspective, a lot of stocks still yield a great deal of money and so it is very easy to see why money is pouring into the stock market," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

"You are just not going to see people put a lot of money to work in a 10-year Treasury that yields 1.8 percent."

Housing stocks <.hgx>, already at a 5-1/2 year high, could get a further bump next week as investors eye data expected to support the market's perception that housing is the sluggish U.S. economy's bright spot.

Home resales are expected to have risen 0.6 percent in December, data is expected to show on Tuesday. Pending home sales contracts, which lead actual sales by a month or two, hit a 2-1/2 year high in November.

The new home sales report on Friday is expected to show a 2.1 percent increase.

The federal debt ceiling negotiations, a nagging worry for investors, seemed to be stuck on the back burner after House Republicans signaled they might support a short-term extension.

Equity markets, which tumbled in 2011 after the last round of talks pushed the United States close to a default, seem not to care much this time around.

The CBOE volatility index <.vix>, a gauge of market anxiety, closed Friday at its lowest since April 2007.

"I think the market is getting somewhat desensitized from political drama given, this seems to be happening over and over," said Destination Wealth Management's Yoshikami.

"It's something to keep in mind, but I don't think it's what you want to base your investing decisions on."

(Reporting by Rodrigo Campos, additional reporting by Chuck Mikolajczak and Caroline Valetkevitch; Editing by Kenneth Barry)

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Consumer sentiment at year low; fiscal debate weighs

NEW YORK (Reuters) - Consumer sentiment unexpectedly deteriorated for a second straight month to its lowest in over a year in January, with many consumers citing fallout from the recent "fiscal cliff" debate in Washington, a survey released on Friday showed.

The sharp drop in sentiment over the last two months coincides with rancorous federal budget negotiations that have led to higher taxes for many Americans.

Just weeks after that deal, President Barack Obama and Republican lawmakers are expected to enter another tough round of negotiations over spending cuts, which could dent consumer confidence still further.

"The handling of the fiscal cliff talks and the realization that paychecks are going to be smaller due to the sunset of the payroll tax holiday are probably weighing on consumer attitudes at the moment," said Thomas Simons, a money market economist at Jefferies & Co. in New York.

While most of the scheduled tax hikes and spending cuts forming the fiscal cliff were avoided when Congress struck a deal on January 1, most U.S. workers saw their take-home salary diminished by the expiry of two percentage-point cut in payroll taxes.

"With the debt ceiling yet to be tackled and more political acrimony on the way, we suspect that confidence has room to deteriorate further," Simons said.

The Thomson Reuters/University of Michigan's preliminary reading on the overall index of consumer sentiment came in at 71.3, down from 72.9 the month before. The index was at its lowest since December 2011. It was also below the median forecast of 75 among economists polled by Reuters.

"The most unique aspect of the early January data was that an all-time record number of consumers - 35 percent - negatively referred to the fiscal cliff negotiations," survey director Richard Curtin said in a statement.

"Importantly, the debt ceiling debate is still upcoming and could further weaken confidence," he said.

House Republicans have signaled they might support a short-term extension of U.S. borrowing authority when the government exhausts that capacity sometime between mid-February and early March. A failure by Congress to raise this debt ceiling could result in a market-rattling government default.

On Friday, Republican House Majority Leader Eric Cantor said the House would consider a bill next week to extend the debt limit by three months in order to force the Senate to pass a budget.

U.S. stocks remained little changed after the data. The S&P 500 <.spx> hit a five-year high in the last session. But on Friday, a weak outlook from Intel offset encouraging data out of China and a fourth-quarter profit at Morgan Stanley .

So far there has been a disconnect between what consumers say and do. U.S. retail sales increased a better-than-expected 0.5 percent in December. But given the recent weakening in sentiment investors will be watching for any signs that spending is starting to slip.

"The impact on consumers will be from the hike in the social security tax. That is undoubtedly going to hit discretionary spending. So this may be a signal of things to come," said Michael Woolfolk, a senior currency strategist at BNY Mellon in New York.

The consumer survey's barometer of current economic conditions fell to 84.8 from 87.0 and was below a forecast of 88.0. The gauge hit its lowest since July.

The survey's gauge of consumer expectations also slipped, hitting its lowest since November 2011 at 62.7 from 63.8, and was below an expected 65.2.

The survey's one-year inflation expectations rose to 3.4 percent from 3.2 percent, while the survey's five-to-10-year inflation outlook was unchanged at 2.9 percent.

(Additional reporting by Steven C. Johnson and Ellen Freilich; Editing by Andrea Ricci)

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Housing, job data push S&P to five-year high; Intel down late

NEW YORK (Reuters) - Stronger-than-expected data on housing starts and jobless claims lit a fire under stocks on Thursday, pushing the S&P 500 to a five-year high and its third day of gains.

A pair of economic reports lifted investors' sentiment. The number of Americans filing new claims for unemployment benefits fell to a five-year low last week and housing starts jumped last month to the highest since June 2008.

Strength in the housing and labor markets is key to sustained growth and higher corporate profits, helping to bring out buyers even on a day when earnings reports were mixed.

Gains were tempered by weakness in the financial sector, with Bank of America down 4.2 percent to $11.28 and Citigroup off 2.9 percent to $41.24 after their results.

In other negative earnings news, shares of chipmaker Intel fell 5.2 percent to $21.49 in extended-hours trading after the company forecast quarterly revenue that fell short of analysts' expectations. Intel had ended the regular session up 2.6 percent at $22.68.

The S&P 500 ended at its highest since December 2007 and now sits just 5.6 percent from its all-time closing high of 1,565.15.

"Having consolidated really for the last two weeks, the fact that we broke out, I think that that is sucking in quite a bit of money," said James Dailey, portfolio manager of TEAM Asset Strategy Fund in Harrisburg, Pennsylvania.

The Dow Jones industrial average <.dji> was up 84.79 points, or 0.63 percent, at 13,596.02. The Standard & Poor's 500 Index <.spx> was up 8.31 points, or 0.56 percent, at 1,480.94. The Nasdaq Composite Index <.ixic> was up 18.46 points, or 0.59 percent, at 3,136.00.

Better-than-expected earnings and revenue reported by online marketplace eBay late Wednesday helped the stock gain 2.7 percent to $54.33.

In the housing sector, PulteGroup Inc shares gained 4.9 percent to $20.29 and Toll Brothers Inc advanced 3.1 percent to $35.99. The PHLX housing sector index <.hgx> climbed 2.4 percent, reaching its highest close since August 2007.

Semiconductor shares <.sox> rose 2 percent to the highest close in eight months.

Financials were the only S&P 500 sector to register a slight decline for the day.

Bank of America's fourth-quarter profit fell as it took more charges to clean up mortgage-related problems. Citigroup posted $2.32 billion of charges for layoffs and lawsuits.

Energy shares led gains on the Dow as U.S. crude oil prices jumped more than 1 percent. Shares of Exxon Mobil were up 0.8 percent at $90.20 while shares of Chevron were up 0.7 percent at $114.75.

S&P 500 earnings are expected to have risen 2.3 percent in the fourth quarter, Thomson Reuters data showed. Expectations for the quarter have fallen considerably since October when a 9.9 percent gain was estimated.

Volume was roughly 6.5 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT, compared with the 2012 average daily closing volume of about 6.45 billion.

Advancers outpaced decliners on the NYSE by about 22 to 7 and on the Nasdaq by about 2 to 1.

(Additional reporting by Chuck Mikolajczak; Editing by Kenneth Barry and Nick Zieminski)

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S&P 500 ends flat as bank profits temper growth concerns

NEW YORK (Reuters) - The S&P 500 ended nearly flat on Wednesday as solid earnings from two major banks and a bounceback in Apple shares offset concerns about a lower forecast for global growth in 2013.

Shares of Goldman Sachs hit their highest since May 2011 as earnings nearly tripled on increased revenue from dealmaking and lower compensation expenses. JPMorgan Chase said fourth-quarter net income jumped 53 percent and earnings for 2012 set a record.

JPMorgan shares rose 1 percent to $46.82, while Goldman climbed 4.1 percent to $141.09.

They were among the first big banks to report results and helped to lift estimates for S&P 500 corporate earnings slightly, to a 2.2 percent gain, Thomson Reuters data showed.

"Pretty solid numbers from both JPMorgan and Goldman Sachs are putting a lot of momentum behind the financials, with a lot more names to report this week. But I think that's helping to put a better bid to the market overall," said Michael James, senior trader at Wedbush Morgan in Los Angeles.

Apple rebounded after three days of losses, helping the Nasdaq outperform the S&P 500 and Dow. Apple rose 4.2 percent to $506.09. It closed below $500 on Tuesday for the first time since February.

"There could not have been more negativity around Apple going into today. So was it due for an oversold bounce on a trading basis? Absolutely," James said.

A slow economic recovery in developed nations is holding back the global economy, the World Bank said on Tuesday, as it sharply scaled back its forecast for world growth in 2013 to 2.4 percent from an earlier forecast of 3.0 percent.

The Dow Jones industrial average <.dji> was down 23.66 points, or 0.17 percent, at 13,511.23. The Standard & Poor's 500 Index <.spx> was up 0.29 points, or 0.02 percent, at 1,472.63. The Nasdaq Composite Index <.ixic> was up 6.77 points, or 0.22 percent, at 3,117.54.

The biggest drag on the Dow was Boeing , whose shares fell 3.4 percent to $74.34 on concerns about its new Dreamliner passenger jets. Japan's two leading airlines grounded their fleets of 787s after an emergency landing, adding to safety concerns triggered by a series of recent incidents.

After the bell, shares of eBay were trading up 0.7 at $53.28, reversing an initial decline following the release of its results. Also after the close, shares of CBS rose 8.3 percent to $41.10 after it said it will convert its Outdoor Americas division into a real estate investment trust. [ID:nL4N0AL98X]

Earlier in the day, U.S. economic data showed consumer prices were flat in December, pointing to muted inflation pressures that should give the Federal Reserve room to prop up the economy by staying on its ultra-easy monetary policy path.

Other data showed U.S. homebuilder confidence in the market for single family homes held steady near seven year highs in January, suggesting the outlook for the housing market remained upbeat.

Volume was roughly 5.6 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT, compared with the 2012 average daily closing volume of about 6.45 billion.

Decliners outpaced advancers on the NYSE by nearly 8 to 7 and on the Nasdaq by almost 7 to 5.

(Additional reporting by Chuck Mikolajczak; Editing by Nick Zieminski and Kenneth Barry)

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Dow, S&P 500 inch up with retailers but Apple drags again

NEW YORK (Reuters) - The Dow and S&P 500 edged higher on Tuesday after stronger-than-expected retail data, though tech heavyweight Apple dragged on the market for a third day.

Apple was the biggest weight on both the S&P 500 and Nasdaq 100 <.ndx> after reports on Monday of cuts to orders for iPhone parts. Shares declined 3.2 percent to $485.92 and closed below $500 for the first time since February.

Retail stocks advanced after a government report showing retail sales rose more than expected in December was seen as a favorable sign for fourth-quarter growth. A separate report showed manufacturing activity in New York state contracted for the sixth month in a row in January.

"A little better-than-expected news on retail sales once again reinforces that the consumer remains alive and reasonably well," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia, which manages about $54 billion in assets.

Among retailers, American Eagle Outfitters Inc gained 4.8 percent to $20.58 and Gap Inc rose 3.4 percent to $32.46. The Morgan Stanley retail index <.mvr> advanced 1.5 percent.

Express Inc surged 23.8 percent to $17.40 after the apparel retailer raised its fourth-quarter and full year 2012 outlook.

The Dow Jones industrial average <.dji> was up 27.57 points, or 0.20 percent, at 13,534.89. The Standard & Poor's 500 Index <.spx> was up 1.66 points, or 0.11 percent, at 1,472.34. The Nasdaq Composite Index <.ixic> was down 6.72 points, or 0.22 percent, at 3,110.78.

Apple's stock has lost about 7 percent in the last three sessions and is down 8.7 percent since the start of the year.

"It's tough to discern exactly what's putting the pressure on it. But at the end of the day, its influence, considering it's still 3 1/2 to 4 percent of the S&P 500 index, is being felt," Luschini said.

"I attribute (it) to just some of the bloom coming off of the rose. They haven't necessarily done anything wrong, as much as others have caught up."

Also keeping investors on edge is the looming debt ceiling debate. On Monday, President Barack Obama rejected any negotiations with Republicans over raising the U.S. debt ceiling. The United States could default on its debt if Congress does not increase the borrowing limit.

Resolving the debt ceiling is more a question of how than if. Investors don't expect a U.S. default, but they are also wary of another eleventh-hour agreement like the one in August 2011.

An expected lackluster earnings season, too, kept investors from taking aggressive bets. Analyst estimates for the quarter have fallen sharply since October. S&P 500 earnings growth is now seen up just 1.8 percent from a year ago, Thomson Reuters data showed.

Homebuilder Lennar reported a sharp rise in quarterly profit, but the stock declined 0.8 percent to $40.68 on worries that growth in orders was slowing.

Dell Inc shares added to Monday's gains, ending up 7.2 percent to $13.17 after sources said talks to take the computer maker private are in an advanced stage.

On the down side, shares of Facebook dropped 2.7 percent to $30.10. The company unveiled a "graph search" feature that CEO Mark Zuckerberg said would help its billion-plus users sort through content within the social network and its content feeds.

Volume was roughly 5.8 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT, compared with the 2012 average daily closing volume of about 6.45 billion.

Advancers outpaced decliners on the NYSE by about 17 to 12 and on the Nasdaq by about 13 to 11.

(Additional reporting by Chuck Mikolajczak; Editing by Kenneth Barry and Nick Zieminski)

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Apple drags on S&P, Nasdaq; Dell jumps after report

NEW YORK (Reuters) - The S&P 500 and Nasdaq ended lower on Monday as worries over demand for Apple products drove down its shares and investors braced for earnings disappointments.

Running counter to that was Dell Inc's stock which jumped 13 percent to about a five-month high at $12.29 after Bloomberg reported the No. 3 personal computer maker is in talks with private equity firms to go private. Dell's gains offset some tech-sector weakness.

Tech heavyweight Apple lost 3.6 percent to $501.75 and was the biggest weight on both the S&P 500 and Nasdaq 100 <.ndx> indexes after reports the company has cut orders for LCD screens and other parts for the iPhone 5 this quarter due to weak demand. The stock hit a session low of $498.51, the first dip below $500 since February 16.

"With Apple, it seems as if the sentiment has shifted from this being the one stock that everybody wanted to own to people beginning to look at it as a company (whose) business is slowing down somewhat," said Eric Kuby, chief investment officer of North Star Investment Management Corp in Chicago.

Adding to investor unease, fourth-quarter earnings kick into high gear this week. Analyst estimates for the quarter have fallen sharply since October. S&P 500 earnings growth is now seen up just 1.9 percent from a year ago, Thomson Reuters data showed.

The Dow Jones industrial average <.dji> was up 18.89 points, or 0.14 percent, at 13,507.32. The Standard & Poor's 500 Index <.spx> was down 1.37 points, or 0.09 percent, at 1,470.68. The Nasdaq Composite Index <.ixic> was down 8.13 points, or 0.26 percent, at 3,117.50.

Apple suppliers also lost ground, with Cirrus Logic off 9.4 percent at $28.62 and Qualcomm down 1 percent at $64.24.

The Dow fared better than the other two indexes, helped in part by Hewlett-Packard shares, which rose 4.9 percent to $16.95. The stock, up early in the session after JPMorgan upgraded its rating on the shares and raised its price target to $21 from $15, added to gains following the Dell report.

Tech has "become the arena for private equity or other capital-restructuring type of maneuvers because of the way their valuations and their balance sheets are," Kuby said.

Appliance and electronics retailer Hhgregg Inc slumped 5.7 percent to $7.44 after the company cut its same-store sales forecast for the full year.

Earnings reports are due this week from Goldman Sachs , Bank of America , Intel and General Electric , among other companies. Third-quarter reports ended with a gain of just 0.1 percent, the worst for an S&P 500 profit period in three years, according to Thomson Reuters data.

President Barack Obama warned Congress at a news conference on Monday that a refusal to raise the U.S. debt ceiling next month could mean a government shutdown and trigger economic chaos.

S&P futures had little reaction to comments after the bell by Federal Reserve Chairman Ben Bernanke, who urged lawmakers to lift the country's borrowing limit to avoid a debt default.

Volume was roughly 5.6 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT, compared with the 2012 average daily closing volume of about 6.45 billion.

Decliners were about even with advancers on the NYSE while decliners outpaced advancers on the Nasdaq by about 12 to 11.

(Additional reporting by Chuck Mikolajczak; Editing by Kenneth Barry, Nick Zieminski and Andrew Hay)

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Yen pressured, Asian stocks subdued

SYDNEY (Reuters) - The yen plumbed a 2-1/2 year low against the dollar on Monday as Japan's central bank faced relentless political pressure to deliver bold stimulus, while Asian stocks got off to subdued start with Tokyo closed for a public holiday.

Prime Minister Shinzo Abe on Sunday said the Bank of Japan (BOJ) must set a 2 percent inflation target and make it a medium-term, not long-term, goal to show markets it was determined to pursue bold monetary easing to end nearly two decades of deflation.

His comments emboldened yen-bears, who took a fresh swipe at the currency. That saw the U.S. dollar hit a high of 89.67 yen, a level not seen since mid-2010, while the euro climbed as far as 119.84 yen, scaling a 20-month peak.

MSCI's broadest index of Asia-Pacific shares outside Japan was flat in early dealings, but not far from a 17-month peak set on Friday. The index has gained more than 2 percent so far this year on growing optimism about the health of the global economy.

Australian's benchmark S&P/ASX 200 index rose 0.3 percent, while South Korea's KOSPI slipped 0.2 percent, partly weighed by lingering concerns about corporate earnings and a firming local currency.

Analysts at HSBC believe global developments this week will support demand for riskier assets, with U.S. and Chinese data likely to show further momentum in the world's two biggest economies.

"In addition, the Fed speaker calendar is dominated by doves in the early part of the week. These should provide reassurance that the Fed is in no rush to turn off the liquidity tap despite these early signs of encouragement on activity," they said in a client note.

Federal Reserve Chairman Ben Bernanke is due to speak later on Monday at the University of Michigan and investors are eagerly waiting for clues on how long the Fed's latest bond purchase program will last.

Any signs that the Fed is in no hurry to end its quantitative easing program could see the U.S. dollar soften against higher-yielding currencies such as the Australian dollar and those of faster growing emerging economies.

The Aussie dollar traded at $1.0531, still remaining within easy reach of a four-month high of $1.0599 set last week.

Against the euro, the greenback dipped to a fresh nine-month low. The single currency rose 0.1 percent to $1.3357, continuing to outperform after European Central Bank chief Mario Draghi last week gave no indication the bank would ease monetary policy any further.

Optimism about the global economy also helped stem a slide in oil prices. U.S. crude rose 29 cents to $93.85 a barrel, recovering from Friday's 26-cent fall, while Brent crude was little changed at $110.62 a barrel.

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Wall Street Week Ahead: Attention turns to financial earnings

NEW YORK (Reuters) - After over a month of watching Capitol Hill and Pennsylvania Avenue, Wall Street can get back to what it knows best: Wall Street.

The first full week of earnings season is dominated by the financial sector - big investment banks and commercial banks - just as retail investors, free from the "fiscal cliff" worries, have started to get back into the markets.

Equities have risen in the new year, rallying after the initial resolution of the fiscal cliff in Washington on January 2. The S&P 500 on Friday closed its second straight week of gains, leaving it just fractionally off a five-year closing high hit on Thursday.

An array of financial companies - including Goldman Sachs and JPMorgan Chase - will report on Wednesday. Bank of America and Citigroup will join on Thursday.

"The banks have a read on the economy, on the health of consumers, on the health of demand," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

"What we're looking for is demand. Demand from small business owners, from consumers."

EARNINGS AND ECONOMIC EXPECTATIONS

Investors were greeted with a slightly better-than-anticipated first week of earnings, but expectations were low and just a few companies reported results.

Fourth quarter earnings and revenues for S&P 500 companies are both expected to have grown by 1.9 percent in the past quarter, according to Thomson Reuters I/B/E/S.

Few large corporations have reported, with Wells Fargo the first bank out of the gate on Friday, posting a record profit. The bank, however, made fewer mortgage loans than in the third quarter and its shares were down 0.8 percent for the day.

The KBW bank index <.bkx>, a gauge of U.S. bank stocks, is up about 30 percent from a low hit in June, rising in six of the last eight months, including January.

Investors will continue to watch earnings on Friday, as General Electric will round out the week after Intel's report on Thursday.

HOUSING, INDUSTRIAL DATA ON TAP

Next week will also feature the release of a wide range of economic data.

Tuesday will see the release of retail sales numbers and the Empire State manufacturing index, followed by CPI data on Wednesday.

Investors and analysts will also focus on the housing starts numbers and the Philadelphia Federal Reserve factory activity index on Thursday. The Thomson Reuters/University of Michigan consumer sentiment numbers are due on Friday.

Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis, said he expected to see housing numbers continue to climb.

"They won't be that surprising if they're good, they'll be rather eye-catching if they're not good," he said. "The underlying drive of the markets, I think, is economic data. That's been the catalyst."

POLITICAL ANXIETY

Worries about the protracted fiscal cliff negotiations drove the markets in the weeks before the ultimate January 2 resolution, but fear of the debt ceiling fight has yet to command investors' attention to the same extent.

The agreement was likely part of the reason for a rebound in flows to stocks. U.S.-based stock mutual funds gained $7.53 billion after the cliff resolution in the week ending January 9, the most in a week since May 2001, according to Thomson Reuters' Lipper.

Markets are unlikely to move on debt ceiling news unless prominent lawmakers signal that they are taking a surprising position in the debate.

The deal in Washington to avert the cliff set up another debt battle, which will play out in coming months alongside spending debates. But this alarm has been sounded before.

"The market will turn the corner on it when the debate heats up," Prudential Financial's Krosby said.

The CBOE Volatility index <.vix> a gauge of traders' anxiety, is off more than 25 percent so far this month and it recently hit its lowest since June 2007, before the recession began.

"The market doesn't react to the same news twice. It will have to be more brutal than the fiscal cliff," Krosby said. "The market has been conditioned that, at the end, they come up with an agreement."

(Reporting by Gabriel Debenedetti; editing by Rodrigo Campos)

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Wall Street Week Ahead: Attention turns to financial earnings

NEW YORK (Reuters) - After over a month of watching Capitol Hill and Pennsylvania Avenue, Wall Street can get back to what it knows best: Wall Street.

The first full week of earnings season is dominated by the financial sector - big investment banks and commercial banks - just as retail investors, free from the "fiscal cliff" worries, have started to get back into the markets.

Equities have risen in the new year, rallying after the initial resolution of the fiscal cliff in Washington on January 2. The S&P 500 on Friday closed its second straight week of gains, leaving it just fractionally off a five-year closing high hit on Thursday.

An array of financial companies - including Goldman Sachs and JPMorgan Chase - will report on Wednesday. Bank of America and Citigroup will join on Thursday.

"The banks have a read on the economy, on the health of consumers, on the health of demand," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

"What we're looking for is demand. Demand from small business owners, from consumers."

EARNINGS AND ECONOMIC EXPECTATIONS

Investors were greeted with a slightly better-than-anticipated first week of earnings, but expectations were low and just a few companies reported results.

Fourth quarter earnings and revenues for S&P 500 companies are both expected to have grown by 1.9 percent in the past quarter, according to Thomson Reuters I/B/E/S.

Few large corporations have reported, with Wells Fargo the first bank out of the gate on Friday, posting a record profit. The bank, however, made fewer mortgage loans than in the third quarter and its shares were down 0.8 percent for the day.

The KBW bank index <.bkx>, a gauge of U.S. bank stocks, is up about 30 percent from a low hit in June, rising in six of the last eight months, including January.

Investors will continue to watch earnings on Friday, as General Electric will round out the week after Intel's report on Thursday.

HOUSING, INDUSTRIAL DATA ON TAP

Next week will also feature the release of a wide range of economic data.

Tuesday will see the release of retail sales numbers and the Empire State manufacturing index, followed by CPI data on Wednesday.

Investors and analysts will also focus on the housing starts numbers and the Philadelphia Federal Reserve factory activity index on Thursday. The Thomson Reuters/University of Michigan consumer sentiment numbers are due on Friday.

Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis, said he expected to see housing numbers continue to climb.

"They won't be that surprising if they're good, they'll be rather eye-catching if they're not good," he said. "The underlying drive of the markets, I think, is economic data. That's been the catalyst."

POLITICAL ANXIETY

Worries about the protracted fiscal cliff negotiations drove the markets in the weeks before the ultimate January 2 resolution, but fear of the debt ceiling fight has yet to command investors' attention to the same extent.

The agreement was likely part of the reason for a rebound in flows to stocks. U.S.-based stock mutual funds gained $7.53 billion after the cliff resolution in the week ending January 9, the most in a week since May 2001, according to Thomson Reuters' Lipper.

Markets are unlikely to move on debt ceiling news unless prominent lawmakers signal that they are taking a surprising position in the debate.

The deal in Washington to avert the cliff set up another debt battle, which will play out in coming months alongside spending debates. But this alarm has been sounded before.

"The market will turn the corner on it when the debate heats up," Prudential Financial's Krosby said.

The CBOE Volatility index <.vix> a gauge of traders' anxiety, is off more than 25 percent so far this month and it recently hit its lowest since June 2007, before the recession began.

"The market doesn't react to the same news twice. It will have to be more brutal than the fiscal cliff," Krosby said. "The market has been conditioned that, at the end, they come up with an agreement."

(Reporting by Gabriel Debenedetti; editing by Rodrigo Campos)

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Wall Street climbs as China data puts S&P back at five-year high

NEW YORK (Reuters) - Stocks rose on Thursday and the S&P 500 ended at a fresh five-year high as stronger-than-expected exports from China spurred optimism about global growth prospects.

Buying accelerated late in the day after the S&P 500 broke through technical resistance at 1,466.47, which was the market's closing level last Friday and the highest level since December 2007.

"Historically, January is a positive month for the market and you're seeing that play out," said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.

Financial and energy stocks were the day's top gainers. The financial sector index <.gspf> rose 1.4 percent and the energy sector <.gspe> was up 1 percent.

Analysts cited economic data out of China as the day's catalyst, which showed the country's export growth rebounded sharply to a seven-month high in December, a strong finish to the year after seven straight quarters of slowdown.

"It is being interpreted positively that they've stopped the downturn (in growth)," said Kurt Brunner, portfolio manager at Swarthmore Group in Philadelphia.

"If they continue to produce good growth, that's going to be supportive of our global manufacturers."

Wall Street's fear gauge, the CBOE Volatility Index <.vix> suggested markets were relatively calm. The VIX was down 2.3 percent at 13.49.

At Thursday's close, the S&P sits about 6 percent below its all-time closing high of 1,565.15, hit in October 2007.

The Dow Jones industrial average <.dji> gained 80.71 points, or 0.60 percent, to 13,471.22. The Standard & Poor's 500 Index <.spx> rose 11.10 points, or 0.76 percent, to 1,472.12. The Nasdaq Composite Index <.ixic> added 15.95 points, or 0.51 percent, to 3,121.76.

Thursday's session had earlier included a dip that traders said was triggered by a trade in the options market that prompted a large amount of S&P futures to hit the market at the same time. That sent the S&P 500 index down rapidly but those losses were reversed through the afternoon.

Financials benefited from events this week that added clarity to mortgage rules and banks' potential exposure to the housing market.

The U.S. government's consumer finance watchdog announced mortgage rules on Thursday that will force banks to use new criteria to determine whether a borrower can repay a home loan.

Earlier this week, several big mortgage lenders reached a deal with regulators to end a review of foreclosures mandated by the government.

"It's a resolution. It's not hanging over their heads," said Brunner.

Bank of America gained 3.1 percent to $11.78, while Morgan Stanley was up 3.7 percent at $20.34, one day after sources said the bank plans to cut jobs.

Shares of upscale jeweler Tiffany dropped 4.5 percent to $60.40 after it said sales were flat during the holidays.

Herbalife Ltd stepped up its defense against activist investor Bill Ackman, stressing it was a legitimate company with a mission to improve nutrition and help public health. The stock ended down 1.8 percent at $39.24 after a volatile day.

After the closing bell, American Express said it would cut about 5,400 jobs, and take about $600 million in after-tax charges in the fourth quarter. The stock added 0.7 percent to $61.20 in after-hours trade.

Volume was above the 2012 average of 6.42 billion shares traded a day, with roughly 6.77 billion shares changing hands on the New York Stock Exchange, the Nasdaq and the NYSE MKT.

Advancers outnumbered decliners on the NYSE by 1,916 to 1,039, while advancers also outpaced decliners on the Nasdaq by 1,439 to 1,036.

(Editing by Nick Zieminski)

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Wall Street rises after Alcoa reports earnings

NEW YORK (Reuters) - Stocks rose on Wednesday, rebounding from two days of losses, as investors turned their focus to the first prominent results of the earnings season.

Stocks had retreated at the start of the week from the S&P 500's highest point in five years, hit last Friday, on worries about possible earnings weakness.

Shares of Alcoa Inc were down 0.5 percent to $9.08 after early gains, following the company's earnings release after the bell on Tuesday. The largest U.S. aluminum producer said it expects global demand for aluminum to grow in 2013.

Herbalife Ltd stock rose 4.2 percent to $39.95 in its most active day of trading in the company's history after hedge fund manager Dan Loeb took a large stake in the nutritional supplements seller. Prominent short-seller Bill Ackman had previously accused the company of being a "pyramid scheme," which Herbalife has denied.

Traders have been cautious as the current quarter shaped up like the previous one, with companies recently lowering expectations, said James Dailey, portfolio manager of Team Asset Strategy Fund in Harrisburg, Pennsylvania. Lower expectations leave room for companies to surprise investors even if their results are not particularly strong.

"The big question and focus is on revenue, and Alcoa had better-than-expected revenue," which calmed the market a little, Dailey said.

Overall, corporate profits were expected to beat the previous quarter's meager 0.1 percent rise. Both earnings and revenues in the fourth quarter are expected to have grown by 1.9 percent, according to Thomson Reuters data.

The Dow Jones industrial average <.dji> gained 61.66 points, or 0.46 percent, to 13,390.51. The Standard & Poor's 500 Index <.spx> rose 3.87 points, or 0.27 percent, to 1,461.02. The Nasdaq Composite Index <.ixic> gained 14.00 points, or 0.45 percent, to 3,105.81.

Facebook Inc shares rose above $30 for the first time since July 2012, trading up 5.3 percent at $30.59. Facebook, which has been tight-lipped about its plans after its botched IPO in May, invited the media to its headquarters next week.

Clearwire Corp shares jumped 7.2 percent to $3.13 after Dish Network bid $2.28 billion for the company, beating out a previous Sprint offer and setting the stage for a takeover battle for the wireless service provider that owns crucial mobile spectrum.

Apollo Group Inc slid after heavier early losses, a day after it reported lower student sign-ups for the third straight quarter and cut its operating profit outlook for 2013. Apollo's shares were last off 7.8 percent at $19.32.

Volume was below the 2012 average of 6.42 billion shares traded per day, as 6.10 billion were traded on the New York Stock Exchange, NYSE MKT and Nasdaq.

Advancing stocks outnumbered declining ones on the NYSE by 2,014 to 963, while on the Nasdaq advancers beat decliners 1,603 to 859.

(Reporting by Gabriel Debenedetti; additional reporting by Angela Moon; Editing by Nick Zieminski)

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Wall Street slips as earnings season gets under way

NEW YORK (Reuters) - Stocks fell on Tuesday, retreating from last week's rally on the "fiscal cliff" deal in Washington, as companies started to report results for the fourth quarter.

After a 4.3 percent jump in the two sessions around the close of the fiscal cliff negotiations, the S&P has declined a bit, with investors finding few catalysts to extend the rally that took the benchmark to five-year highs.

"We had a brief respite, courtesy of what happened on the fiscal cliff deal and the flip of the calendar with new money coming into the market," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

Shares of AT&T Inc dropped 1.7 percent to $34.35, making it one of the biggest drags on the S&P 500, after the company said it sold more than 10 million smartphones in the quarter.

This figure beat the same quarter in 2011, but also means increased costs for the wireless service provider. Providers like AT&T pay hefty subsidies to handset makers so that they can offer discounts to customers who commit to two-year contracts.

Fourth-quarter profits are expected to beat the previous quarter's lackluster results, but analyst estimates are down sharply from October. Quarterly earnings are expected to grow by 2.7 percent, according to Thomson Reuters data. Dow component Alcoa, the largest U.S. aluminum producer, reported results after the closing bell.

The Dow Jones industrial average <.dji> dropped 55.44 points, or 0.41 percent, to 13,328.85. The Standard & Poor's 500 Index <.spx> fell 4.74 points, or 0.32 percent, to 1,457.15. The Nasdaq Composite Index <.ixic> lost 7.01 points, or 0.23 percent, to 3,091.81.

"The stark reality of uncertainty with regard to earnings, plus the negotiations on the debt ceiling, are there and that doesn't give investors a lot of reason to take bets on the long side," Hellwig said.

With AT&T's fall, the S&P telecom services index <.gspl> was the worst performer of the 10 major S&P sectors, down 2.7 percent.

Sears Holdings shares dropped 6.4 percent to $40.16 a day after the company said Chairman Edward Lampert would take over as CEO from Louis D'Ambrosio, who is stepping down due to a family member's health issue. The U.S. retailer also reported a 1.8 percent decline in quarter-to-date sales at stores open at least a year.

Markets went lower as some of the first reported earnings were weak.

"It doesn't seem to be bouncing back, it might stay here or sell off a little further," said Stephen Carl, head of U.S. equity trading at The Williams Capital Group in New York.

Shares of restaurant-chain operator Yum Brands Inc fell 4.2 percent to $65.04 a day after the KFC parent warned sales in China, its largest market, shrank more than expected in the fourth quarter.

GameStop was one of the worst performers on the S&P 500 as shares slumped 6.3 percent to $23.19 after the video game retailer reported low customer traffic for the holiday season and cut its guidance.

Shares of Monsanto Co gained 2.5 percent to $98.42 after reaching a more than four-year high at $99.99. The world's largest seed company raised its earnings outlook for fiscal year 2013 and posted strong first-quarter results.

Volume was below the 2012 average of 6.42 billion shares traded per day, as 6.19 billion were traded on the New York Stock Exchange, NYSE MKT and Nasdaq.

Declining stocks outnumbered advancing ones on the NYSE by 1,495 to 1,458, while on the Nasdaq decliners beat advancers 1,305 to 1,158.

(Reporting by Gabriel Debenedetti; Editing by Kenneth Barry and Nick Zieminski)

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Asian shares steady, Basel ruling supports banks

SINGAPORE (Reuters) - Asian shares outside Japan edged up on Monday, supported by data showing the U.S. economy continuing on a path of slow but steady recovery that had pushed Wall Street stocks to a five-year high.

Financial stocks were underpinned by a decision from global regulators on Sunday to give banks four more years and greater flexibility to build up cash buffers so they can use some of their reserves to help struggling economies grow.

MSCI's broadest index of Asia Pacific shares outside Japan <.miapj0000pus> gained 0.1 percent, but Tokyo's Nikkei share average <.n225> retreated after touching a 23-month high in early trade and last stood down 0.4 percent. <.t/>

The MSCI benchmark's financial sector sub-index <.miapjfn00pus> gained 0.2 percent after the Basel Committee of banking supervisors agreed at the weekend to a relaxation of a draconian earlier draft of new global bank liquidity rules.

Shares in Japanese exporters were supported by a weaker yen, which was steady around 88.17 to the dollar, after the U.S. currency rose as far as 88.40 yen, its highest in nearly two-and-a-half years, on Friday.

The dollar ticked up slightly against the euro, which traded around $1.3060.

The U.S. benchmark S&P 500 index <.spx> closed at its highest level since December 2007 on Friday after data showed a steady pace of jobs growth and brisk expansion of the services sector in the world's biggest economy.

(Reporting by Alex Richardson; Editing by Eric Meijer)

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"Cliff" concerns give way to earnings focus

NEW YORK (Reuters) - Investors' "fiscal cliff" worries are likely to give way to more fundamental concerns, like earnings, as fourth-quarter reports get under way next week.

Financial results, which begin after the market closes on Tuesday with aluminum company Alcoa , are expected to be only slightly better than the third-quarter's lackluster results. As a warning sign, analyst current estimates are down sharply from what they were in October.

That could set stocks up for more volatility following a week of sharp gains that put the Standard & Poor's 500 index <.spx> on Friday at the highest close since December 31, 2007. The index also registered its biggest weekly percentage gain in more than a year.

Based on a Reuters analysis, Europe ranks among the chief concerns cited by companies that warned on fourth-quarter results. Uncertainty about the region and its weak economic outlook were cited by more than half of the 25 largest S&P 500 companies that issued warnings.

In the most recent earnings conference calls, macroeconomic worries were cited by 10 companies while the U.S. "fiscal cliff" was cited by at least nine as reasons for their earnings warnings.

"The number of things that could go wrong isn't so high, but the magnitude of how wrong they could go is what's worrisome," said Kurt Winters, senior portfolio manager for Whitebox Mutual Funds in Minneapolis.

Negative-to-positive guidance by S&P 500 companies for the fourth quarter was 3.6 to 1, the second worst since the third quarter of 2001, according to Thomson Reuters data.

U.S. lawmakers narrowly averted the "fiscal cliff" by coming to a last-minute agreement on a bill to avoid steep tax hikes this weeks -- driving the rally in stocks -- but the battle over further spending cuts is expected to resume in two months.

Investors also have seen a revival of worries about Europe's sovereign debt problems, with Moody's in November downgrading France's credit rating and debt crises looming for Spain and other countries.

"You have a recession in Europe as a base case. Europe is still the biggest trading partner with a lot of U.S. companies, and it's still a big chunk of global capital spending," said Adam Parker, chief U.S. equity strategist at Morgan Stanley in New York.

Among companies citing worries about Europe was eBay , whose chief financial officer, Bob Swan, spoke of "macro pressures from Europe" in the company's October earnings conference call.

REVENUE WORRIES

One of the biggest worries voiced about earnings has been whether companies will be able to continue to boost profit growth despite relatively weak revenue growth.

S&P 500 revenue fell 0.8 percent in the third quarter for the first decline since the third quarter of 2009, Thomson Reuters data showed. Earnings growth for the quarter was a paltry 0.1 percent after briefly dipping into negative territory.

On top of that, just 40 percent of S&P 500 companies beat revenue expectations in the third quarter, while 64.2 percent beat earnings estimates, the Thomson Reuters data showed.

For the fourth quarter, estimates are slightly better but are well off estimates for the quarter from just a few months earlier. S&P 500 earnings are expected to have risen 2.8 percent while revenue is expected to have gone up 1.9 percent.

Back in October, earnings growth for the fourth quarter was forecast up 9.9 percent.

In spite of the cautious outlooks, some analysts still see a good chance for earnings beats this reporting period.

"The thinking is you need top line growth for earnings to continue to expand, and we've seen the market defy that," said Mike Jackson, founder of Denver-based investment firm T3 Equity Labs.

Based on his analysis, energy, industrials and consumer discretionary are the S&P sectors most likely to beat earnings expectations in the upcoming season, while consumer staples, materials and utilities are the least likely to beat, Jackson said.

Sounding a positive note on Friday, drugmaker Eli Lilly and Co said it expects profit in 2013 to increase by more than Wall Street had been forecasting, primarily due to cost controls and improved productivity.

(Reporting By Caroline Valetkevitch; Editing by Kenneth Barry)

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S&P 500 finishes at 5-year high on economic data

NEW YORK (Reuters) - The benchmark Standard & Poor's 500 index ended at a five-year high on Friday, lifted by reports showing employers kept up a steady pace of hiring workers and the vast services sector expanded at a brisk rate.

The gains on the S&P 500 pushed the index to its highest close since December 2007 and its biggest weekly gain since December 2011.

Most of the gains came early in the holiday-shortened week, including the largest one-day rise for the index in more than a year on Wednesday after politicians struck a deal to avert the "fiscal cliff."

The Dow Jones industrial average <.dji> gained 43.85 points, or 0.33 percent, to 13,435.21. The Standard & Poor's 500 Index <.spx> rose 7.10 points, or 0.49 percent, to 1,466.47. The Nasdaq Composite Index <.ixic> edged up 1.09 points, or 0.04 percent, to 3,101.66.

For the week, the S&P gained 4.6 percent, the Dow rose 3.8 percent and the Nasdaq jumped 4.8 percent to post their largest weekly percentage gains in more than a year.

The CBOE Volatility index <.vix>, a measure of investor anxiety, dropped for a fourth straight session, giving the index a weekly decline of nearly 40 percent, its biggest weekly fall ever. The close of 13.83 on the VIX marks its lowest level since August.

In Friday's economic reports, the Labor Department said non-farm payrolls grew by 155,000 jobs last month, slightly below November's level. Gains were distributed broadly throughout the economy, from manufacturing and construction to healthcare.

Also serving to boost equities was data from the Institute for Supply Management showing U.S. service sector activity expanding the most in 10 months.

With the S&P 500 index at a five-year closing high, analysts said any gains above the index's intraday high near 1,475 in September may be harder to come by.

"We are getting to a point where we need a strong catalyst, which could be earnings, it could be three months of good economic data, it could be a variety of things," said Adam Thurgood, managing director at HighTower Advisors in Las Vegas, Nevada.

"What is going on right now is this conflicting view of fundamentals look pretty good and improving, and then you've got these negative tail risks that could blow everything up," Thurgood said.

He referred to "a fiscal superstorm brewing" of issues still left unresolved in Washington, including tough federal budget cuts and the need to raise the government's debt ceiling all within a couple of months.

The rise in payrolls shown by the jobs data did not make a dent in the U.S. unemployment rate still at 7.8 percent.

A Reuters poll on Friday of economists at Wall Street's top financial institutions showed that most expect the Fed in 2013 to end the program with which it bought Treasury debt in an effort to stimulate the economy.

A drop in Apple Inc shares of 2.6 percent to $528.36 kept pressure on the Nasdaq.

Adding to concerns about Apple's ability to produce more innovative products, rival Samsung Electronics Co Ltd is expected to widen its lead over Apple in global smartphone sales this year with growth of 35 percent. Market researcher Strategy Analytics said Samsung had a broad product lineup.

Eli Lilly and Co was among the biggest boost's to the S&P, up 3.7 percent to $51.56 after the pharmaceuticals maker said it expects its 2013 earnings to increase to $3.75 to $3.90 per share, excluding items, from $3.30 to $3.40 per share in 2012.

Fellow drugmaker Johnson & Johnson rose 1.2 percent to $71.55 after Deutsche Bank upgraded the Dow component to a "Buy" from a "Hold" rating. The NYSEArca pharmaceutical index <.drg> climbed 0.6 percent.

Shares of Mosaic Co gained 3.3 percent to $58.62. Excluding items, the fertilizer producer's quarterly earnings beat analysts' expectations, according to Thomson Reuters I/B/E/S.

Volume was modest with about 6.07 billion shares traded on the New York Stock Exchange, NYSE MKT and Nasdaq, slightly below the 2012 daily average of 6.42 billion.

Advancing stocks outnumbered declining ones on the NYSE by 2,287 to 701, while on the Nasdaq, advancers beat decliners 1,599 to 866.

(Reporting by Chuck Mikolajczak; Editing by Nick Zieminski and Kenneth Barry)

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Asian shares drop on Fed minutes, dollar extends gain

TOKYO (Reuters) - Asian shares fell on Friday, tracking overnight weakness in global equities, but the dollar gained as U.S. debt yields rose after several Federal Reserve officials expressed concerns about continuing to expand stimulative bond buying.

Minutes from the Fed's December policy meeting released on Thursday showed some voting members of the Federal Open Market Committee were increasingly concerned about the potential risks of the Fed's asset purchases on financial markets, even if it look set to continue an open-ended stimulus program for now.

The Fed's asset buying policy has been a crucial factor underpinning investor risk appetite and supporting global equities, so the more hawkish Fed minutes unnerved financial markets on Thursday, driving benchmark U.S. Treasury yields up to a near eight-month high and weighing on equities and oil, while bolstering the dollar.

The dollar extended gains early in Asia on Friday, hitting its highest since July 2010 against the yen at 87.78 while the euro fell to a three-week low of $1.3022. The U.S. dollar <.dxy> hit a near four-week high against a basket of major currencies on Thursday.

"The minutes have added a fresh degree of uncertainty into the investment climate, which is likely to mean a steeper yield curve. But equity investors should take heart from the fact that the Fed's perception is qualified on an improving economy," Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York, said in a note to clients.

MSCI's broadest index of Asia-Pacific shares outside Japan <.miapj0000pus> fell 0.4 percent, after scaling its highest since August 2011 on Thursday.

Australian shares <.axjo> slipped 0.5 percent, with investors pulling back after a sharp two-day rally which took shares to their highest in more than 19 months on Thursday.

"U.S. equities were due for a correction at any rate ... and the same is true of the KOSPI. Investors would do well to buy while shares are easing," Lee Seung-woo, an analyst at KDB Daewoo Securities, said of South Korean shares <.ks11>, which opened down 0.1 percent.

Japan's benchmark Nikkei stock average <.n225> opened sharply higher, up 2 percent, to its highest since March 2011 on the back of the tumbling yen. Japanese markets were closed from December 31 to January 3 for the new year's holidays. The Nikkei ended 2012 with the sharpest yearly gain since 2005. <.t/>

U.S. lawmakers earlier this week narrowly avoided falling off a "fiscal cliff" of automatic higher taxes and spending cuts, which had been set to kick in at the start of the year and threatened to derail the U.S. economy, providing an immediate boost for financial markets.

But U.S. President Barack Obama and congressional Republicans face tough talks on spending cuts and an increase in the nation's debt limit as the hard-fought deal to avert the fiscal cliff covered only taxes and delayed decisions on expenditures until March 1.

Investor sentiment was, on the other hand, supported by recent data showing activity in China's services sector and at U.S. factories expanded in December, which brightened the outlook for global growth.

The U.S. jobs market remained on a recovery track, with data on Thursday showing U.S. private-sector employers shrugged off the budget wrangling and stepped up hiring in December, heightening hopes for a strong nonfarm payrolls report due later on Friday.

The U.S. economy likely added 150,000 jobs in December, according to a Reuters survey of economists, up from 146,000 in November. The unemployment rate is expected to hold steady at 7.7 percent.

Resolution of the U.S. fiscal cliff crisis could spell trouble for some Asian assets that are coming off a stellar 2012 as investors could start to shift some money out of overpriced Asian investments in favour of the U.S. on a view that the fiscal deal manages to avert a U.S. recession and so boosts the prospects for American stocks.

U.S. crude inched down 0.2 percent to $82.78 a barrel.

(Additional reporting by Somang Yang in Seoul; Editing by Eric Meijer)

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Wall Street starts new year with a bang after "cliff" deal

NEW YORK (Reuters) - Stocks kicked off the new year with their best day in over a year on Wednesday, sparked by relief over a last-minute deal in Washington to avert the "fiscal cliff" of tax hikes and spending cuts that threatened to derail the economy's growth.

In 2013's first trading session, the S&P 500 achieved its biggest one-day gain since December 20, 2011, pushing the benchmark index to its highest close since September 14.

Concerns over Washington's ability to sidestep the cliff had driven the S&P 500 down for five straight sessions, before signs that a resolution was near sent the benchmark index higher on the final trading session of 2012.

The CBOE Volatility Index or the VIX <.vix>, Wall Street's favorite gauge of investor anxiety, dropped 18.5 percent to 14.68 at the close. The VIX has fallen 35.4 percent over the past two sessions, the biggest 2-day percentage drop in the history of the index.

The Dow Jones industrial average <.dji> jumped 308.41 points, or 2.35 percent, to 13,412.55 at the close. The Standard & Poor's 500 Index <.spx> gained 36.23 points, or 2.54 percent, to finish at 1,462.42. The Nasdaq Composite Index <.ixic> climbed 92.75 points, or 3.07 percent, to end at 3,112.26.

U.S. markets were closed on Tuesday for New Year's Day.

Market breadth reflected the strong rally, with 10 stocks rising for every one that fell on the New York Stock Exchange. All 10 of the S&P 500 industry sector indexes gained at least 1 percent. The S&P financial index <.gspf> shot up 2.9 percent.

The S&P Information Technology index <.gspt> gained 3.2 percent, including Hewlett-Packard , which climbed 5.4 percent to $15.02. HP's gain followed a miserable 2012 when the stock fell nearly 45 percent as one of the S&P 500's worst performers for 2012.

On Tuesday, Congress passed a bill to prevent huge tax hikes and delay spending cuts that would have pushed the world's largest economy off a "fiscal cliff" and possibly into recession.

The vote avoided steep income-tax increases for a majority of Americans, but failed to resolve a major showdown over cutting the budget deficit, leaving investors and businesses with only limited clarity about the outlook for the economy. Spending cuts of $109 billion in military and domestic programs were temporarily delayed, and another fight over raising the U.S. debt limit also looms.

"We got through the fiscal cliff. The next big thing, and probably more contentious thing, is negotiating the debt ceiling and possibly entitlement reform in early 2013," said Jim Russell, senior equity strategist for U.S. Bank Wealth Management in Cincinnati.

Hard choices about budget cuts and the critical need to raise the debt ceiling will confront Congress about the same time in two months "so the fur will be flying," Russell said.

U.S. stocks ended 2012 with the S&P 500 up 13.4 percent for the year, as investors largely shrugged off worries about the fiscal cliff. For the year, the Dow gained 7.3 percent and the Nasdaq jumped 15.9 percent.

Bank shares rose following news that U.S. regulators are close to securing another multibillion-dollar settlement with the largest banks to resolve allegations that they unlawfully cut corners when foreclosing on delinquent borrowers.

Bank of America Corp rose 3.7 percent to $12.03 and Citigroup Inc gained 4.3 percent to $41.25. The KBW bank index <.bkx> rose 3.2 percent.

Shares of Zipcar Inc surged 47.8 percent to $12.18 after Avis Budget Group Inc said it would buy Zipcar for about $500 million in cash to compete with larger rivals Hertz and Enterprise Holdings Inc. Avis advanced 4.8 percent to $20.77.

Shares of Apple rose 3.2 percent to $549.03, helping to lift the S&P information technology index <.gspt> up 3.2 percent following a report that the most valuable tech company has started testing a new iPhone and a new version of its iOS software.

Economic data from the Institute for Supply Management showed U.S. manufacturing ended 2012 on an upswing despite fears about the fiscal cliff, but the Commerce Department reported that construction spending fell in November for the first time in eight months.

Volume was heavy, with about 7.8 billion shares traded on the New York Stock Exchange, the NYSE MKT and the Nasdaq, well above the 2012 daily average of 6.42 billion.

(Reporting by Chuck Mikolajczak; Editing by Jan Paschal)

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Asia holds breath as U.S. fiscal talks go to wire

SYDNEY/HONG KONG (Reuters) - Asian stocks started new year trading with tentative gains as investors anxiously wait to see if the U.S. Congress can strike a last-minute compromise and avert the harsh "fiscal cliff" tax rises and spending cuts that are technically already in force.

The U.S. Senate early on Tuesday passed a bill that aims to avoid the cliff's automatic implementation of $600 billion in spending cuts and tax increases.

But the bill's fate was uncertain in the House of Representatives, where a number of Republicans complained it did not tackle spending cuts adequately.

"Frankly, we don't know what to make of it all. It's like a circus there," said one exasperated forex dealer at an Australian bank in Sydney.

"The markets have always assumed they would eventually strike a deal that would avoid the worst affects of the fiscal cliff, but it's getting harder and harder to stay optimistic."

The MSCI Asia Pacific ex-Japan index of stocks <.miapj0000pus> was up 0.3 percent largely on the back of gains in Australian markets where mining giants Rio Tinto and BHP Billiton helped the local benchmark <.axjo> rise 0.6 percent in early trading.

Asian stocks outside Japan rose nearly 20 percent last year as a combination of improving economic data from China, receding worries about the euro zone, and global central bank easing that encouraged investors back into equity markets.

Sakthi Siva, Asia strategist for Credit Suisse, said 2013 could see similar returns for Asian equities as the pace of earnings downgrades slows.

Improved earnings could prompt a long-awaited switch out of safe haven assets such as gold and bonds, she said, noting such a view assumes "a minimalist compromise deal is reached on the fiscal cliff."

With the last-minute Senate deal on the fiscal cliff already hitting stumbling blocks in the House of Representatives, and the prospects of more wrangling as the U.S. nears its debt ceiling in February, there is little comfort for investors as political events continue to trump market fundamentals.

YEN SLIPS

The Japanese yen continued its slide as investors wagered the Bank of Japan would have to take ever-more aggressive easing steps to support the economy and satisfy the new government.

The dollar held firm on the yen at 86.60 yen, having touched its highest level since August 2010. The Japanese currency also dropped to depths not seen in over four years against the Australian and New Zealand dollars.

Japanese stock markets <.n225> will reopen on Friday.

The euro was a shade weaker against the U.S. dollar at $1.3195, but turnover was extremely thin.

Spot gold was little changed at $1,671 an ounce, while oil futures dipped 11 cents to $91.71.

(Reporting by Wayne Cole in SYDNEY and Vikram Subhedar in HONG KONG; Editing by Eric Meijer)

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"Fiscal cliff" deal reached between White House, lawmakers: source

WASHINGTON (Reuters) - The White House and congressional lawmakers have reached a deal to avoid the "fiscal cliff" that would delay harsh spending cuts by two months, Obama administration officials said on Monday.

President Barack Obama called Democratic Senate Majority Leader Harry Reid and House of Representatives Minority Leader Nancy Pelosi, who both signed off on the deal, one source said.

The agreement includes a balance of spending cuts and revenue increases to pay for the delay in the automatic spending cuts that would go into effect without a deal by lawmakers.

Of those spending cuts, 50 percent would come from defense and 50 percent from non-defense areas, the sources said. The White House viewed that as a victory, one source said, and sees it as a model for future deficit reduction pacts.

Vice President Joe Biden traveled to Capitol Hill to discuss the deal.

(Reporting by Jeff Mason and Mark Felsenthal; Editing by Peter Cooney)

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Stock futures edge higher as "cliff" talks continue

(Reuters) - Equity futures were slightly higher on Sunday night as talks continued in Washington over resolving the "fiscal cliff."

While the Senate will not vote Sunday night on any bill to avoid a series of $600 billion in tax hikes and spending cuts, as many had hoped, negotiations continued between lawmakers and the White House.

The Senate will reconvene on Monday after the open of equity trading. In order for a deal to take effect, it would also have to be passed by the House of Representatives.

Despite the gain indicated by futures, stocks still could end up falling on Monday when the cash markets open if lawmakers are unable to come to an agreement to avoid the cliff, which many fear could push the economy into recession.

"There is always a chance for a massive stalemate, and we could see a lot more volatility if we get to a point where there's no more hope. Right now there's still hope," said Adam Sarhan, chief executive of Sarhan Capital in New York.

Midnight on Monday marks the deadline for a deal, though the government can pass legislation in 2013 that retroactively prevents going over the cliff, an option that is viewed as politically easier.

"At some point, someone will have to blink, or Congress will just come in early in 2013 and vote for a tax cut," Sarhan said. "Something will be done to resolve this."

S&P 500 futures were up 5.4 points, or 0.4 percent, at 1,389 in electronic trading. Still, futures were about 7 points below the fair value level of 1,397.19. Fair value is a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Despite the rise, if futures remain below fair value, cash markets will open lower.

Dow and Nasdaq futures were also slightly higher, though below fair value.

Stocks fell sharply on Friday, with significant losses in the last minutes of trading, as prospects for a deal worsened at the beginning of the weekend.

The rise in the futures market does not necessarily augur for a rally on Monday, however. The cash market and futures markets closed with a wide gulf on Friday, by virtue of the extra 15 minutes of trading in futures.

The S&P 500 closed at 1,402.43 at 4 p.m. ET on Friday, down 1.1 percent, but futures continued to fall before closing 15 minutes later with a loss of 1.9 percent. S&P futures and the S&P cash index don't match point-by-point, but that kind of disparity points to a weak opening in stocks on Monday.

One hour before they had hoped to present a plan on Sunday, Democratic and Republican Senate leaders said they were still unable to reach a compromise.

Earlier in the day, President Barack Obama, appearing on NBC's "Meet the Press," said investors could begin to show greater concerns in the new year.

"If people start seeing that on January 1st this problem still hasn't been solved ... then obviously that's going to have an adverse reaction in the markets," he said,

Investors have remained relatively sanguine about the process, believing that it will eventually be solved. In the past two months markets have not shown the kind of volatility that was present during the fight to raise the debt ceiling in 2011.

The Dow industrials and the S&P 500 each lost 1.9 percent last week, after stocks fell for five straight sessions, which marked the S&P 500's longest losing streak in three months. Equities have largely performed well in the last two months despite constant chatter about the fiscal cliff, but the last few days shows a bit of increased worry.

The CBOE Volatility Index <.vix> rose to its highest level since June on Friday, closing at 22.72.

(Additional reporting by David Gaffen; Editing by Jan Paschal)

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