World stock gains capped by U.S. inflation worries

LONDON -- European stock markets and Wall Street futures traded higher Tuesday after strong earnings from investment bank Goldman Sachs Group Inc. and health care products maker Johnson & Johnson -- but a surprising spike in U.S. producer price pressures capped the gains.

In Europe, the FTSE 100 index of leading British shares was up 27.85 points, or 0.7 percent, at 4,229.98 while Germany's DAX rose 43.96 points, or 0.9 percent, to 4,766.30. The CAC-40 in France was up 21.57 points, or 0.7 percent, at 3,073.65, with trading volumes down heavily because of the Bastille Day national holiday.

Futures markets were pointing to a solid, if unspectacular opening on Wall Street, despite a raft of fairly upbeat news. Dow futures were up only 25 points, or 0.3 percent, at 8,294 while the broader Standard & Poor's 500 futures rose 2.1 points, or 0.2 percent, to 897.90.

World stock markets started the week strongly -- Japan's Nikkei index even snapped a nine-day losing streak -- on mounting expectations that Goldman Sachs would kick off the banking reporting season with a strong set of results.

Given the pre-release advance, it was difficult for the bank's strong report to entice more buying. Goldman Sachs said it earned $2.72 billion, or $4.93 per share, after preferred stock dividends, up from $1.66 billion, or $3.39 per share, a year earlier. Goldman also recorded a charge of 78 cents per share as it repaid the government's $10 billion investment in the bank as part of the Troubled Asset Relief Program.

Perhaps more immediate encouragement came from Johnson & Johnson, which reported a bigger than anticipated profit after cost savings, and the news that retail sales in June rose by their largest amount in five months. The Commerce Department said retail sales rose 0.6 percent last month, better than the 0.4 percent gain that economists had expected.

The second consecutive monthly rise boosted hopes that the world's largest economy may be on the verge of a rebound. Without the support of the U.S. consumer, which accounts for around 70 percent of the U.S. economy and 20 percent of the global economy, any recovery will soon fizzle out.

Weighing on sentiment though was the news that wholesale prices in the U.S. in June rose by their most since November 2007, led by more expensive energy products. The 1.8 percent jump in the Producer Price Index, which tracks the costs of goods before they reach store shelves, was double market expectations and fanned fears about future inflation.

Over the rest of the week, investors will be particularly interested to see if other big U.S. banks, such as Citigroup Inc. and Bank of America Corp. are in similarly good shape as Goldman Sachs. The American banks are widely considered to have been the catalyst to the first synchronized global economic downturn since the Second World War.

"Should earnings reports elsewhere in the banking sector surprise on the upside, equity markets could see fresh gains," said Neil Mackinnon, chief economist at ECU Group. Mackinnon said the S&P could run up to 925 in the short term.

Equities rose from the middle of March until the start of June on hopes that the U.S. economy in particular will recover from recession sooner than anticipated and that stocks were undervalued relative to their earnings potential.

But disappointing economic news over the last few weeks, culminating in a worse than expected U.S. jobs report for June, altered the mood prevailing among investors that a significant rebound in the U.S. was a possibility. Since recent highs in early June, the S&P index and the Dow Jones industrial average have dropped around 7 percent.

Earlier in Asia, Japan's benchmark Nikkei 225 stock average rose 211.48 points, or 2.3 percent, to 9,261.81, erasing most of the previous day's decline and Hong Kong's Hang Seng vaulted 631.10, or 3.7 percent, to 17,885.73.

Elsewhere in Asia, Australia's key index leapt 3.5 percent, while encouraging economic news propelled Singapore's main index up 1.9 percent. The island's export-dependent economy grew for the first time in a year in the second quarter, according to preliminary figures, suggesting the region is emerging from the global slump.

South Korea's Kospi gained 0.5 percent and China's Shanghai index was up 2.1 percent.

Oil prices climbed Tuesday, with the benchmark crude for August delivery up $1.10 cents to $60.79 a barrel. The contract fell 20 cents to settle at $59.69 on Monday.

The dollar was up 0.1 percent at 93 yen while the euro fell 0.1 percent to $1.3965.