Sunday, June 27, 2010

U.S. economic data pounded markets this past week

Following a week in which world markets rallied, this week, the TSX finished down 219.74 points. In the U.S., the Dow lost 2.8%, while the S&P 500 fell 3.6%. From a technical perspective, the S&P 500 closed below its 200-day moving average, which is a bearish indicator.

The negative movement in markets this week was caused by poor economic data from the U.S. Meanwhile, the biggest positive news for the week, that China is allowing its currency to trade in a larger range, provided little upside strength for the markets on Monday.

Last Sunday, I wrote that “economic data from the U.S...might not be positive for stocks, since recent data have been worse than expectations.” That has indeed been the theme this week, with the National Association of Realtors saying on Tuesday that sales of existing homes unexpectedly fell 2.2% in May. In addition, on Wednesday, the U.S. Commerce Department reported that sales of new single-family homes dropped 33% in May.

Upside for markets likely in the coming week

This week, the completion of the banking reform bill by the House and Senate will be positive for the financial sector, since the measures are not as harsh as some had anticipated. In fact, on Friday, Citigroup, JP Morgan, Goldman Sachs and Bank of America saw their shares rise 4.2%, 3.7%, 3.5% and 2.7% respectively. I expect to see U.S. banks continue to rally on Monday.

In addition, the conclusion of the G20 summit should add a sense of stability to the markets, after world leaders pledged to slash deficits. 

The continuing stabilization of the debt crisis in Europe should also provide some upward momentum to the markets. While some worries about Greece were briefly apparent this week, the overall situation has been stable in the euro zone in the past few weeks.

Finally, the steep losses suffered in North American markets also presents opportunities for bargain hunters, making it likely that the coming week will see markets end in the black.

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