Sunday, June 20, 2010

Continuing stability in Spain should provide upside momentum this week

It has been a great week for investors worldwide. Last Sunday, I wrote that given the increasing stability in Spain, stock markets were “poised to move higher this week”. Markets have certainly jumped higher this week on a range of encouraging news. The TSX closed up on 4 of 5 days, and is up 260.67 points this week. Overseas, the MSCI world index hit a 1-month high on Friday. In addition, European markets have been up for eight days in a row, while Asian stocks just posted their best week in 6 months. 

The euro, whose price these days is determined by the perceived strength of the euro zone economy, is at a 3-week high above US$1.24. The volatility index VIX has also fallen to 25 from a 14-month high of 47 in May.

This worldwide rally has been caused by the successful government bond sales in Europe. For example, Spain successfully raised €3.5-billion on Thursday. In addition, the fear that some investors had of a collapse in the Spanish banking sector has simply not materialized.

The continuing stabilization of the situation in Spain will provide further upside in this risk-asset rally. However, if the situation in Europe continues to stabilize, investors will increasingly look elsewhere to determine the direction of markets.

Investors will focus more on economic data from the U.S., which might not be positive for stocks, since recent data have been worse than expectations. For example, more data like last week's (which showed initial claims for jobless benefits rose in the week of June 7 by 12,000 to 472,000) would hurt upside momentum in markets.

The U.S. Federal Reserve will announce a decision on interest rates, and issues a policy statement on Wednesday. With a rate hike out of the question, investors will be reading the policy statement carefully to see the Fed's outlook for the U.S. economy. Other factors for markets this week are the first round of quarterly earnings, with Adobe giving its report on Tuesday, and Oracle and Research In Motion announcing theirs on Thursday.

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