Sunday, August 29, 2010

Brace yourselves for the worst September since 2008

North American markets ended the week on Friday on a positive note, as Fed chairman Ben Bernanke promised more aggressive quantitative easing measures if necessary. However, for the week, the S&P 500 fell 0.7%, its third consecutive weekly fall. It was also its longest consecutive fall since February, and left the S&P 500 13% below its April highs. Meanwhile, the Dow fell 0.6% for the week, leaving the index down 3% so far this month.

On Friday, U.S. second quarter GDP was revised down to 1.6% from the prior reading of 2.4%. It was also much lower than the first quarter growth of 3.7%. However, since most economists had been expecting a worse revision to 1.4%, the markets rallied on the news.

Various data earlier in the week were far gloomier. U.S. July existing home sales fell to their lowest level in 15 years, while new-home sales were the lowest on record since 1963. Housing sales were weak despite the average rate for a 30-year fixed-rate mortgage falling to 4.42 per cent, the lowest in the history of a 39-year survey by Freddie Mac. In addition, U.S. July durable goods orders rose 0.3% from the prior month, which is far lower than the 2.8% that was expected. Removing the volatile transportation component actually leaves the number at -3.8%, the largest fall in 6 months.

News from Europe this week were not any better, as S&P cut its rating on Ireland to AA-. The rating agency stated that the Irish banking industry needs an injection of $50 billion from the government, which is far higher than the previously-estimated $35 billion, and equal to 32% of the country's GDP. As a result, Irish CDS rose to their highest level in 6 months, to 316 basis points, which indicates a 23.6% chance of a default within 5 years. 

While Friday offered a pleasant upward bounce, the direction for the coming week is clearly downwards, with some economists expecting unemployment to edge up to 9.6% from 9.5% with Friday's employment data. Another data to watch is the ISM's report on U.S. manufacturing in August. A weak reading would raise double-dip concerns among investors.

In fact, as we head into the traditionally treacherous month of September, I expect continuing worst-than-expected economic, employment and consumer confidence data to drive North American markets lower. In fact, I am expecting a fall of 7% to 11% for the Dow, S&P 500 and TSX in September.

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