Sunday, August 22, 2010

Expect markets to head lower as investors face plethora of economic data

The S&P 500 and Dow declined for a second straight week on concerns about an economic recovery that is losing steam. For the week, the Dow fell 0.9%, while the S&P 500 declined 0.7%. The Nasdaq managed to finish the week in positive territory by adding 0.3%.

The worrisome Fed statement on August 10th continued to pull markets lower this week. Adding to the concerns were Thursday's report of U.S. initial jobless claims, which shows a nine-month high; meanwhile, a mid-Atlantic manufacturing index showed the first contraction in a year.

Data from Credit Suisse have shown that institutional investors have taken a more defensive positions in the second quarter in the face of a weakening economic recovery. They increased positions in sectors such as telecoms and utilities.

M&A activity provided a boost to a select number of sectors, as BHP Billiton launched a $39 billion bid for Potash Corp., and Intel bought McAfee for $7.68 billion.

Things were not any more encouraging in the euro zone, as the euro fell to a 5-week low of US$1.266, after a ECB Governing Council member urged the ECB to extend its loose monetary policy. Meanwhile, the yield on the 10-Year U.S. Treasury fell to a 1-year low of 2.552%, as investors sought a low-risk asset.

For the coming week, I expect markets to continue heading lower, as the gloom from the August 10th Fed statement continues to persist, and investors continue to realize the implications of the weak initial jobless claims and manufacturing activity data. Investors will be focused on plenty of economic data this week, with reports on U.S. existing-home sales and new home sales in July, durable goods orders in July and GDP for the second quarter. With the overwhelming majority of economic data from the U.S. being worst than expected in recent months, investors should expect most of the data this week to be the same.

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