Monday, December 20, 2010

Markets head higher on US data and bullish sentiment

The S&P 500 edged higher to another 2-year high today, as the index rose 3.17 or 0.25% to 1,247.08. Meanwhile, the Dow slipped 13.78 or 0.12% to 11,478.13. The S&P 500 is up 5.7% so far in December, and 11.8% in 2010.

The S&P 500 rose 0.3% last week, while the Dow gained 0.7%. It was a week in which a list of US data either met expectations or were better than expected. The list included consumer spending, manufacturing indices and initial jobless rates.

As a result, analysts are turning increasingly bullish on upcoming US economic growth. For example, Bill Gross of PIMCO stated that fourth quarter US economic growth will be 3% to 3.5%, while Alan Greenspan sees US GDP growing 3% to 3.5% in 2011.

Euro zone crisis continues

Investors continue to pay attention to the euro zone. While negative news continue to emerge, developments there have not been large or negative enough to push markets lower. Today, Moody's downgraded 4 Irish banks and an insurer. This followed Moody's move on Friday, downgrading Ireland's credit rating by 5 notches, from Aa2 to Baa1.

Last Tuesday, the euro zone avoided further crisis when Italian Prime Minister Mario Berlusconi survived a confidence motion by 3 votes. On the same day, the S&P 500 warned that it could cut Belgium's rating. Later in week, Moody's put Spain's rating on negative watch. Meanwhile, strikes continued across Europe, as workers and tax-payers resisted austerity budgets. Protests have been particularly bad in Greece and the UK.

Outlook for the week

If negative news coming out of Europe continues to be too insignificant to weigh on markets, then North American indices can continue to rally on bullish sentiment and positive US data. However, investors will face a rude awakening in January at the latest, when the situation in the euro zone continues to deteriorate. In addition, with inflation at 5%, China needs to raise its interest rate 3 to 4 times next year even if it leaves rates unchanged for the rest of 2010. This represents another negative impact looming for markets.

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