Monday, December 13, 2010

Markets little changed as China tightens

North American markets changed very little on Monday, as the Dow gained 18.24 or 0.16% to close at 11,428.56, while the S&P 500 rose a mere 0.06 points to 1,240.46. Today, investors were mostly focused on further tightening in China. The Santa Claus rally also appears to be losing steam, as the euro zone debt crisis persists. 

On Friday, the S&P 500 rose 0.6% to 1,240.4, its highest close since mid-Sept. 2008. Meanwhile, the Dow gained 0.35% to 11,410.32. For the week, the Dow rose 0.2%, while the S&P 500 gained 1.3%. Late last week, U.S. December consumer sentiment was better than expected, and hit the highest level in 6 months. The country's trade deficit also dropped more than expected in October.

China tightens on strong growth

On Saturday, China reported November CPI of 5.1%, which was higher than expected. It was also greater than the previous month's reading of 4.4%, and was a 28-month high. The Chinese Central Bank had raised the reserve requirement ratio (RRR) for banks by 50 bp (basis points) ahead of the announcement.

Euro zone worries still present

The euro zone debt crisis continues, as protests and strikes continue to occur in some countries. Germany also continues to refuse to use its taxpayer money to assist other euro zone members. For example, Angela Merkel is resisting calls to increase the size of the $750 billion euro bailout fund. She has also pushed repeatedly for investors of PIIGS nations' government bonds to take losses in any debt restructuring. 

These comments by Germany, the largest economy in Europe, has spooked investors repeatedly in recent weeks. On Friday, the spread between the Portuguese and German 10-year government bonds increased 18 bp to 346 bp. The same spread between Irish and German bonds rose to 540 bp. It is believed that the ECB has slowed in its purchase of government bonds from PIIGS nations.

Outlook for this week

With analysts believing that China could raise its interest rate before the end of the year, and the euro zone debt crisis far from over, investors should expect markets to head lower this week. In fact, analysts expect the Chinese Central Bank to raise its interest rate 3-4 times next year, which could weigh on markets particular in the beginning of 2011.

The Santa Claus rally appears to be running out of steam, as it becomes overwhelmed by news from the euro zone and China. The S&P 500 is also running into technical resistance, as it reached its highest level since mid-Sept. 2008. However, investors should expect gold to outperform, as euro zone worries persist.

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