Sunday, July 3, 2011

US markets rise on Greece and US data

U.S. markets rose this week on expectation of the Greek austerity package being passed, and some stronger-than-expected US economic data. On Friday, the S&P 500 gained 19.03 points or 1.44% to 1,339.67. The Dow rose 168.43 points or 1.36% to 12,582.77. For the week, the S&P 500 gained 5.6%, while the Dow jumped 5.4%.

All week, markets expected that Greece would pass its 5-year austerity bill. In fact, on Wednesday, the Greek parliament passed the austerity plan. On Thursday, the Greek parliament voted to pass the measures of the austerity plan. This resulted in a rally, since the Greek crisis has been troubling markets for weeks.

Strong US manufacturing data

Apart from the relief from Greece, markets also received a boost from US manufacturing data this week. The ISM index rose to 55.3 in June, from 53.5 in May. It was also higher than the 52 expected by economists, and the first increase in 4 months.

Worries remain for the US

Everything was not rosy for the US this week. Initial jobless claims reported on Thursday fell by only 1,000, to 428,000. It was worse than the decrease of 9,000 that economists expected. Once again, initial jobless claims continued to remain above the key 400,000 level.

S&P also warned that if the US government failed it pay $30 billion due on August 4, it would downgrade its rating on the US from “AAA” to “D”, the lowest level.
Soft data from China

Partially offsetting the positive US manufacturing data was soft manufacturing data from China. On Friday, China's June PMI was reported at 50.9, 1.1 lower than May. It was the lowest level in 28 months, and the 4th consecutive monthly drop.

Euro zone troubles remain

Italy is increasingly in the spotlight. S&P said this week that Italy's $47 billion euro austerity plan does not remove the possibility that the country will be downgraded.

Looking ahead to next week

While the Greek crisis has been averted for now, the crisis still remains. Greece only received $12 billion euros this week. It will continue to need to repay debt that comes due, and is unable to go to the market for funding. Thus, Greece will require additional loans, as early as August.

While the 5%+ boost that US markets experienced this week could be a sign of more gains to come, markets could pull back slightly after such a strong rally. Negative factors still exist in the US (debt ceiling), euro zone (Italy and other PIGS nations) and China (slowing growth). Thus, I believe that a pullback is more likely than further gains next week.

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