Sunday, October 2, 2011

US markets fall on euro zone and China

U.S. markets fell on Friday on fears of U.S. banks being exposed to the euro zone debt crisis, and on fears of a hard landing for China. The S&P 500 dropped 289.98 points or 2.5% at 1,131.42. The Dow fell 240.60 points or 2.16% at 10,913.38. 

Shares of Morgan Stanley tumbled 10.5% on Friday on fears that it was the most exposed U.S. bank to a default in the euro zone. For the week, the S&P 500 lost 0.4%, while the Dow fell 1.3%. For the quarter, the S&P 500 fell 14.3%, while the Dow dropped 12.1%. In September alone, the S&P fell 7%.

China PMI data eyed

Investors became increasingly concerned about a hard landing for the Chinese economy this week. On Friday, Chinese CDS rose to their highest level since March 2009. However, the CDS were indicating a 10.6% chance of default for China, lower than the level for Korea and Japan.

Because of this concern, China's September PMI was the center of attention for markets. On Saturday, the reading was announced at 51.2, an increase of 0.3 over August. It was the second consecutive month of increase, and will likely soothe concerns over China on Monday. 

The Trioka returns to Greece 

On Thursday, representatives from the EU, IMF and ECB returned to Greece to examine the country's finances. The “trioka” will decide on October 13 whether to release the next tranche of $8 billion euros to Greece. 

Germany approves expanding EFSF 

On Thursday, the German Parliament passed a vote to expand the EFSF from $250 billion euros to $440 billion euros. However, Germany and other countries are split over what steps to take to increase the size of the EFSF beyond $440 billion, since the current size is seen by the market as inadequate. 

Gold rises 8% in quarter

Despite falling 11% in September, gold rose 8% in the quarter, its biggest quarterly rise this year. On Friday, December gold futures closed up $0.30 at $1,622.30/ounce. This week, as gold mining shares fell on weak a weak gold price, I added shares of Goldcorp (at $47.00) and Barrick (at $47.00). This was done using a strategy in Gold Investing Mastery Guide.

I also initiated a position in Silver Wheaton at $31. I see Silver Wheaton as a clear bargain, as I expect the price of silver to quickly rebound in the coming days after the current correction, especially if the euro zone debt crisis worsens.

Looking ahead to next week 

Investors will get some relief on Monday, as Saturday's China September PMI was stronger than expected. Markets will also be focused on a series of US economic data this week. The US September employment report will be announced Friday. US manufacturing data from the ISM will be out on Monday, while the ISM services sector index will be released Wednesday.

Markets will of course also be focused on the euro zone. Since Greece has yet to default or take a haircut on its debt, the worse is not yet over. The worry that Greece will default will likely continue to drag markets lower next week.

I see a rebound in gold and silver prices as imminent after the recent correction. Clearly, gold has significant support at $1,600/ounce. Thus, I added to my positions in Goldcorp and Barrick this week, and initiated a position in Silver Wheaton, using a strategy in Gold Investing Mastery Guide.

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