Sunday, October 23, 2011

US Markets Rise for 3rd Week on Euro Zone Hopes

U.S. markets rose for a 3rd week on hopes that euro zone officials would come to a concrete solution for the debt crisis during a meeting this weekend. On Friday, markets rose on rumours that the EFSF would be combined with the ESM, increasing the bailout fund to $940 billion euros. The rumour sent German and French markets up 3.6% and 2.8% respectively.

On Friday, the S&P 500 gained 22.86 points or 1.88% to 1,238.25. The Dow rose 267.01 points or 2.31% to 11,808.79. For the week, the S&P 500 gained 1.1%, while the Dow rose 1.3%.

China growth slows

On Tuesday, China's 3rd quarter GDP data was announced. The 9.1% growth was weaker than the 9.3% the market expected, and was the 3rd consecutive quarter of decline.

US economic data eases fears

In addition to hopes that euro zone officials would agree on a plan to end the debt crisis, markets received a boost this week from better-than-expected US economic data. US jobs data show the jobs situation is stabilizing, retail demand has firmed and a regional manufacturing survey show a rebound.

Looking ahead to next week

Investors looking for the euro zone leaders to entirely solve the debt crisis this weekend will likely be disappointed. EU officials need to recapitalize European banks with at least $100 billion euros. They also need to leverage the $440 billion euro EFSF in order to increase its size. Finally, they need to decide the amount of write-down for Greek debt, which is currently expected to be between 20% and 60%.
Considering how ineffective EU leaders have been since early 2010 in trying to resolve the debt crisis, it is very unlikely they would accomplish all three above tasks within a weekend. Thus, investors will likely be disappointed when markets open Monday, leading to a downward direction for markets.

Investors will also be watching the US GDP data on Friday. The market expects a 2.5% annual growth for the 3rd quarter (July to September) which is almost double the growth in the 2nd quarter. The number meeting expectations would reinforce the belief that the economy is growing steadily. Meanwhile, a worst-than-expected reading could erase the gains the market has been accumulating in the past three weeks.

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