Sunday, October 16, 2011

U.S. Markets Rise on Hope for Action from Euro Zone Leaders

U.S. markets rose this week on better-than-expected economic data and hope that euro zone leaders will take action to resolve the debt crisis. On Friday, the S&P 500 rose 20.92 points or 1.74% to 1,224.58. Meanwhile, the Dow gained 166.36 points or 1.45% to 11,644.49. Since its intra-day low of 1,074.77, the S&P 500 has risen 14%. 

For the week, the S&P 500 climbed 6%, while the Dow gained 4.9%. Investors were hopeful that euro zone leaders would take concrete action to resolve the debt crisis following the G20 summit. 
U.S. Retail Sales Better Than Expected

On Friday, September US retail sales rose 1.1% over August. It beat consensus of a 0.7% rise, and was the fastest growth in 7 months. In addition, August retail sales growth was revised up, to 0.3%. 
Consumer Sentiment Still Weak

However, consumer sentiment fell in early October by more than expected, to the lowest level in more than 30 years. The October reading was 57.5, lower than the 59.4 in September. It was also lower than consensus of 60.2. 
Looking Ahead to Next Week

Equities could continue to receive a boost from earnings, with results from Apple and IBM expected by the Street to be strong. Markets could continue rising if investors continue to be hopeful that euro zone leaders will finally take concrete and effective action. 
However, major banks including Citigroup, Goldman Sachs and Wells Fargo are also reporting earnings. With disappointing results from JP Morgan on Thursday, the banks are unlikely to post impressive results.

Investors will also be eyeing economic data next week. Industrial production and capacity utilization will be announced Monday, with producer and consumer inflation on Tuesday and Wednesday respectively. The final reading of the Reuters/University of Michigan consumer sentiment index will be announced Friday. 
While the upward bounce in the market this week has some momentum, I see it unlikely to last more than another two weeks. Greece has yet to default or take a haircut on its debt. In addition, euro zone leaders have failed multiple times since early 2010 in resolving the debt crisis. I continue to expect markets to bottom only when Greece defaults or forces investors to take a haircut. While markets may not be hit hard by the 30% haircut that is being discussed, a 50%-60% haircut could drive up the yield of Italian and Spanish debt, causing markets to tumble.

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