Sunday, November 6, 2011

US Markets Fall For 1st Time in 4 Weeks

U.S. markets fell on Friday ahead of a confidence vote on Greek Prime Minister George Papandreou. On Friday, the S&P 500 fell 7.92 points or 0.65% to 1,253.23. The Dow lost 61.23 points or 0.51% to 11,983.24. For the week, the S&P 500 fell 2.5%, while the Dow dropped 2%. The retreat in markets broke 4 consecutive weeks of gains.

U.S. Data Fails to Inspire Optimism

On Friday, the U.S. Labour Department reported gains of 80,000 non-farm jobs in October. It was worst than the 95,000 that the market expected. While the government shed 24,000 jobs, the private sector added 104,000 positions.

Even though the unemployment rate fell in October to 9% (from September's 9.1%) it was not a big enough drop to lift markets.

Greece Takes Markets on Roller Coaster Ride

Greek Prime Minister George Papandreou survived the confidence vote on Saturday. Today, he agreed to a deal with the opposition to form a coalition government to pass the $130 billion euro bailout package, before early elections take place. However, investors have lost a lot of confidence in Greece after George Papandreou tried to take the bailout package to a referendum. Investors will be weary of any setbacks in Greece in the near future.

Italy Now in Focus 

Investors are increasingly troubled by Italy, as the yield on the country's 10-year bonds closed at 6.37% on Friday. It was an increase over the previous day's close of 6.194%. If the yield remains over 6%, investors would become increasingly concerned since it is considered unsustainable, and could force the country through the same debt crisis as Greece.
On Friday, Italian banks UniCredit and Intesa SanPaolo, heavily exposed to Italian soveriegn debt, fell 6.6% and 4.8% respectively. Italian Prime Minister Silvio Berlusconi, who turned down a funding offer from the IMF, placed the country under IMF financial supervision on Friday.

MF Global Goes Bankrupt

MF Global declared bankruptcy this week, as the brokerage had billions in PIIGS sovereign debt. The market then began speculating on the next brokerage to go under. Shares of Jefferies Group fell 7.4% on Friday, and lost almost 20% this week. The company had to issue a statement to say that it had a very small exposure to Portugal, Italy, Ireland, Greece and Spain.

Looking Ahead to Next Week

Volatility will remain the name of the game next week, as investors evaluate developments from Greece and monitor the situation in Italy. For the next few weeks, it will likely be a tug-of-war between improving US economic data and the euro zone debt crisis.

The situation in Italy will have a significant effect on markets. Ever since the debt crisis began in Greece in early 2010, contagion was the biggest concern. As the yield on 10-year Italian debt remains above 6%, investors will brace for a significant shock to markets.

As gold remained firmly above US$1,700 this week and gold miners reported increasing margins, I sold about 75% of my positions in Barrick and Goldcorp (at C$52 for both). Once the shares pull back, I will add shares at around C$47.

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