Sunday, March 25, 2012

U.S. Markets Rebound on Euro Strength and Energy Sector

 U.S. stocks rose on Friday on a stronger euro, as well as strength in the energy and base metals sectors. The S&P 500 gained 4.33 points or 0.31% to 1,397.11. The Dow rose 34.59 points or 0.27% to 13,080.73. For the week, the S&P 500 fell 0.5%, while the Dow dropped 1.2%. It was only the second week this year that the S&P 500 had a down week.

China Growth Concerns Drag Markets

For much of the week, concerns about economic growth in China dragged on markets. On Monday, China's Department of Finance announced that in the first two months of this year, revenues at state-owned companies fell 10% versus 2011. This resulted in sharp losses in the Hang Seng index in Hong Kong and indices in China.

On Thursday, HSBC's China PMI showed a reading of only 48.1 for March, which was lower than the 49.7 in February. It was also the lowest reading in 4 months. Within the index, new orders in March had a reading of only 46.1, lower than the 48.5 in February. Meanwhile, new export orders in March was also below 50, with a reading of 48.7, but was higher than the 47.5 in February. The PMI reading pushed U.S. markets lower on Thursday.

Looking Ahead to Next Week

The relief rally that North American markets experienced since the start of 2012 is clearly over. The market is either in a pause or a pull-back. Markets will likely continue to be dragged lower next week by news from China. On Saturday, China's banking regulator told banks that they had incorrectly classified around 20% of their loans to local governments into the safest category of loans. The re-classification of these loans would require more loan-loss provisions to be set aside, reducing the net income of banks. Thus, that would push banks' share prices and Chinese stock indices lower.

In addition, high energy prices will likely neutralize gains in the US market. On Friday, Brent crude settled at above the $125 mark, at $125.13/barrel (up $1.99). Meanwhile, WTI rose $1.52 to settle at $106.87/barrel. With the summer driving season around the corner, the effect of high energy prices on the economy will be more clearly felt in the coming weeks.

Sunday, March 18, 2012

S&P 500 Posts Best Weekly Gain Since December

US markets posted mixed results on Friday, after the Thomson Reuters/University of Michigan consumer sentiment index for February posted a lower-than-expected reading. The index fell in February from 75.3 to 74.3, and was lower than the 76.0 that economists expected.

On Friday, the S&P 500 rose slightly by 1.57 points or 0.11% to 1,404.17. The Dow fell 20.14 points or 0.15% to 13,232.62. For the week, the Dow gained 2.4%, while the S&P 500 posted its 5th consecutive week of gains.

Stress Test Results Boost Market

Most of the market's gains this week was on Tuesday, because of the results of the stress test on US banks and Fed Chairman Ben Bernanke's statement after the FOMC meeting. The stress test results indicated that of the 19 large banks tested, only 4 banks failed. Several banks were allowed to increase their dividends following the stress test. Following the results, shares of JP Morgan rose 7%.

US Federal Reserve Boosts Economic Outlook

Also on Tuesday, Federal Reserve Chairman Ben Bernanke issued a statement following the FOMC meeting. He improved the wording used to describe economic growth for the next several quarters, from “modest” to “moderate”. Meanwhile, monetary policy remains unchanged, with the current low interest rate to be kept in place until late 2014. A new round of QE was also not mentioned, and Bernanke reiterated continuing Operation Twist.

Looking Ahead to Next Week

With the S&P 500 having gained about 30% since October 3rd, a 5-10% pullback is likely. In addition, there is concern that Portugal would need to have its debt restructured, since its debt have been at unsustainable high yields. Furthermore, a Greek election is expected in April or May, and the new government's ability to implement tough bailout conditions is in question.

Brent crude has rebounded to settle above $125/barrel this week, as Iranian exports will soon be restricted. The high price of oil presents another headwind for stocks. Thus, North American markets will likely trade sideways or head lower next week.

Sunday, March 11, 2012

US Markets Rise on Greece Bond Deal and Jobs Data

On Friday, US markets received a lift from Greece avoiding a hard default and the better-than-expect February jobs number. The S&P 500 gained 4.96 points or 0.36% to 1,370.87. The Dow gained 14.08 points or 0.11% to 12,922.02. For the week, the S&P 500 gained 0.1%.

The Greek government announced on Friday that 83% of bond holders have accepted the bond-swap deal. With the activation of the collective action clause (CAC) the percentage of participants increases to 96%. The deal decreases Greece's debt by about $100 billion euros.

In addition, on Friday the U.S. government announced that 227,000 non-farm jobs were added, which was higher than the 210,000 the market expected. The February unemployment rate remained at 8.3%, meeting market's expectations. The market also received a boost from rumours that the US Federal Reserve is considering a new type of QE.

Greece Debt Classified as in Default

By Saturday, the ISDA has ruled that the bond swap deal is considered a default, while Moody's and Fitch have downgraded Greek debt to selective default. This activates about US$3.2 billion in CDS payments, but was largely brushed aside by markets on Friday.

China Decreases Growth Target

On Sunday, China decreased its 2012 GDP growth target from 8% to 7.5%. It was the first time since 2004 that the growth target had been lowered, and the news weighed on markets early in the week.

Looking Ahead to Next Week

The Fed's FOMC will meet on Tuesday, and issue a statement after. Investors will be looking for any sign of a new round of QE or operation twist (OT). Meanwhile, the Thomson Reuters/University of Michigan consumer sentiment data will be released on Friday. The market expects a reading of 76.0 for March.

The bond swap deal and the resulting triggering of CDS payments could have a negative effect for markets next week. In addition, investors with high hopes for a new type of QE will likely be disappointed Tuesday. Even if the Fed gives a hint about conducting a new type of QE, its size will likely be much smaller than QE2. Finally, markets will likely be pushed lower early in the week by China's weak February export numbers, and its largest monthly trade deficit in 22 years.

Sunday, March 4, 2012

LTRO Lifts S&P 500 To 8th Weekly Gain in Past 9 Weeks

US markets fell slightly on Friday, as the recent rally lost some momentum. The S&P 500 fell 4.46 points or 0.32% to 1,369.63. The Dow slipped 2.73 points or 0.02% to 12,977.57. For the week, the S&P 500 rose 0.3%, while the Dow edged 0.05% lower.

The S&P 500 recorded its 8th week of gains in the past 9 weeks, and has risen 9% since the beginning of 2012.

LTRO Boosts Stocks

World markets received a boost on Wednesday when the ECB's second tranche of LTRO was larger than expected. The ECB loaned €529.5 billion ($713.4 billion) to 800 European banks, which was larger than the €500 billion the market expected. It was also larger than the €489 billion in the first tranche.

Bernanke Dashes Hopes for QE3

On Thursday, US Fed Chairman Ben Bernanke dashed the market's hopes for a QE3, when he did not mention quantitative easing during his testimony to Congress. Many investors have been hoping for QE3 to provide more liquidity to markets. As a result, US markets and gold prices fell on Thursday.

Looking Ahead to Next Week

The US government is scheduled to release the February jobs report on Friday. Economists expect non-farm payrolls to have gained 210,000 jobs last month. With the impressive gains that US markets have achieved since the beginning of 2012, markets are susceptible to a pull-back. Thus, a jobs report that is worst than expected could cause a pull-back. Meanwhile, a better-than-expected report could continue to send markets higher.

The high oil price is another concern. The tensions in the Middle East has kept the price of Brent crude above $120/barrel. If the high price of oil continues, it would eat into consumer spending and cut short any rallies in the market. In addition, if the situation with Iran rapidly deteriorates, it would certainly send markets lower.