Sunday, May 27, 2012

U.S. Markets Fall Ahead of Long Weekend on Spanish Bank Troubles

U.S. markets fell on Friday on a relatively uneventful day before the long weekend. The S&P 500 fell 2.86 points or 0.22% to 1,317.82. The Dow dropped 74.92 points or 0.60% to 12,454.83. For the week, the S&P 500 ended higher, breaking the index's streak of consecutive declines at 3 weeks. For the week, the S&P 500 gained 1.7%, while the Dow rose 0.6%. The S&P 500 has fallen 5.7% since the beginning of May, but is still up 4.8% for 2012.

Spanish Bank Bankia Seeks Expanded Bailout

On Saturday, Spanish bank Bankia requested $19 billion euros of additional bailout funding from the Spanish government, which was twice as large as what the market expected. As a result, S&P downgraded Bankia and two other banks to a “junk” rating. On Thursday, the Spanish government had decided to completely nationalize Bankia by injecting $9 billion into the bank. However, that amount was determined to be inadequate by Saturday. In addition, the Spanish government injected $4.5 billion euros into Bankia in early May, which brings the entire bailout to a total of $23.5 billion euros.

EU Leaders Meet But Produce No Results

On Tuesday, EU leaders began to meet for a summit in Brussels to resolve the euro zone debt crisis. French President Hollande pushed for the issuance of Eurobonds, which Germany resisted. The market doubted that the meeting would produce any significant results. In addition, Reuters reported that EU officials were instructing EU member nations in preparing for Greece to exit the euro zone. As a result, the Dow fell around 160 points in early trading on Wednesday. Meanwhile, the euro fell to its 21-month low of US$1.2615. By Friday, Germany and France were unable to come to an agreement on Eurobonds, and simply suggested 3 measures to help economic growth.

Facebook Shares Tumble In Second Week of Trading

On Monday, Facebook shares tumbled 11% after Friday's disappointing IPO. The shares closed down $4.20 at $34.03. By the end of the week, FB closed at $31.91, after losing 3.4% on Friday. It hit a intraday low of $30.94 on Tuesday.

Looking Ahead to Next Week

With elections in Greece to be held on June 17th, it is likely the situation in the country has stabilized until then. While the possibility of Greece exiting the euro zone will provide a negative overhang for stocks, its effect could be small until the election occurs. Meanwhile, most of the euro zone concerns will be focused on Spain, as a result of the Bankia bailout. Investors will be watching to see whether Spain's other banks also require bailouts.

Next week, investors will be watching a long list of economic data to be released in the U.S. Consumer confidence, GDP and May non-farm payrolls reports will be released. Better-than-expected economic data from the U.S. could send markets higher next week, if few negative news emerge from the euro zone.

Sunday, May 20, 2012

U.S. Markets Tumble on Greece Euro Zone Exit Concerns

The S&P 500 fell for a 6th consecutive day on Friday on euro zone worries, and posted its worst week since November. On Friday, the S&P 500 fell 9.64 points or 0.74% to 1,295.22. The Dow lost 73.11 points or 0.59% to 12,369.38. For the week, the S&P 500 tumbled 4.3%, while the Dow fell 3.5%. The S&P 500 has fallen 7.3% so far in May.

Facebook Records Lackluster Performance After IPO

After its IPO on Friday, shares of Facebook initially rose 10% in early trading. However, it closed just 0.6% above its issue price of $38, at $38.23. The shares almost fell below the $38 level, but were supported by its underwriters.

16 Spanish Banks Downgraded as Euro Zone Concerns Spread

On Friday, Moody's downgraded 16 Spanish banks by 1 to 3 notches, as concerns about Greece spread to other PIIGS nations. Meanwhile, with the increasing threat of Greece leaving the euro zone, S&P downgraded Greece on Friday, from B- to CCC.

Spanish Debt Yields Hit Record Highs

On Thursday, Spain auctioned $2.5 billion of 3- and 4-year government bonds. The yield on the 4-year bonds was 5.106%, much higher than the 3.374% at the last auction. As a result, the yield on 10-year Spanish bonds rose to 6.38%, and its spread versus German debt rose to 500 basis points.

Greeks Rush To Withdraw Deposits from Banks

With the increasing threat of Greece leaving the euro zone, Greeks have been rushing to withdraw money from banks. On Monday, Greeks withdrew $700 million euros from Greek banks. The situation was similar on Tuesday. This caused the euro to fall to US$1.2688 on Wednesday, and the yield on Spanish 10-year debt to hit 6.51%.

Looking Ahead to Next Week

With the severity of the euro zone crisis increasing, markets will likely continue to fall until the situation in Greece is resolved, either with a temporary solution by the ECB/EU/IMF or through exiting the euro zone. G8 leaders have been meeting this weekend, and investors will look to see if there are any concrete measures announced next week. Meaningful action by the G8 would provide markets with a boost. Investors will also be looking at the German, French and euro zone PMIs to gauge the health of the euro zone economy. In addition, Germany's Ifo for business sentiment will shed light on the strength of Europe's leading economy.

Sunday, May 13, 2012

U.S. Markets Fall For Second Week on Greece and Spain Concerns

U.S. stocks fell for a second week in a row, as a $2 billion trading loss by JP Morgan and concerns about the political uncertainty in Greece and the stability of Spanish banks pulled markets lower. On Friday, the S&P 500 fell 4.60 points or 0.34% to 1,353.39. The Dow dropped 34.44 points or 0.27% to 12,820.60. For the week, the S&P 500 lost 1.1%, while the Dow dropped 1.7%.

JP Morgan Loses $2 Billion in 6 Weeks

On Friday, shares of JP Morgan Chase & Co tumbled 9.3% after revealing that the bank had lost $2 billion in 6 weeks on hedging positions involving the CDS Index. Investors became concerned that other U.S. banks would be affected, sending the KBW bank index down 1.2%.

U.S. Consumer Sentiment Surprises

On Friday, the Thomson Reuters/University of Michigan's consumer confidence index for May improved to 77.8 from April's 76.4. It was higher than the 76.2 that economists expected, and was a 4-year high.

Spain Nationalizes Fourth Largest Bank

On Thursday, Spain injected $4.5 billion euros into its fourth largest bank, Bankia, to take a 45% stake. This caused investors to become concerned about the health of Spanish banks, and whether further bailouts are needed.

Greece Political Turmoil Troubles Markets

Alexis Tsipras enters Greek Presidential Palace. Source: Associated Press
On Tuesday, after Greece's largest political party failed to form a government, the responsibility to do so fell to Alexis Tsipras and his Syriza party, the radical leftist party that seeks to overturn Greece's bailout agreement with the EU and IMF. As a result, concerns about Greece either exiting the euro zone or backing out of its agreement with the EU and IMF sent the Dow 150 points lower in early trading. German and French markets fell by 2% and 3% respectively, while the Greek market tumbled by 4%, reaching its lowest level in 20 years. The euro fell below the US$1.30 level, reaching US$1.2988.

Looking Ahead to Next Week

As I correctly forecasted last Sunday, U.S. markets fell this week on increasing uncertainty in the euro zone, especially the political crisis in Greece. Investors will continue to focus on the situation in Greece in the coming week. If the parties are unable to form a government, and the public heads into another election, markets will likely fall on the continued uncertainty. However, if a government is formed without the radical leftist Syriza party, markets will likely see a upward bounce. Meanwhile, investors will also pay attention to the banking system in Spain. If no other banks face trouble following the nationalization of Bankia, it would provide a boost to markets.

Sunday, May 6, 2012

U.S. Markets Post Biggest Weekly Drop of 2012

U.S. markets tumbled on Friday on a weaker-than-expected jobs report, and weak economic data from the euro zone. On Friday, the S&P 500 dropped 22.47 points or 1.61% to 1,369.10. The Dow tumbled 168.32 points or 1.27% to 13,038.27. For the week, the S&P 500 fell 2.4%, for its worst weekly performance in 2012.

Disappointing April Jobs Report

The jobs data responsible for Friday's market tumble was the U.S. April jobs report, which showed a gain of only 115,000 jobs. It was 55,000 less than the 170,000 jobs that economists expected. In addition, job gains decreased for the third month in a row. Even though the unemployment rate fell to 8.1%, it was due to 342,000 people giving up looking for work.

Euro Zone PMI Disappoints

On Friday, the Eurozone Services PMI from Markit showed a reading of 46.9 in April, which was significantly lower than the 49.2 in March. It indicated a deeper recession for the euro zone. In addition, France and Greece were heading into elections in the weekend, which added to the uncertainty in the markets.

Yields on Spanish Debt Remains Elevated

On Thursday, 3-year Spanish debt was auctioned at 4.037%, much higher than the 2.89% in the previous auction. Meanwhile, 5-year debt was auctioned between 4.752% and 4.960%, higher than the 4.319% previously.

ADP Shows Weak Private-Sector Hiring

On Wednesday, the ADP jobs report alluded to the disappointing April jobs numbers. The ADP report showed a gain of only 119,000 private-sector positions, much lower than the 177,000 the market expected. In addition, U.S. factory orders in March fell 1.5%, its biggest fall in 3 years. This caused the U.S. markets to open lower on Wednesday.

ISM Data Better Than Expected

Not all economic data this week was weaker-than-expected. On Tuesday, the April ISM reading was 54.8, better than the 53 the market expected. As a result, the Dow rose almost 100 points in early trading.

Looking Ahead to Next Week

Investors will be watching data from China next week, when the country releases inflation, retail and factory numbers. In addition, investors will pay attention to March readings on industrial output in Germany, France, Italy and Spain for a measure of how deep the euro zone recession will be.

Sunday's election defeat of Nicolas Sarkozy in France and the ruling parties in Greece will cause investors to become concerned about how determined the euro zone is in carrying out austerity measures. These election defeats will add to the uncertainty in the markets. With the disappointing jobs data from Friday continuing to weigh on markets, stocks will likely head lower in the beginning of next week. With earnings season winding down, investors will turn their focus back to the euro zone. With uncertainty in the euro zone increasing and what appears to be a deeper recession, U.S. markets will likely head lower next week.