Monday, June 4, 2012

US Markets Fall Into Correction Territory on Disappointing Jobs Reports

U.S. markets tumbled on Friday on disappointing jobs reports from the U.S. and the euro zone. The S&P 500 fell 32.29 points or 2.46% to 1,278.04; the Dow dropped 274.88 points or 2.22% to 12,118.57. For the week, the S&P 500 lost 3%, while the Dow dropped 2.7%. The S&P 500 is now in a correction, after falling 10% from its April 2nd highs. The index also closed below its 200-day moving average for the first time in 2012 on Friday.

Disappointing Jobs Report from the U.S. and euro zone

On Friday, the U.S. May jobs report showed a gain of only 69,000 non-farm positions, which was far lower than the 165,000 that economists expected. In addition, the unemployment rate rose for the first time since July 2011, to 8.2%.

Meanwhile, the unemployment rate in Spain, France, Italy and Portugal also rose in May, causing the unemployment rate in the 17-member euro zone to reach 11%.

Troubles in Spain Continue

On Friday, Spain's central bank announced that in the first quarter, $97 billion euros were pulled from the country's financial sector. The amount is approximately 10% of Spain's GDP. In addition, the yield on 10-year Spanish debt reached 6.63%, as it continued to head towards the dangerous 7% level. Spanish 5-year CDS, which reflects the probability of a default, reached 615 basis points, a historical high.

U.S. Manufacturing Weakens

On Thursday, U.S. first quarter GDP was adjusted downwards to 1.9%. In addition, initial jobless claims was higher than expected, increasing by 10,000 to 383,000. May Chicago PMI fell to 52.7, close to the 50 mark and its lowest level since September 2009.

Looking Ahead to Next Week

A sustained rally in the market in the coming weeks would likely require stimulative measures from the US Federal Reserve. The Fed is scheduled to meet on June 19-20, and an extension of Operation Twist or an introduction of QE 3 would send markets higher by double digits over several months. Some analysts expect the Fed to take action at a later date, in August.  Ben Bernanke is expected to testify before Congress on Thursday, and he might give a hint of how the Fed intends to act.

In the coming week, if euro zone leaders announce concrete measures and few bad news emerge from the euro zone, markets could get an upward bounce as a result of bargain hunting. Regardless of the direction of the market in the coming week, the magnitude of its movement, either upwards or downwards, will likely be large, as volatility increases.

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