US markets fall on debt ceiling and weak GDP data

US markets fell on Friday because of the inability to reach an agreement on the debt ceiling, and the weaker-than-expected GDP data. The S&P 500 fell 8.39 points or 0.65% to 1,292.28. The Dow dropped 96.87 points or 0.79% to 12,143.24. For the week, both the S&P 500 and the Dow fell 3.9%, the worst week for both indices this year. For July, both indices fell 2.2% for the month. 

US markets fell most of the week because of the inability of the Democrats and Republicans to reach an agreement on the debt ceiling. Markets were presented with ugly economic data on Friday, since US 2^nd quarter GDP was 1.3%, lower than the 1.8% economists expected. In addition, 1^st quarter GDP was revised down from 1.9% to 0.4%.

Markets had received a boost on Thursday, when US initial jobless claims fell 24,000 to 398,000. It was below the important 400,000 level, and lower than the 415,000 that economists expected. In addition, US pending home sales increased 2.4% in June, the second monthly increase.

Gold soars to record highs

Because of the crisis surrounding the US debt ceiling, gold reached several record highs this week. For the week, December gold futures rose $15 or 0.93% to settle at $1,631.20. It reached as high as $1,637.50, a record high.

Euro zone problems persist

As the world was focused on the US debt ceiling, Moody's on Friday warned that it could cut Spain's credit rating from its current level of Aa2. This followed Moody's move on Monday to cut Greece's rating further into junk territory.

Looking ahead to next week

The spotlight is on the US, as the country faces a August 2^nd deadline to increase the debt ceiling. An agreement before the deadline should cause a relief rally. However, the size of the rally is in doubt, since the 1.3% 2^nd quarter GDP growth (and 0.4% 1^st quarter growth) will likely hold markets back. In addition, the euro zone could drag markets lower if yields for Italian and Spanish government bonds increase. 

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Why RIM shares are about to receive a big boost

When RIM reported its first quarter earnings on June 16, its shares plummeted.  Since then, its shares have been trading in a range between C$24.31-$29.67.  Today, it closed at C$25.19, after providing details about its previously-announced plan to reduce headcount.

Commentary about the company has been very negative, particularly in the U.S.  This is partly why the shares are trading at an incredibly discounted level of 4.22 trailing P/E.  Despite the negative sentiment, the shares are going to receive a big boost, as early as possibly tomorrow.

As Co-CEO Mike Lazaridis stated at the annual shareholders' meeting on July 12, RIM is launching 7 new devices in the coming months.  Out of these 7 new devices, only 1 has been announced, which is the Bold 9900/9930 (announced on May 3 during BlackBerry World).  While BlackBerry supporters who follow the company closely may know about most of the other 6 devices (Torch 9810, Torch 9850/9860, Curve 9350/9360, Touch Curve and Bold 9790) most investors have no idea about any of the un-announced devices.  Thus, RIM shares will receive a significant boost when these devices are announced.  This might happen as occur as tomorrow, as RIM's official twitter account has hinted that an announcement may occur tomorrow.

RIM shares in the past have received a significant boost in the run-up to the announcement of new devices.  For example, last year, before the Torch was announced on August 3, RIM shares rose from C$50.06 on July 6 to $60.00 on August 3, a gain of 19.86% in less than 1 month.  Thus, investors should expect a similar boost in the coming days.

In fact, one could argue that the boost RIM shares will receive this time will be stronger than the one from the Torch last year.  This is because RIM is launching 7 new devices (versus just 1 last time) and sentiment is extremely bearish (thus the 4.22 trailing P/E).  In addition, RIM is launching its new devices simultaneously at more carriers this time.  For example, at the AGM on July 12, Mike Lazaridis stated that RIM was currently in 491 certification programs with 191 carriers around the world, in what he said will be the "largest global launch of BlackBerry smartphones".

The first bit of good news from RIM should be a release date for the Bold 9900/9930, which leaks from Bell and Sprint have shown to be August 21.  The second bit of news from RIM should be an announcement of the Torch 9850/9860, which leaks have shown has a release date of August 27.   Thus, I expect RIM to rally at least 20% in the next 2-3 months on the new devices.  In fact, as RIM's twitter account has hinted, this may begin to happen as early as tomorrow. 

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US markets mixed as debt ceiling agreement not reached

US markets were mixed on Friday, on better-than-expected earnings and the on-going negotiations on the US debt ceiling. On Friday, the S&P 500 rose 1.22 points or 0.09% to 1,345.02. Meanwhile, the Dow fell 43.25 points or 0.34% to 12,681.16. For the week, the S&P 500 rose 2.2%, while the Dow gained 1.6%.

For most of the week, markets received a boost leading up to the negotiations on Thursday about a deal for Greece. A deal was struck on Thursday, which involved giving Greece a second bailout of $109 billion euros. The duration of rescue loans to Greece were extended from 7.5 years to 15-30 years. Meanwhile, the interest rate was reduced from 4.5% to 3.5%. Markets shrugged off Fitch's statement that Greece would be in temporary default as a result of the deal.

Strong earnings season

The earnings season has been strong, with AMD and MacDonald's being the latest companies that have posted better-than-expected earnings.

China's PMI falls below 50

A China PMI recorded by HSBC showed on Thursday that China's July PMI fell below 50, which indicated a contraction. It was also the lowest level in 28 months, since March 2009.

Looking ahead to next week

Investors will be focused on the continuing debt ceiling negotiations in the US. Despite President Barack Obama having made Friday the deadline for negotiations, Friday passed without a deal between the Democrats and Republicans. If a deal continues to be out of reach, then markets will likely fall next week. In contrast, a deal on the debt ceiling could spark a relief rally, since both the Greek crisis and the US debt ceiling would be resolved. 

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US markets rise on Google and JP Morgan earnings

US markets rose on Friday on better-than-expected earnings by Google and JP Morgan Chase. The S&P 500 rose 7.27 points or 0.56% to 1,316.14. The Dow rose 42.61 points or 0.34% to 12,479.73. For the week, the S&P 500 fell 2.1%, while the Dow dropped 1.4%. 

 

US debt negotiations continue

One of the main factors for the markets this week was the debt ceiling negotiations between Barack Obama and the Republicans. The two sides did not reach an agreement this week, causing uncertainty to remain in the markets. In fact, on Wednesday, Moody's placed the United States' “Aaa” rating under a negative outlook.

Bernanke raises hopes for QE3

On Wednesday, Ben Bernanke testified to Congress that the Federal Reserve was prepared for more stimulus if it was needed, which boosted the markets. However, on Thursday, Ben Bernanke stated that there were currently no plans to conduct further stimulus.

Euro zone troubles spread to Italy and Spain

On Monday, stock markets tumbled on concerns that the euro zone debt crisis was spreading to Italy. On Tuesday, Moody's downgraded its rating on Ireland 2 notches, from “Baa3” to “Ba1”. This means that Ireland now has a “junk” rating. Meanwhile, the yield of 10-year Spanish government bonds reached a record high of 6%, while Italian 10-year yields rose to 5.7%.

On Friday, the EBA announced the results of its stress test, which showed that 8 out of 90 European banks failed. The EBA found that a total of $2.5 billion euros was needed by the banks. Another 16 banks barely passed the stress test.

China growth provides relief

On Wednesday, China's 2^nd quarter GDP growth was reported at 9.5%, better than economists expected. It provided relief to markets that were concerned that a slowdown in growth in China would decrease the demand of oil and commodities.

Looking ahead to next week

Investors will be focusing on earnings next week. Additional better-than-expected earnings could push markets higher. However, concerns about the euro zone debt crisis spreading to Italy and Spain could pull markets lower. Investors would be particularly concerned if the yield on Italian and Spanish government bonds continue to increase. Negotiations over the US debt ceiling will continue to affect markets. An agreement to raise the debt ceiling could provide markets with a relief rally. 

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US markets fall on dismal June payrolls report

US markets fell on Friday on dismal June jobs data. The S&P 500 dropped 9.42 points or 0.70% to 1,343.80. The Dow fell 62.29 points or 0.49% to 12,657.20. For the week, both indexes rose, with the S&P 500 rising 0.3% and the Dow gaining 0.6%.

On Friday, it was reported that June US non-farm payrolls added only 18,000 jobs, far lower than the 90,000 that economists expected. Job growth was the slowest in 9 months. In addition, the US unemployment rate rose 0.1% to 9.2% in June.

Bad news continue in the euro zone

The euro zone had its share of bad news this week. Early in the week, S&P stated that the debt roll-over planned that French and German banks have agreed to would constitute a default by Greece. This was a blow for euro zone officials, who have been hoping that this plan would allow Greece to delay paying its debt.

On Tuesday, Moody's dropped its rating on Portugal by 4 notches, resulting in a junk rating for the country. After the situation in Greece had been temporarily resolved, it appears other PIGS nations will be in a spotlight.

On Thursday, the ECB raised interest rates by 0.25% to 1.50%. Economists reacted by saying that it would make borrowing costs even higher for troubled euro zone countries such as Greece and Portugal.

Rate hike and high inflation in China

On Wednesday, the Chinese Central Bank raised its interest rates by 0.25%, resulting in a 1-year savings rate of 6.56% and a lending rate of 3.5%. This was in anticipation of the June inflation data released later in the week.

In fact, on Saturday, China's June CPI was reported at 6.4%, higher than economists' expectations of 6.2%. It was also the highest inflation rate in 35 months.

Looking ahead to next week

The effect of the horrible US June jobs report should spill over to stock markets early next week. The report was an important one among the many economic data that have been reported in the past 2 weeks. It eliminated the hopes of some investors for a US economy that they hoped was slowly picking up strengthen.

Portugal's debt being given a junk rating shows that attention is being shifted from Greece to other troubled euro zone countries. Thus, the euro zone debt crisis will likely to continue to drag markets lower in the weeks to come. The ECB's decision to raise interest rates might have an immediate negative impact on Greece, Portgual, Ireland, Italy and Spain.

I expect US markets to head lower next week, primarily on Friday's jobs data and Saturday's inflation report from China. China's June inflation of 6.4% will cause concern among investors of further tightening, which would negatively affect oil and other commodities the most.

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US markets rise on Greece and US data

U.S. markets rose this week on expectation of the Greek austerity package being passed, and some stronger-than-expected US economic data. On Friday, the S&P 500 gained 19.03 points or 1.44% to 1,339.67. The Dow rose 168.43 points or 1.36% to 12,582.77. For the week, the S&P 500 gained 5.6%, while the Dow jumped 5.4%.

All week, markets expected that Greece would pass its 5-year austerity bill. In fact, on Wednesday, the Greek parliament passed the austerity plan. On Thursday, the Greek parliament voted to pass the measures of the austerity plan. This resulted in a rally, since the Greek crisis has been troubling markets for weeks.

Strong US manufacturing data

Apart from the relief from Greece, markets also received a boost from US manufacturing data this week. The ISM index rose to 55.3 in June, from 53.5 in May. It was also higher than the 52 expected by economists, and the first increase in 4 months.

Worries remain for the US

Everything was not rosy for the US this week. Initial jobless claims reported on Thursday fell by only 1,000, to 428,000. It was worse than the decrease of 9,000 that economists expected. Once again, initial jobless claims continued to remain above the key 400,000 level.

S&P also warned that if the US government failed it pay $30 billion due on August 4, it would downgrade its rating on the US from “AAA” to “D”, the lowest level.

Soft data from China

Partially offsetting the positive US manufacturing data was soft manufacturing data from China. On Friday, China's June PMI was reported at 50.9, 1.1 lower than May. It was the lowest level in 28 months, and the 4^th consecutive monthly drop.

Euro zone troubles remain

Italy is increasingly in the spotlight. S&P said this week that Italy's $47 billion euro austerity plan does not remove the possibility that the country will be downgraded.

Looking ahead to next week

While the Greek crisis has been averted for now, the crisis still remains. Greece only received $12 billion euros this week. It will continue to need to repay debt that comes due, and is unable to go to the market for funding. Thus, Greece will require additional loans, as early as August.

While the 5%+ boost that US markets experienced this week could be a sign of more gains to come, markets could pull back slightly after such a strong rally. Negative factors still exist in the US (debt ceiling), euro zone (Italy and other PIGS nations) and China (slowing growth). Thus, I believe that a pullback is more likely than further gains next week.

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