US markets had their worst week in over 2 years as investors lost confidence in US and European governments. On Friday, the Dow managed to rise on hopes that the ECB would start buying Italian government bonds to prevent the yield from increasing further. This followed a meltdown on Thursday, when the Dow dropped 512 points.
On Friday, the S&P 500 edged down 0.69 points or 0.06% to 1,199.38. The Dow rose 60.93 points or 0.54% to 11,444.61. For the week, the S&P 500 lost 7.2%, while the Dow dropped 5.8%. The S&P 500 has fallen 10.8% in the last 10 sessions, and is down 12% from its April 29th closing high.
Better-than-expected payrolls data
On Friday, better-than-expected US jobs data barely boosted the markets. Non-farm payrolls showed an addition of 117,000 jobs in July, better than the 85,000 jobs expected. In addition, the unemployment rate fell from 9.2% to 9.1%. However, after the Dow rose 150 points after markets opened, it was in the red by about 200 points later in the day. After markets closed on Friday, S&P downgraded the US' rating from AAA to AA, and maintained a negative outlook.
Weak world economic data cause worries of double-dip
The US was not the only reason for the massive fall in the markets this week. On Monday, China's July PMI fell for the 4th month in a row, to 50.7. It was the lowest since March 2009, though was better than the 50.2 expected. Meanwhile, Euro zone PMI fell from 52 in June to 50.4 in July, the lowest level since October 2009. These weak data were in addition to the US' July PMI, which fell from 55.3 in June to 50.9 in July. It was much worst that economists expected, since they were expecting a decrease of only 1 point. In addition, US consumer spending in June fell 0.2%, which was the first decrease since September 2009.
All eyes on Italy
While most of the attention was previously on Spain after the turmoil eased in Greece, attention is now fully on Italy. Italy's 120% debt-to-GDP ratio and slow economic growth has put it in a worst situation than Spain. Currently, both Italy and Spain's 10-year government bonds are yielding at a dangerous level of over 6%. In a hopeful sign, the ECB today signalled that it is ready to buy Italian and Spanish bonds.
Looking ahead to next week
Italy and Spain will be the biggest factors for markets next week. The ECB signalling its intention to buy Italian and Spanish bonds will provide a boost for markets. Meanwhile, slow economic growth in the US has already been priced into stocks, and Friday's better-than-expected jobs data will temporarily ease concerns of a double-dip recession. With US markets significantly oversold, a temporary bounce-back is a definite possibility. If markets have lost so much confidence in US and European governments that they doubt the ECB's resolve in buying Italian and Spanish bonds, then markets will continue to fall next week. In addition, the US being downgraded to AA after markets closed on Friday will likely add to the bearishness of investors next week.
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