US Markets Surge on Europe Deal and Economic Data

U.S. markets rose on Friday on relief over the European debt deal and strong corporate earnings. Markets cheered the euro zone's Thursday agreement. In addition, Merck and Chevron beat expectations with earnings.

On Friday, the S&P 500 rose 0.49 point or 0.04% to 1,285.08. The Dow rose 22.56 points or 0.18% to 12,231.11. For the week, the S&P 500 climbed 3.7%. It is up about 13% this month, and is on pace for its biggest monthly gain since October 1974.

Markets Rally on Euro Zone Deal

The euro zone agreement on Thursday consisted of 3 points. 1) Leverage the EFSF from $440 billion euros to $1 trillion euros. 2) With the agreement of banks, write down Greek debt by 50%. 3) Provide $100 billion euros of funding to European banks. European leaders finally agreeing to a comprehensive deal was a sign of relief for investors.

Troubles Remain for Italy

While the deal was aimed at helping Greece, there was nothing for Italy and Spain. Immediately, troubles appeared for Italy when its 10-year bond yields surpassed 6% for the first time in history.

Is MF Global the Next Lehman Brothers?

MF Global was in the spotlight this week on concerns about funding issues. Its shares tumbled 16.1% on Friday to close at $1.20. Reports indicate that customers were moving money from the futures brokerage. Rumours could lead to a self-fulfilling prophecy that causes the company to become the next Lehman Brothers.

Strong US Economic Data Increases Optimism

On Friday, data showed US consumer sentiment improved in October for the 2^nd consecutive month. U.S. quarterly GDP growth of 2.5% also met expectations. With the improving data, JP Morgan raised its 4^th quarter GDP forecast to 2.5% from 1%.

Gold Soars on Leveraging of EFSF

Gold rose 6.5% this week to settle at US$1,743.10/ounce. Earlier on Friday, it was at a 1-month high of $1,751.99/ounce. Clearly, the market is considering the leveraging of the EFSF from $440 billion euros to $1 trillion euros as quantitative easing. Thus, while the gold price was weak when the debt crisis appeared the bleakest, it has rallied on a $560-billion-euro QE program ($1 trillion minus $440 billion).


Looking Ahead to Next Week

Investors will be looking to the G20 meeting in Cannes, France next week. They will be eyeing any effort to stabilize world financial markets. In addition, euro zone manufacturing and services data will be released Wednesday, which could confirm an entry into recession. In the US, employment data will be released Friday, with consensus expectations of 95,000 new non-farm jobs.

While the European agreement has removed a major concern for markets, many headwinds remain. Italy is facing significant problems, and MF Global could be a temporary shock for world financial markets. The market's direction in the next few weeks will be determined by whether the optimism and potentially positive economic data will outweigh the lingering problems.

Investors can expect gold to continue to move up to the $1,800, $1,900 and $2,000 levels in the months ahead. In addition to the market embracing the leveraging of the EFSF as a QE measure, investors expect the Fed to conduct QE3 in the months ahead. This would boost the price of gold even more.

Tweet

US Markets Rise for 3rd Week on Euro Zone Hopes

U.S. markets rose for a 3^rd week on hopes that euro zone officials would come to a concrete solution for the debt crisis during a meeting this weekend. On Friday, markets rose on rumours that the EFSF would be combined with the ESM, increasing the bailout fund to $940 billion euros. The rumour sent German and French markets up 3.6% and 2.8% respectively.

On Friday, the S&P 500 gained 22.86 points or 1.88% to 1,238.25. The Dow rose 267.01 points or 2.31% to 11,808.79. For the week, the S&P 500 gained 1.1%, while the Dow rose 1.3%.

China growth slows

On Tuesday, China's 3^rd quarter GDP data was announced. The 9.1% growth was weaker than the 9.3% the market expected, and was the 3^rd consecutive quarter of decline.

US economic data eases fears

In addition to hopes that euro zone officials would agree on a plan to end the debt crisis, markets received a boost this week from better-than-expected US economic data. US jobs data show the jobs situation is stabilizing, retail demand has firmed and a regional manufacturing survey show a rebound.

Looking ahead to next week

Investors looking for the euro zone leaders to entirely solve the debt crisis this weekend will likely be disappointed. EU officials need to recapitalize European banks with at least $100 billion euros. They also need to leverage the $440 billion euro EFSF in order to increase its size. Finally, they need to decide the amount of write-down for Greek debt, which is currently expected to be between 20% and 60%.

Considering how ineffective EU leaders have been since early 2010 in trying to resolve the debt crisis, it is very unlikely they would accomplish all three above tasks within a weekend. Thus, investors will likely be disappointed when markets open Monday, leading to a downward direction for markets.

Investors will also be watching the US GDP data on Friday. The market expects a 2.5% annual growth for the 3^rd quarter (July to September) which is almost double the growth in the 2^nd quarter. The number meeting expectations would reinforce the belief that the economy is growing steadily. Meanwhile, a worst-than-expected reading could erase the gains the market has been accumulating in the past three weeks.

Tweet

U.S. Markets Rise on Hope for Action from Euro Zone Leaders

U.S. markets rose this week on better-than-expected economic data and hope that euro zone leaders will take action to resolve the debt crisis. On Friday, the S&P 500 rose 20.92 points or 1.74% to 1,224.58. Meanwhile, the Dow gained 166.36 points or 1.45% to 11,644.49. Since its intra-day low of 1,074.77, the S&P 500 has risen 14%. 

 

For the week, the S&P 500 climbed 6%, while the Dow gained 4.9%. Investors were hopeful that euro zone leaders would take concrete action to resolve the debt crisis following the G20 summit. 

 

U.S. Retail Sales Better Than Expected

On Friday, September US retail sales rose 1.1% over August. It beat consensus of a 0.7% rise, and was the fastest growth in 7 months. In addition, August retail sales growth was revised up, to 0.3%. 

 

Consumer Sentiment Still Weak

However, consumer sentiment fell in early October by more than expected, to the lowest level in more than 30 years. The October reading was 57.5, lower than the 59.4 in September. It was also lower than consensus of 60.2. 

 

Looking Ahead to Next Week

Equities could continue to receive a boost from earnings, with results from Apple and IBM expected by the Street to be strong. Markets could continue rising if investors continue to be hopeful that euro zone leaders will finally take concrete and effective action. 

 

However, major banks including Citigroup, Goldman Sachs and Wells Fargo are also reporting earnings. With disappointing results from JP Morgan on Thursday, the banks are unlikely to post impressive results.

Investors will also be eyeing economic data next week. Industrial production and capacity utilization will be announced Monday, with producer and consumer inflation on Tuesday and Wednesday respectively. The final reading of the Reuters/University of Michigan consumer sentiment index will be announced Friday. 

 

While the upward bounce in the market this week has some momentum, I see it unlikely to last more than another two weeks. Greece has yet to default or take a haircut on its debt. In addition, euro zone leaders have failed multiple times since early 2010 in resolving the debt crisis. I continue to expect markets to bottom only when Greece defaults or forces investors to take a haircut. While markets may not be hit hard by the 30% haircut that is being discussed, a 50%-60% haircut could drive up the yield of Italian and Spanish debt, causing markets to tumble.

Tweet

US markets fall on euro zone and China

U.S. markets fell on Friday on fears of U.S. banks being exposed to the euro zone debt crisis, and on fears of a hard landing for China. The S&P 500 dropped 289.98 points or 2.5% at 1,131.42. The Dow fell 240.60 points or 2.16% at 10,913.38. 

 

Shares of Morgan Stanley tumbled 10.5% on Friday on fears that it was the most exposed U.S. bank to a default in the euro zone. For the week, the S&P 500 lost 0.4%, while the Dow fell 1.3%. For the quarter, the S&P 500 fell 14.3%, while the Dow dropped 12.1%. In September alone, the S&P fell 7%.

China PMI data eyed

Investors became increasingly concerned about a hard landing for the Chinese economy this week. On Friday, Chinese CDS rose to their highest level since March 2009. However, the CDS were indicating a 10.6% chance of default for China, lower than the level for Korea and Japan.

Because of this concern, China's September PMI was the center of attention for markets. On Saturday, the reading was announced at 51.2, an increase of 0.3 over August. It was the second consecutive month of increase, and will likely soothe concerns over China on Monday. 

The Trioka returns to Greece 

On Thursday, representatives from the EU, IMF and ECB returned to Greece to examine the country's finances. The “trioka” will decide on October 13 whether to release the next tranche of $8 billion euros to Greece. 

Germany approves expanding EFSF 

On Thursday, the German Parliament passed a vote to expand the EFSF from $250 billion euros to $440 billion euros. However, Germany and other countries are split over what steps to take to increase the size of the EFSF beyond $440 billion, since the current size is seen by the market as inadequate. 

Gold rises 8% in quarter

Despite falling 11% in September, gold rose 8% in the quarter, its biggest quarterly rise this year. On Friday, December gold futures closed up $0.30 at $1,622.30/ounce. This week, as gold mining shares fell on weak a weak gold price, I added shares of Goldcorp (at $47.00) and Barrick (at $47.00). This was done using a strategy in Gold Investing Mastery Guide.

I also initiated a position in Silver Wheaton at $31. I see Silver Wheaton as a clear bargain, as I expect the price of silver to quickly rebound in the coming days after the current correction, especially if the euro zone debt crisis worsens.

Looking ahead to next week 

Investors will get some relief on Monday, as Saturday's China September PMI was stronger than expected. Markets will also be focused on a series of US economic data this week. The US September employment report will be announced Friday. US manufacturing data from the ISM will be out on Monday, while the ISM services sector index will be released Wednesday.

Markets will of course also be focused on the euro zone. Since Greece has yet to default or take a haircut on its debt, the worse is not yet over. The worry that Greece will default will likely continue to drag markets lower next week.

I see a rebound in gold and silver prices as imminent after the recent correction. Clearly, gold has significant support at $1,600/ounce. Thus, I added to my positions in Goldcorp and Barrick this week, and initiated a position in Silver Wheaton, using a strategy in Gold Investing Mastery Guide.

Tweet