U.S. Markets Post Biggest Gains of 2012 on Hopes of Spain Bailout

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U.S. markets rose on Friday, as investors expected Spain to ask the euro zone for a bailout on Saturday for its troubled banking system. On Friday, the S&P 500 climbed 10.67 points or 0.81% to 1,325.66. Meanwhile, the Dow gained 93.24 points or 0.75% to 12,554.20. For the week, the S&P 500 jumped 3.7%, while the Dow gained 3.6%.

One week after the S&P 500 lost 6.3% in May and dropped below its 200-day moving average, the index posted its strongest weekly gains so far in 2012.

Euro Zone Agrees to Bailout For Spain

Today, the 17-member euro zone has agreed to a 100 billion euro bailout for Spain's banks. This was larger than the amount that the market expected, and followed a 2.5 hour telephone meeting among euro zone finance ministers. On Friday, a report by the IMF had indicated that Spain needed 40 billion euros to inject into its banks. The bailout is likely to erase the market's concerns about Spain, at least in the short term.

Spain Troubles World Markets

Prior to Sunday's bailout announcement, the situation in Spain dogged U.S. markets for the entire week. On Friday, Fitch downgraded Spain 3 by botches, from A to BBB. The agency also gave Spain a negative outlook, meaning further downgrades are likely. In addition, Moody's warned that Spain and other euro zone nations were at risk of a downgrade. On Tuesday, following a meeting of G7 finance ministers, Spain indicated for the first time that it was asking for assistance from the euro zone.

China Cuts Interest Rate By Quarter-Percent

After a slew of data indicated a slowing economy in China, the country's central bank cut interest rates by 0.25% on Thursday. It was the first rate cut in 3 years, and caused markets to rally.

Ben Bernanke Offers No Hints of QE3

Testifying in front of the U.S. Congress on Thursday, Federal Reserve Chairman Ben Bernanke said the Fed was ready to take action, but offered no details or promises on a new round of stimulus. As a result, markets posted reduced gains following Bernanke's statements, after recording strong gains following China's rate cut.

Looking Ahead to Next Week

Markets will likely receive a strong boost on Monday, following Spain's 100-billion euro bailout. The focus in the euro zone will shift back to Greece, as investors anticipate the June 17 elections. Thus, U.S. markets are likely to head higher this coming week.

Investors will also be paying attention to China, with recent data indicating a slow-down in the economy. With May CPI in the country falling to 3%, it gives policy makes room for stimulus. Thus, investors will look for hints of further stimulus in the country. In the U.S., economic data to be released in the coming week includes the PPI and retail sales on Wednesday. CPI and initial jobless claims are scheduled for Thursday. The Empire State manufacturing index, U.S. industrial production and the June reading of consumer sentiment from Thomson Reuters/University of Michigan are expected on Friday.

US Markets Fall Into Correction Territory on Disappointing Jobs Reports

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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 2^nd 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.