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.

U.S. Markets Rebound on Euro Strength and Energy Sector

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 U.S. stocks rose on Friday on a stronger euro, as well as strength in the energy and base metals sectors. The S&P 500 gained 4.33 points or 0.31% to 1,397.11. The Dow rose 34.59 points or 0.27% to 13,080.73. For the week, the S&P 500 fell 0.5%, while the Dow dropped 1.2%. It was only the second week this year that the S&P 500 had a down week.

China Growth Concerns Drag Markets

For much of the week, concerns about economic growth in China dragged on markets. On Monday, China's Department of Finance announced that in the first two months of this year, revenues at state-owned companies fell 10% versus 2011. This resulted in sharp losses in the Hang Seng index in Hong Kong and indices in China.

On Thursday, HSBC's China PMI showed a reading of only 48.1 for March, which was lower than the 49.7 in February. It was also the lowest reading in 4 months. Within the index, new orders in March had a reading of only 46.1, lower than the 48.5 in February. Meanwhile, new export orders in March was also below 50, with a reading of 48.7, but was higher than the 47.5 in February. The PMI reading pushed U.S. markets lower on Thursday.

Looking Ahead to Next Week

The relief rally that North American markets experienced since the start of 2012 is clearly over. The market is either in a pause or a pull-back. Markets will likely continue to be dragged lower next week by news from China. On Saturday, China's banking regulator told banks that they had incorrectly classified around 20% of their loans to local governments into the safest category of loans. The re-classification of these loans would require more loan-loss provisions to be set aside, reducing the net income of banks. Thus, that would push banks' share prices and Chinese stock indices lower.

In addition, high energy prices will likely neutralize gains in the US market. On Friday, Brent crude settled at above the $125 mark, at $125.13/barrel (up $1.99). Meanwhile, WTI rose $1.52 to settle at $106.87/barrel. With the summer driving season around the corner, the effect of high energy prices on the economy will be more clearly felt in the coming weeks.