The Nitty Gritty Details:
Today is significant in that it marks the end of the Federal Reserve’s QE2 bond buying program as well as the end of the second quarter. Plus, we get another Greece vote (implementation of the austerity plan was approved yesterday). Otherwise, there is not much in the way of new market-moving news this morning. In any event, Greece optimism has been enough for a roughly half percent gain in the broad averages in early trading this morning. Overseas markets are higher, as European banks staged a relief rally on the Greece developments, while Hong Kong rallied 1.5%. Commodities are mixed, with slight gains in copper and silver offset by weakness in natural gas and agriculture. Gold and oil are unchanged near $1510 and $95, respectively.
Looking back at Wednesday, the passage of the Greek austerity vote and $8.5 billion mortgage securities settlement by a major financial industry player lifted stocks for a third straight day. The S&P has now recovered 3.4% off the mid-June lows after the strong three-day rally. Some positive news from a global chemical manufacturer, a favorable debit card ruling from the Federal Reserve, better-than-expected pending home sales and commodities gains also helped lift the major averages. The clarity offered by the mortgage settlement news – as ugly as it was – lifted Financials (+2.1%) to the top of the sector rankings, while Materials (+1.6%) rode higher commodity prices to solid gains on a day when cyclicals led. Crude jumped about $2 on tight inventory data amid a weaker dollar and increased comfort with Greece, while copper and silver also produced strong gains, as the CRB commodity index gained 1.5%.
Around our financial planning services firm this morning, we were discussing four items that we thought would be of particular interest to our readers:
The Markets Broken Down:
1. QE2 ends today. The Fed ends today its $600 billion bond-buying program with opinions mixed as to whether it was a success and whether another round of easing is likely to follow. The end of QE2 comes as growth has slowed, inflation has risen and unemployment remains above 9%, and leaves the Fed as the largest holder of Treasuries with around 17% of U.S. marketable debt. What do you think? Email me here.
2. One down, one to go. Greece is expected to approve today a second austerity bill covering $40.5 billion of spending cuts, tax hikes and privatizations after an initial bill was approved yesterday. World markets and the euro rallied overnight as the prospects of a default receded, but the optimism is mixed with concern about the government’s ability to implement the unpopular measures. And, there is no guarantee that the government will find takers for the assets it is selling, let alone the prices that it is hoping for.
3. Initial claims for unemployment benefits exceed 400,000 for the 12th consecutive week. 428,000 individuals filed for unemployment benefits in the week ended June 25th. The last time fewer than 400,000 people filed in a given week was on April 2nd. The claims data suggests that the labor market isn’t getting much better, but also that it isn’t getting much worse either. The early shutdowns at auto plants this year (mid-year instead of early July) along with teacher layoffs has probably pushed claims higher over the past few weeks. Looking ahead, claims normally rise sharply during the first full week of a new quarter, so we would expect another increase in claims next week. But, by mid-July, the number of people filing for unemployment benefits each week should begin to move lower, back into the mid-300,000 range. If claims do not move back to this level, the underlying labor market may be weaker than the market thinks it is right now.
4. The ECB signals a rate rise. The ECB signaled again that it will begin raising interest rates next week from 1.25% after the June CPI came in at 2.7%, well above the bank’s target of below 2% – ending speculation it might delay a hike in light of the Greek crisis and fears of contagion. In overnight trading, the euro hit a new three-week high against the dollar.
As always, email me here with your questions or comments. I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.
Greg Powell, CIMA
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.
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