What Will Impact The Markets This Week?

Meeting5/31/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.

U.S. stocks opened solidly higher this morning following reports that a fresh Greece bailout may be forthcoming.  Today’s economic calendar includes the S&P Case/Shiller Home Price Index and consumer confidence, while later this week the key ISM (Wednesday) and monthly payrolls (Friday) will garner a lot of attention.  Most key overseas equity benchmarks are riding Greece optimism to strong gains between 1 and 2%.  Banks are particularly strong after the reports of Germany’s softer stance toward a Greek rescue.  Japan’s Nikkei jumped 2% as Moody’s placed its Japanese credit rating under review for possible downgrade.  Commodities are broadly higher and the dollar sharply lower as the global risk trade follows European headlines.  Big gainers include crude, natural gas, silver and cotton, while wheat is under pressure after Russia lifted its 10-month export ban.

Looking back at Friday, stocks finished the week with modest gains ahead of the holiday weekend.  Market participants were able to shrug off more weak data, including tepid personal income and spending and weak pending home sales, and push stocks higher.  The advance was broad-based as all ten S&P sectors rose, led by cyclical.  Higher metal prices and strength in fertilizer stocks propelled Materials to the top of the sector rankings with a 1% advance, while Financials (+0.8%) also produced solid gains on anticipation of less onerous capital requirements.  For last week, the S&P 500 fell a modest 0.1%, but has still returned a solid 6.7% in 2011 and is down just 2.2% from April highs.

Around our financial planning firm this morning, we were discussing four items that we thought would be of particular interest to our readers:

  1. More on the economic and employment reports due out this week. The week ahead features an avalanche of economic data for April and May, including the key Institute for Supply Management’s (ISM) report on manufacturing for May and the May employment report from the U.S. Bureau of Labor Statistics.  Although the reports on the health of the manufacturing sector and labor market in May are likely to garner most of the market’s attention this week, there are a number of other key reports due out this week (May vehicle sales, May non-manufacturing ISM and consumer confidence for May) that warrant the market’s attention.
  2. Moody’s placed Japanese sovereign debt on credit watch negative. Moody’s may downgrade the Aa2 rating of Japanese government bonds in coming days or weeks.  Moody’s stated Japan has not done enough to kick-start the economy in the wake of the March earthquake.  The Yen is weaker versus the dollar on the news.
  3. Treasuries are marginally weaker to start the new week following euro-zone news. Euro-zone leaders have taken a softer tone towards another Greek financial aid package.  Peripheral European government debt is rallying on the news with 10-year French and German government bond prices down by 0.3% to 0.5% so far.  Less talk of restructuring and a softer tone from Germany in particular is leading to a removal of the safe-haven premium for Treasuries as well.  However, domestic economic data has also contributed to recent Treasury strength, and with a full week of economic reports on tap, weakness is limited thus far.
  4. In one month, QE2 will formally come to an end. Despite fear of a spike in interest rates due to the potential absence of the Fed, Treasury yields have declined.  Supply/demand dynamics play only a secondary role in the taxable bond market to the primary driver of economic growth, inflation and Fed interest rate changes.  Economic expectations have driven yields still lower in May and the anticipation of a Fed rate hike, still a ways off, will likely be the eventual driver to steadily higher yields.

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
President/CEO
Wealth Consultant

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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