The Nitty Gritty Details:
Stocks rose this morning around the world as China’s GDP growth beat consensus forecasts and some value hunters stepped in to capitalize on the 3% pullback since last Thursday. Still, gains are being constrained some by ongoing concerns about the euro zone and the U.S. budget battle. Fed Chairman Bernanke may move markets today as he begins congressional testimony. Overseas markets were broadly higher, with particular strength in Hong Kong and China on the strong GDP data. On the commodities front, agriculture and silver prices are up strongly, while crude is modestly lower ahead of weekly inventory data.
Looking back at Tuesday, stocks and currencies continued to follow Europe headlines “up and down.” The major averages finished lower but ended well above overnight lows as prospects of more European debt intervention helped the morning tone before stocks reversed lower after news of an Irish debt downgrade by Moody’s. The FOMC minutes, which left the door open for QE3, also caused investors to take a pause while earnings season got off to a slow start. Only Utilities and Health Care, two defensive sectors, managed to finish the session in positive territory as investors remained on edge. Prospects for more money printing from the Fed lifted commodities, including a more than $2 jump in crude to over $97, while grains rose sharply on updated crop forecasts from the U.S.D.A. and a bullish Chinese demand outlook.
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. European banks are strengthening their defenses. European banks are reigning in cross-border lending to Spanish and Italian companies and depositing more money with the ECB as they shore up their defenses against the debt crisis. Markets calmed down yesterday over Italy but got renewed jitters after Moody’s became the first ratings agency to downgrade Ireland to junk, saying it will probably need another bailout. The EU leaders will reportedly meet again on Friday to discuss Greece, with the roadmap now a plan to buy back the country’s debt at a discount and exchange its bonds to reduce its debt-servicing burden.
2. Still no progress from Washington. Democrats and Republicans will meet again for a fourth straight day as the deadline for raising the debt ceiling looms closer. President Obama played to the emotions yesterday with a warning the government might miss payments to the elderly, veterans and disabled, while John Boehner again changed his mind and indicated an openness to a $4T grand bargain. However, a proposal from Republican Mitch McConnell to let Obama raise the limit by $2.4T in three installments and so take the political flack for doing so looks fairly unlikely.
3. Bernanke is due before Congress today with a divided Fed behind him. Chairman Bernanke is expected to warn Congress in two-day testimony starting today against steep near-term spending cuts because of the tepid economy, as well as against not raising the debt ceiling. However, his appearance comes as minutes from the last FOMC meeting show the Fed divided over whether it may need to increase easing or withdraw it sooner than expected because of inflation, and with the bank’s “tool kit” looking increasingly bare.
4. Pace of Japan’s recovery quickens while China continues to head toward a soft landing. Japan’s industrial production increased by a stronger-than-expected 6.2% month-over-month in May, a sizeable acceleration from the 1.6% month-over-month gain in April. In the wake of the March 11th earthquake and tsunami, Japanese industrial production fell a record 15.5% between February and March. Meanwhile, the other Asian economic giant, China, reported last night that its economy grew at 9.5% year-over-year in the second quarter, slowing from the near 12% growth rate seen in 2009 and 2010. The slightly stronger-than-expected gain in Chinese GDP eased fears that China was headed for a hard landing, but also kept more rate hikes in China on the table.
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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