The Nitty Gritty Details:
Equity investors digested yesterday’s gains while expressing some caution over Greece’s critical upcoming austerity vote, leading to a flattish open for U.S. stocks. Yesterday’s rally was welcomed but stocks have had a tough time sustaining advances since this latest European flare-up began in late April. Today’s data, which like yesterday’s may not be market moving in light of the market’s focus on Greece, includes the S&P/Case-Shiller April Home Price Index, the Richmond Fed Manufacturing Index for June and Consumer Confidence. European markets are mixed, while Asian markets closed flat-to-higher. Commodities are higher across the board amid a weaker dollar and increased global risk appetite. Crude is up about a dollar to near $92, while gold has inched higher to back about the $1500 level.
Looking back at Monday, stocks broke their three-day losing streak on optimism that Greece would be able to avoid a disorderly default through a shared public-private solution. The focus on Greece was evident as markets shrugged off weak consumer income and spending data and stocks moved solidly higher in a broad-based rally. These hopes fueled a rally that lifted all 10 S&P sectors. Tech topped the sector rankings on new product optimism while Financials got a lift from clarity on global bank capital requirements, which are less onerous than had been feared. Commodity prices were mostly lower, giving further fuel to the rally in terms of tempering inflation expectations but weighing some on the resource sectors.
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. Who would purchase Greek debt that banks are trying to sell? Some debt is maturing, but some is being sold to distressed asset investors who believe that there will be no default and Greece’s credit is as good as Germany’s which is backing it up. Getting the debt off the balance sheets of leveraged financial institutions in Europe (the banks) and in the hands of non-leveraged holders reduces the net negative impact on the European financial system if there is a default.
2. And, speaking of Greece, lawmakers will vote tomorrow on a package of budget cuts. Totaling 78 billion euros over five years, passage of the austerity plan is necessary for Greece to receive the next installment of its rescue funds and stave off default.
3. Weekly retail sales post the largest week-over-week gain in 15 months as gasoline prices drop and the weather warms up. Weekly retail sales rose 2.9% week-over-week in the week ending June 25th. The 2.9% week-over-week gain matched the largest week-over-week gain seen over the past 10 years. It is notable that the other occurrences of such a large gain in sales came during holiday periods (Christmas and Easter). The 2.9% week-over-week gain in sales left sales 3% ahead of their year-ago level, right in the middle of the range seen thus far in 2011. Sales averaged a 3.5% year-over-year gain during the 2002-2007 economic expansion. Weekly retail sales are the narrowest measure of consumer spending, but they are by far the timeliest.
4. The high-grade bond market suffered a big sell off yesterday. Long-term Treasury yields rose by 11 basis points (bps), the biggest increase since January. A decline in risk aversion despite weak economic data contributed to the weakness, which was exacerbated by lackluster demand at the 2-year Treasury note auction. Foreign participation declined to 22%, forcing primary dealers to absorb most of the supply. The Treasury will auction 5-year notes today and 7-year notes tomorrow.
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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