European Contagion Fears Have The Markets Edgy

7/12/11: 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.

The Nitty Gritty Details:

Global markets rallied off overnight lows but are still broadly lower at the U.S. open this morning on European contagion fears (mostly Italy) and the reported stalemate in U.S. budget talks.  Hopes of more intervention in the European debt markets to stem the contagion helped European markets and U.S. futures claw their way back, while solid retail sales didn’t hurt.  Commodities are mostly lower, with particular weakness in silver and grains, while natural gas and gold are holding firm.  European stocks are down for the third straight session to near 2011 lows, while Asian markets tracked yesterday’s U.S. losses.  Asian weakness is also attributable to Chinese corporate governance concerns raised by Moody’s.

Looking back at Monday, the fears of contagion in Europe drove global markets into a tailspin, while reports of little progress in U.S. budget talks and an uptick in Chinese inflation also weighed on investor sentiment.  The lack of progress in Washington negotiations is concerning, but the potential for a full blown Italian – or Spanish – debt crisis has global markets very much on edge, reflected not only in recent losses for European stocks but also the recent euro weakness.  All 10 S&P sectors lost two-thirds of a percent or more on the session, with the defensives (not surprisingly) holding up better.  Commodities were broadly lower, though safe-haven bids drove gold higher and livestock bucked the downtrend as well to move higher.

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. Treasuries rallied sharply again yesterday on an increase in risk aversion over sovereign European debt fears. The 10-year Treasury note yield dropped 28 basis points over the last week and is approaching its lowest levels of the year.  Fear of contagion spreading from Greece to other peripheral European nations, most notably Italy, has pushed credit default swaps to record-high levels.

2. The pace of rebuilding in Japan quickens in May and June. The latest round of data in Japan revealed that the pace of the recovery for the March 11th earthquake hastened in May and June, which is good news for the global supply chain, U.S. auto production and a reacceleration in global economic growth in the second half of 2011.  Machine tool orders accelerated to +53.3% year-over-year in June from +34% year-over-year in May, while consumer confidence increased slightly in June, but remains below pre-quake levels.

3. The merchandise trade balance is likely to be a plus for GDP in Q2 2011. The nation’s merchandise trade balance widened considerably between April and May, led by a surge in crude oil import volumes and crude prices.  Exports in May were 15% ahead of their year ago level, in line with the growth of exports seen in the 2002-2007 economic expansion.  Imports increased 16% year-over-year in May, reflecting solid consumer and industrial demand.  The trade data is adjusted for prices as it is incorporated into the quarterly GDP report.  On this basis, the inflation adjusted trade deficit averaged $46 billion per month in April and May, a sizeable improvement from the $50.4 billion average deficit in the first quarter.  As a result of this improvement, net exports should add about 1.5 percentage points to GDP in Q2.

4. Despite tepid job growth, retail sales continue to move higher. Weekly retail sales rose 0.4% week-over-week in the week ending July 9th, the third consecutive week-over-week gain, and the fifth week-over-week gain in the past seven weeks.  Weekly retail sales are now at a new all-time high, and were 5.5% ahead of their year-ago level in the latest week, the strongest reading in seven years.  Warm, dry weather is helping to boost sales, and the solid performance of the consumer calls into question the veracity of the tepid nonfarm payroll jobs report.

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
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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