Global Markets Focused on China this Morning but Quickly Lose Interest

China's Interest Rate Hike2/8/11: 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.

Considerable market focus this morning is centered on China’s interest rate hike and the possibility of a sharp slowdown in that economy.  Fortunately, the continuing positive tone from U.S. earnings and mergers & acquisition activity appears to be “outweighing” the Chinese impact, leaving American stocks near unchanged.  Higher weekly retail sales despite storms in the Northeast and strong same-store sales from McDonald’s are also supporting the major averages this morning.  European stocks were off slightly in mid-day trading, while we will have to wait and see until tonight to process how Asian markets react to China’s latest rate hike.  Japan’s Nikkei rose, getting a lift from better-than-expected results from Toyota.  Crude prices are down again on Chinese growth concerns, while precious metals are up strongly.  Domestically, the most recent U.S. earnings reports are not quite as strong as recent trends.

Looking back at Monday, merger news and some incremental easing of Middle East tensions buoyed investor sentiment, pushing the S&P 500 higher yet again.  Merger deal activity in energy services and medical equipment supported those industry groups, although the overall Energy sector only matched the broad-based market and Health Care lagged.  Financials topped yesterday’s sector rankings on broad-based strength supported by improving consumer credit.  Crude prices dipped as prospects for a Suez shutdown dimmed, while metal and agricultural prices were mixed.Mac, Ashley and Greg meeting

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

State revenues increased 7% during the fourth quarter of 2010. The Rockefeller Institute of Local Government released a preliminary report on state revenues in Q4.  The fourth quarter increase was the strongest since the second quarter of 2006.  The increase will help address, but not fully offset, state budget deficits for the coming fiscal year.

Municipal bonds are still trying to stabilize. High-quality municipal bonds outperformed their taxable counterparts last week.  Still, Treasury weakness was significant enough where municipal bond prices declined for the week.  Secondary supply has come down but remains elevated, while new issuance is almost non-existent this week.  Traditional taxable bond buyers remain the primary purchasing force, while individual investors remain timid.  On a positive note, municipal bond outflows have slowed.

In a light week of economic reports, Treasury auctions will take “center stage.” The Treasury will auction 3-, 10- and 30-year securities starting today.  Recent Treasury auctions have met strong demand, but the longer duration of 10- and 30-year bonds may pose a challenge given the weak tone in the bond market.

And speaking of Treasuries, better economic growth expectations were the driver of higher yields. Inflation expectations, as measured by 10-year TIPS, increased by 0.1% and did not account for the entire 0.3% rise in intermediate Treasury yields, indicating that .2% of the yield increase was due to the swath of stronger-than-expected economic data last week.  Although inflation expectations increased over the fourth quarter of 2010, they remain just below the average level in existence prior to the start of the financial crisis.

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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