Greece? What About The Debt Issue For The Rest Of Europe?

Question Marks06/17/11: 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:

Stocks were boosted this morning by comments from French President Sarkozy that hinted at a possible deal to resolve the Greek debt crisis.  While a definitive plan has not yet been announced, Sarkozy and German Chancellor Merkel agreed that the EU must support Greece, perhaps hinting at a less onerous deal than Germany had been pushing for in recent weeks.  The market has thus far shaken off a bad earnings report from a major PDA manufacturer and will digest both the University of Michigan Consumer Sentiment report and Leading Indicators later today.  Asian stocks traded lower overnight, while Europe is higher in mid-day trading.  Crude oil is trading nearly $2 lower in the early going, back in the $93 range.

Looking back at Thursday, stocks rebounded to finish slightly higher, led by defensives.  Ongoing concerns in Greece weighed on the markets early yesterday, but better-than-expected readings on jobless claims and housing starts offered at least a temporary pause in the recent string of negative data and some hope that the current soft spot might be short-lived.  Despite the positive day for the S&P 500, trading was decidedly defensive led by Consumer Staples and Utilities, while Materials declined more than 1%.  The Technology heavy Nasdaq Composite was in the red yesterday as the Tech sector dipped 0.3%.

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. Greece is the focal point for now, but what is happening with the rest of European debt issues (i.e. Ireland, Portugal and Spain)? The latest flare-up in the peripheral European fiscal situation is impacting Greece, but in the past 18 months, Greece, Ireland, Portugal, and to a lesser extent Italy and Spain, have been in the hot seat.  The near term catalyst for Greece is a debt maturity in July, but even after this is resolved, the underlying fiscal issues in peripheral Europe are not likely to disappear overnight.
  2. The Federal Reserve Open Market Committee (FOMC) is “front and center” next week. Although there is data on new and existing home sales and durable goods orders and shipments for May due out next week, the key event for markets will be the FOMC meeting, the FOMC’s latest economic forecast and Fed Chairman Bernake’s press conference.  The Fed will end QE2, but maintain the size of its balance sheet for the foreseeable future.  The FOMC is likely to acknowledge the recent soft spot in the economy and pickup in inflation.  Bernake is likely to be questioned about the end of QE2 and its impact on the markets, what it would take for the Fed to embark on QE3 and about the Fed’s view of the latest flare-up in the European debt debate.
  3. Major credit-rating firms, including Standard & Poor’s, are drawing SEC scrutiny. U.S. securities regulators are weighing civil fraud charges against some credit-rating companies for their role in developing the mortgage-bond deals that helped unleash the financial crisis.  The leading ratings companies have been criticized by lawmakers as “key enablers” of the financial meltdown, helping to fuel the $1 trillion Wall Street mortgage-securities machine before the boom ended.  Simply put, SEC officials are focusing on whether the ratings companies committed fraud by failing to do enough research to be able to rate adequately the pools of subprime mortgages that were the crux of the problem.
  4. The world’s largest banks are facing an extra capital requirement of 2.5% of their assets that would be on top of the “Basel III” minimum set by regulators last year. As part of efforts to make large banks more resilient and to further protect the financial system, regulators are due to discuss next week proposals in which the surcharge a bank receives is based on its size, global reach, structural complexity and whether other banks could absorb its businesses.  Several banks in a lower category would get a 2% surcharge, while 10-15 small banks would have to hold 0.5-2% extra.

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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