How might the weekend’s events in Libya impact the markets?

Greg at table3/21/2011:  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.

U.S. stocks opened solidly higher this morning on optimism that a nuclear catastrophe would be averted in Japan.  News of a mega-merger in the Telecom sector is also helping sentiment.  European and key Asian markets were solidly higher after heavy losses last week, although Japan’s market is closed for a holiday.  On the commodities front, oil, gold, silver and corn are solidly higher while copper is under some modest selling pressure.

Looking back at Friday, U.S. stocks continued their rebound from Japanese fears and turmoil in the Middle East, posting strong gains for the second straight session.  Japan’s nuclear crisis is not over, but some encouraging developments lifted investors’ spirits and cleared the way for some bargain hunters to come in.  A coordinated global yen intervention, Federal Reserve approval for bank dividend increases and stable oil prices also contributed to Friday’s gains.  The much anticipated dividend hikes from the Fed boosted Financials more than 1%, while only Energy and Consumer Discretionary ended lower.  Weakness in oil services stocks and disappointing profits from a major shoe retailer weighed on these sectors.  Oil started the day higher on Bahrain headlines, but gains were erased after the news of the Libyan cease fire.  Thanks to a strong finish, the S&P 500 ended just 1.9% lower for the week and is down less than 5% since the February 18th market peak.

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

So, what about Libya and the markets?  U.S. and European intervention in Libya has continued with more airstrikes, cruise missiles and coalition aircraft.  The intent is to take out anti-aircraft capabilities, weaken armored units around the rebel stronghold city of Benghazi and engage ground units in the area to defend civilians from attack by loyal Gadhafi forces.  However, the limited mandate (no troops on the ground) likely lengthens the conflict.  Gadhafi has been winning on the ground in the past couple of weeks and doesn’t need to take to the air.  If the fighting takes to the city streets and buildings, a no-fly zone is of little hindrance.  This likely lengthens the conflict and will support oil prices, but not drive them to economically destructive levels around $125.  That would likely take uprisings in a major Middle East oil producer, such as Saudi Arabia, which at the moment does not seem likely.

Treasury yields increased and credit spreads tightened late last week as risk aversion receded.  Treasury yields are higher by 3 to 4 basis points (bps) this morning, marking the first three-day stretch of weaker Treasuries over the last six weeks.  Despite the improvement in credit spreads to close last week, investors pulled $802 million from high-yield mutual funds, the first withdrawal in more than three months.  The fund flow data was taken through last Wednesday, when high-yield spreads reached their highest level since mid-January.  Spreads tightened on Thursday and Friday, indicating the pace of withdrawals likely slowed.

Leading banks get the “all clear” to return capital to shareholders.  Several leading banks got the OK from the Federal Reserve on Friday to raise dividends and buy back stock after passing recent stress tests.  Overall, this return of capital should help sentiment toward the group.

The market’s attention this week will be split between the relatively light economic calendar in the United States and the international situation.  In addition to Japan and the escalation of the conflict in Libya, U.S. monetary policy could move to the forefront this week as Chairman Bernake and two noted “inflation hawk” members of the FOMC are scheduled to make public appearances.  Although Congress is out of session this week, the release of the United Kingdom’s budget may refocus attention on the U.S. budget situation.  Elsewhere overseas, it is a quiet week for Chinese economic data, as market participants continue to gauge how much longer China’s central bank will be moving interest rates higher.  Several overseas central banks are set to meet this week, including the Phillipines, South Africa and the Czech Republic.  Of that group, only the Phillipines is likely to raise rates.

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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Has the Municipal Bond Market Returned to Full Health? Stocks are up and oil is down on the latest developments in Japan and Libya.