The Nitty Gritty Details:
Market weakness this morning is being driven by an unwinding of optimism that the shape of a U.S. debt deal would start to come into view. Meanwhile, concerns that Italy would be the next shoe to drop in Europe are also weighing on global financial markets and pressuring the euro, which is down over a percent versus the U.S. dollar. Some delayed reaction to Friday’s weak jobs report is likely also contributing to the bearish tone this morning. As if that weren’t enough for the market to grapple with, an increase in Chinese inflation reported over the weekend is adding to market jitters. Commodities are mostly lower on renewed global growth concerns, with the exception of gold which rose to a fresh two-week high near $1555 per ounce on safe-haven buying.
Looking back at Friday, the weak jobs report sent stocks lower, catching most market watchers by surprise after the strong ADP report the day before. The broad averages did manage to close well above session lows on value hunting and in response to an increase in consumer credit. Nonetheless, stocks still managed a modest gain for the holiday shortened week. On Friday, the economically sensitive Financials and Industrials sectors led the slide, while the defensive sectors held up relatively well, with none losing as much as one half percent. Concerns about U.S. growth as well as the European debt situation weighed on commodities but provided some support for gold and silver. Oil lost 2.5% to near $96, dragging the CRB Commodity index down 0.7%.
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 Market Broken Down:
1. Second quarter earnings season begins tonight. The market rebound in the face of falling second quarter earnings estimates (but resilient third and fourth quarter estimates) suggests that market participants believe the second quarter earnings growth rate slowdown is transitory. It is being driven in large part by the supply-chain impact of the Japanese earthquake and tsunami on the world’s third largest economy, the violence in North Africa and in the Middle East, and the European debt problems. This is being partially offset by currency impacts from a year ago when the dollar was soaring. We will be watching closely to see how much of the slowdown appears to be transitory – and what is not.
2. EU holds meeting on potential Italy crisis. The EU is set to hold an emergency meeting of top officials today on concern Europe’s sovereign debt crisis could spread to Italy after a sharp sell-off in Italian assets on Friday. The market pressure is due to Italy’s high sovereign debt, sluggish economy, concerns about stress tests on banks, and political uncertainty about spending cuts. Five-year credit default swaps on Italian bonds rose to a record high this morning.
3. Unfortunately, debt talks are at a standstill. President Obama and Congressional leaders will meet again today over raising the $14.3T debt ceiling after little progress was made in an unexpectedly brief parley yesterday. The weekend also saw a new element of disagreement: Obama wants a deal to cut the deficit by $4T, while the GOP believes $2T is about as much as can be achieved.
4. Small companies are adding to the anemic economic outlook. Almost two-thirds of small businesses, which employ a significant proportion of the employees in the private sector, don’t expect to increase their workforce over the next year. With many firms worried about the uncertain economy, another 12% plan to cut jobs, while only 19% said they would increase payrolls. The survey follows Friday’s negative 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
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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