We hope that you had a great weekend. As we always do at the beginning of the market week, we wanted to give you a “look ahead” at a few items that we will be tracking carefully during the week. These are just a few opinions that we have, and as with life, nothing is certain about them.
1. First, here is a “week-at-a-glance” view of several key market drivers for the next five business days and the upcoming weekend. Beginning today, the Supreme Court comes out with a number of orders and opinions. Tuesday sees The Treasury release its May budget report. On Wednesday, the U.S. issues data on producer prices and retail sales for May while J.P. Morgan CEO Jamie Dimon testifies before a Senate panel on his firm’s large trading losses. Thursday brings the release of the May consumer-price index and OPEC members convene. The market week ends Friday with reports coming out on consumer sentiment and industrial production. The real “drama” for this next week is actually on Sunday, June 17th, as Greece holds an election that could determine whether it remains in the euro zone. France also conducts a second round of balloting in parliamentary contests that could have long-ranging impact on whether the country continues to move away from austerity measures.
What does this mean for investors? We are particularly focused on this weekend as an example of how markets truly are “global” in their reach and impact. When you think about it, did you ever really believe that a country with the GDP size of Dallas-Fort Worth would dominate headlines more than our own industrial production data being released on Friday?
2. Looking deeper into the Spanish bank bailout. Spain’s agreement over the weekend to a $125 billion bailout for its banks begs a deeper question: “Will the country eventually need a bailout for itself?” To us, it seems that the real fundamental problem in Spain is that the banks and the country itself are so closely intertwined with one another. The primary liquidity problem for the country is that there is no buyer of Spanish debt beyond the domestic base, which is primarily the Spanish banks themselves! In our view, another fundamental problem that may emerge is that the European bailout funds, which are priced at a reasonable interest rate of 3%, are being injected as superior, and not subordinated, debt. How willing are non-bailout bond holders going to be to immediately put their interests behind that of the bailout fund?
What does this mean for investors? In our view, all of these events in Europe, two of which this week are major, are going to keep markets volatile for a while. More than ever, markets are a reflection of politics around the world. Unfortunately, politics contain the most “random” elements of markets, thus heightening volatility. At best, it appears that the Spanish bank bailouts will only keep borrowing costs lower for awhile. What’s really odd about the whole thing is that as a member of the eurozone, Spain is backstopping (and paying for some of) its own bank bailout.
3. And speaking of Spain, its issues are raising concerns that Italy could be next. Italy faces more scrutiny, not less, following Spain’s bank bailout. For one thing, Italy is now a guarantor of 22% of Spain’s bailout funds. Italy also confirmed that its Q1 GDP fell 0.8% on the quarter. Positives for Italy are that it has a relatively healthy banking system, a jobless rate less than half of Spain’s 24% and appears on track to reduce its budget deficit. One reason that Italy’s progress is measured, however, is that most of its companies that drive GDP growth are of small to moderate size due to years of heavy union involvement.
What does this mean for investors? This has the potential to be another “volatility drip” for markets this summer beyond Spain. It is hard to see how Europe can ever solve their issues without totally “overhauling” the structure of the European Union. As one NYU economist put it very well, Europe is trying to solve a “Constitutional” problem with an “Articles of Confederation” government. This may have been fine when times were good, but now that major “centrist” type issues need to be solved, it’s just not enough. Simply put, Europe just does not have the political structure in place currently to accomplish all it needs to in stemming the crisis.
4. The much anticipated release of Chinese economic data over this past weekend showed mixed results. As a sobering reminder that Europe is not the only “market driver” out there, Chinese economic data is also a strong focus of ours. As some expected when the PBOC cut rates on Thursday, the “data deluge” from China wasn’t pretty, but it wasn’t all bad either. May exports grew 15.3% and imports 12.7% (both well above expectations), while CPI increased less than forecast. Industrial production and retail sales data also disappointed.
What does this mean for investors? That we are in a “synchronized” economic slowdown around the world. With Europe buying less from China, China in turn is buying less from its commodity suppliers and from those nations that supply is burgeoning middle class.
Please call me at (205) 989-3498 or email me here with your questions or concerns. I would be delighted to talk with you.
Senior Vice President
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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