The Nitty Gritty Details:
U.S. stocks opened higher this morning on a light day for economic and market news. The higher open comes despite an earnings miss from a major technology company which cited the adverse impact of Japan on its bottom line. On the other hand, a major health care products company posted better-than-expected earnings and offered positive guidance while a handful of banks also posted strong results. Most Asian markets were lower overnight, though Europe was trading broadly higher in mid-day action after rebounding from earlier lows. Crude oil is back under $107 this morning while gold is trading essentially flat near $1,490.
Looking back at Monday, the session was set up to be quiet with modest losses on some lingering Europe concerns and another not totally unexpected increase in China’s bank reserves. But S&P had other ideas, catching the market off guard by offering a negative outlook for the U.S. government’s AAA credit rating. The news turned slight losses to big losses as the S&P slid fourteen points after falling twenty points at the lows. Earnings reports were generally well received, but were drowned out by the S&P headline. No S&P sector rose, but Technology and Consumer Staples held up relatively well.
The Markets Broken Down:
Around our financial planning firm this morning, we were discussing three issues that we thought would be of particular interest to our readers:
- So, can we take some comfort to what happened to the U.K. with their negative S&P outlook? As a comparison, the U.K. was placed on “outlook negative” by S&P back in July 2009 but their AAA rating has not changed since. The U.K. remains on outlook negative, but their government bond market was among the best government bond performers in a difficult first quarter of 2011. The discussion around our offices is that the S&P news on the American debt rating will serve as a “shot across the bow” to the administration that the national debt problem is one that needs to be firmly confronted. As a reminder, outlook is different than credit watch. Outlook refers to a longer-term, 6-month to 3-year ratings direction and is not indicative of a pending rating change (credit watch). 18 countries around the world have AAA-ratings on their sovereign debt, with Germany, France and the U.K. most relevant to Treasuries from a market perspective.
- Last week’s new municipal issuance was well received. New issuance remains very light, but the fact that several large deals successfully came to market is an encouraging sign that the municipal market may be ready for a heavier load. Strong demand caused a few deals to be re-priced at lower yields. The passage of tax day, April 15th, should incrementally help the municipal market as seasonal investor selling of municipals to pay capital gains diminishes. Interestingly, municipal defaults are on pace to decline for the third consecutive year.
- In a broader context, the S&P action is another factor in the “push and pull” on U.S. Treasury yields. Treasury weakness from the S&P outlook change was reversed over the course of yesterday, and Treasuries finished with modest gains. Investors focused on renewed European debt concerns and additional monetary policy tightening in China. Since President Obama’s speech last Wednesday announcing tax hikes and spending cuts of his own, the bond market is growing increasingly worried about slower economic growth in the future.
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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