The Nitty Gritty Details
Carryover from Bernanke’s gloomy outlook and ongoing peripheral Europe uncertainty are the primary contributors to the market’s sour mood this morning. Not helping matters was an uptick in weekly jobless claims. The latest batch of earnings was generally good, with shares of most reporting companies higher on better-than-expected results. Health Care will get some support today from two major drug manufacturers favorable study results for an experimental blood thinner. Overseas markets are weak virtually across the board, though China’s Shanghai index bucked the trend with gains last night. Commodities are broadly lower amid a weaker dollar and growth concerns, with oil, copper, silver, gold and corn particularly weak, losing between 1.5% and, in the case of crude, roughly 4%.
Looking back at Wednesday, the major averages hugged the flat line much of the session before selling off after Bernanke downgraded the Federal Reserve’s economic forecast, while also raising its inflation estimates and providing a generally downbeat assessment of the U.S. economy. Little meaningful updated news out of Greece left market participants focused squarely on the Fed, which provided little ammunition for the bulls. All ten S&P sectors were lower. Lower agriculture prices offset higher crude, as the broad commodity indexes fell in line with equities.
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. The FOMC and Bernanke followed the script yesterday. The only surprise in yesterday’s FOMC meeting and press conference is that there were no surprises. Risk assets, however, seemed surprised that Fed Chairman Bernanke did not argue forcefully for another round of quantitative easing (QE3). Instead, Bernanke reiterated that the FOMC’s view is that the current soft spot is transitory and that growth will reaccelerate later in the year. Bernanke repeated several times that any move toward QE3 would be data dependent. Our view, and the Fed’s, is that the economy will improve making QE3 unnecessary.
2. Initial unemployment claims move higher, and are likely to move up even further in the coming weeks. Underscoring the recent soft spot in the economy, initial claims for unemployment insurance moved higher this week (to 429,000), and should move higher in the coming weeks reflecting earlier-than-usual shutdowns at auto manufacturers and parts makers. Claims are likely to remain elevated until early-to-mid July and then begin to decline again. If they stay elevated, it would be a signal that the economy may not yet be ready to emerge from the soft spot.
3. Taking a brief history lesson, what are the similarities and differences between the Argentina default in 2001 and a potential Greece default? If Greece were to default, the impact may be more akin to Argentina than Lehman Brothers. In December 2001, the government of Argentina initiated the largest government debt default on record, suspending interest payments and principal repayments on bond issues with a face value of more than $81 billion. Many large financial institutions that held Argentinean debt were still undercapitalized following the 2001 recession and took substantial losses, yet a global financial crisis did not take place and the global recovery continued. Argentina was able to devalue its currency as a means of paying off debt, not an option for Greece unless it leaves the eurozone.
4. Treasuries are rallying sharply this morning on weak jobless claims data, with the benchmark 10-year yield down 8 basis points to 2.91%, just above the record low levels of the year. Treasury yields finished yesterday essentially unchanged, despite elevated intraday volatility. Risk assets had been outperforming in the morning, but gave way to a flight-to-quality rally following Bernanke’s press conference, which highlighted risks to growth. While the Fed left open the door to additional Treasury purchases, QE2 will expire at the end of June, as planned.
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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