The Nitty Gritty:
We’ve got a “hurricane relief rally” today. U.S. stocks opened higher this morning on relief that Hurricane Irene caused less damage in New York City and throughout the mid-Atlantic than had been feared. A better-than-expected consumer spending report this morning also contributed to the positive open. Today’s economic calendar also includes Chicago PMI and pending home sales. European shares also rose on stimulus hopes, while Hong Kong got a lift from oil producer earnings. Crude is solidly higher along with equities, while safe havens gold and silver are both lower. No serious damage to oil refining facilities was reported over the weekend. Key grains are higher following reports of further weather-related deterioration in U.S. harvests.
Looking back at Friday, stocks rallied strongly after an initial negative reaction to Bernanke. Stocks staged a sharp reversal Friday after losing 2% on a combination of losses in Europe, a soft U.S. GDP report and a negative initial reaction to Bernanke’s comments from Jackson Hole. Bernanke gave us little news, but reiterated the Fed stands ready to do more and called on policymakers to do their part. At the end of the day, the market liked it and the S&P 500 rallied about a percent and a half, the fourth gain in five days and the first positive week in the last five. Cyclicals led the rally, including Tech, Industrials and Resources, while Utilities was the only sector to finish in the red. Bernanke’s leaving the door open to additional monetary policy action drove gold 2% higher to back near $1800.
The Markets Broken:
Around our financial planning services firm this morning, we were discussing four items that we thought would be of particular interest to our readers:
1. Most immediate items on the policy front this week. The Fed will release the minutes of the August 9th Federal Open Market Committee (FOMC) meeting, and perhaps more importantly, German Chancellor Angela Merkel holds a key policy conference with her own caucus as the market continues to wait for a policy response from Europe. Japan’s ruling party will choose a new Prime Minister from its own ranks after the current Prime Minister resigned on Friday, August 26th. As with elsewhere around the globe, the path of future fiscal and monetary policy in Japan is crucial to the outlook for the global economy.
2. Also on the policy front, what is a “little farther out” on the horizon for investors? First, it is the now two-day long September FOMC meeting on September 20th and 21st. Second, some type of policy action in Europe will have a major focus. Third, there is a jobs proposal from President Obama. Finally, there is the ongoing work by the so called congressional “Super Committee” tasked with finding at least $1.5 trillion in budget savings by the end of this year.
3. Italy will auction 8 billion euros of government bonds tomorrow. This will be the first auction since the ECB conducted secondary market purchases of Italian and Spanish debt in early August to contain the rise in yields. Italy’s 10-year yields, which had increased to 6.4% prior to the ECB purchases, currently yield 5.10%, demonstrating the success of the bond buying program. The ECB is not permitted to participate in government bond auctions, so investor demand will be closely monitored to judge whether private investors are comfortable holding the debt.
4. Something to think about… creating a Eurobond market would provide investors with a highly liquid, well-rated alternative to U.S. Treasuries. The liquidity boost provided by an alternative to U.S. Treasuries may lower collective yields for the Eurozone members, even for Germany. Eurobond draft legislation, which may be unveiled soon, may be helpful in providing market participants with a confidence-boosting glimpse of a long-term solution to Europe’s debt problems that they have been demanding even if the implementation is not imminent.
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.
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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