U.S. crude is up over 1% this morning to near $106, while European Brent crude is over $117 as fighting in Libya continues to disrupt supplies and increase oil’s risk premium. So far this morning, though, higher oil prices have not been enough to prevent stocks from achieving early gains. Some positive corporate news including acquisition reports and bullish analyst comments are helping sentiment at the open. European markets are higher in mid-day trading overseas, while Asian markets were mixed. The Shanghai Composite closed solidly higher on the government’s economic outlook, while Japan’s Nikkei lost nearly 2% due to a combination of high oil prices, the resignation of a key government official and S&P’s downgrade of a major automotive manufacturer’s debt. Precious metals are getting a strong safe-haven bid, led by silver’s continued surge, while agriculture commodities are higher across the board on ongoing supply concerns.
Looking back at Friday, a strong jobs report was not enough to offset the further rise in oil. The S&P 500 did manage to pare losses late in the session, rallying from down over 1% to a loss of just over a half percent. Financials and Industrials led the slide, while the defensive Health Care sector held up best. Developments in Libya offered little hope for quick resolution, sending U.S. crude up 2.5% to within striking distance of $105 and a fresh new high. The late Friday afternoon rally pushed the S&P into positive territory for last week with a fractional 0.1% gain.
Around our financial planning firm this morning, we were discussing four items that we thought would be of particular interest to our readers:
This is a relatively quiet week for economic data and events inside the United States. Obviously, this will allow market participants to focus on the troubling rise in energy prices that has accompanied the ongoing political unrest in the Middle East. Outside the United States, a full slate of economic data in China and a scattering of central bank policy meetings will compete for the market’s attention. Finally, the markets will continue to mull over the February employment report (released on Friday), which revealed that the U.S. labor market may have finally turned the corner. Aside from the monthly jobs report, the other economic data released last week was equally strong, suggesting that the economy was accelerating as it began to absorb the higher consumer energy prices.
Treasury yields are higher by 5 basis points (bps) this morning as the market sets up for this week’s 3-, 10-, and 30-year Treasury auctions. Treasuries rallied on Friday despite decent payrolls data, as investors focused on the potential implications for the sharp rise in oil prices to crimp growth. Greece’s debt rating was cut three notches to B1 by Moody’s today. The rating agency cited the risks that Greece’s measures to cut its budget deficit faced implementation challenges as tax receipts and spending cuts have not met the conditions outlined in its bailout plan. Credit default swaps are up over 1,000 bps to near the all-time high reached two months ago.
Who will purchase U.S. Treasuries when the Fed ends QE2? Foreign investors, primary dealers and domestic money managers purchase Treasuries at auctions, and they will continue to do so after QE2 expires. The Fed’s QE2 purchases are made directly to banks in order to increase banks’ funds available to make loans. When QE2 expires, banks’ holdings of Treasury securities will increase and fewer funds for loans will be made available.
The head of the Government of Singapore Investment Corporation, one of the world’s most active sovereign wealth funds, said today that Americans are being too hard on themselves and have failed to recognize the resilience of the U.S. economy. In an interview with the Wall Street Journal, GIC Executive Director Tony Tan Keng Yam said that negative sentiment “is a problem when I talk with Americans. They don’t see the potential in their own economy, which is one of the most innovative, open economies in the world. Foreigners seem more optimistic.” GIC has invested more than $100 billion into a portfolio of stocks, commodities, bonds and private-equity stakes. More than one-third of the fund’s holdings are in the U.S., Dr. Tan said, adding that GIC will continue to invest here. As we often do here at Fi Plan often, it’s smart to get perspectives that are “outside yourselves” when looking at markets.
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
President/CEO Wealth Consultant
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. Because of regulation, comments have been turned off.