What I’m Watching This Week – 18 June 2012

What?  Did you think you were going to arrive late to this party?

Investors face a high level of uncertainty.  Yet financial markets seem surprisingly optimistic about the entire affair.  Against this outlook, global equity markets, and the U.S. in particular, have kicked off summer trading on a note of strength.  Will that be dashed come Monday morning?   Eerily I’m seeing shades of 2011, as this market is clearly politically event-driven and that fundamentals are again being ignored to our detriment.   Hopefully we won’t be pushed into a media driven panic but I certainly expect a lot of whipsaw action ahead as the news from Europe begins to penetrate the markets psyche.

Last week’s economic data laid out for all to see, a recipe of a slowing economic recovery: industrial production, capacity utilization and retail sales ticking down, inventories and unemployment claims up, consumer confidence slipping.  This week brings housing data and durable goods orders but the attention will again be concentrated on Europe.

The U.S. markets last week, added another solid weekly performance.  Each of the major indexes recorded gains as all nine major S&P sectors ended the week in the black, led by the energy stocks with an advance of nearly 2.5%.  Rather unexpectedly, Tech stocks even showed up to the party (BYOB of course).  The global markets participated in what I dare not call a rally, because it really wasn’t, with eleven of the twelve major indexes recording gains.  Investors are favoring stable earnings and dividends as we move into 2nd quarter’s earnings season.

Treasury yields, which had self-destructed at the end of May then returned a little in the first week of June, once again went the other direction.   The 10 year bond yield approached 1.7% and retreated.  The 30 year bond ran into resistance at 2.8%.   Bond strength stretched to corporate and municipal issues, as well as TIPS, which performed on Friday, in my speculation, due to the Greek elections.  Across the Atlantic yields on bunds, gilts and JGBs dropped, while Spanish and Italian yields rose to above  7% and just over 6% respectively, by the close.  The hands of the central bankers are playing out right in front of our eyes, as they prepare to possibly flood the markets with liquidity and drive down yields across the globe.  This continues to become more and more interesting as the days grow longer.

Commodities appeared to move back into a buying mode, as Oil maintained above $80, and gold rose last week. Copper also seemed to bottom with some upward momentum ready to push past resistance. Unfortunately the grains, livestock, and most of the softs, saw continuing downward pressure.

The U.S. dollar index came back just under the January high as most of the major currencies gained ground against the greenback.  The euro managed to consolidate and ended the week above $1.26.   The British Sterling on Friday, after British officials designated more monetary support for the struggling economy made a big move upwards against the Euro and dollar.  Any further action/reaction depends on what happens across the Atlantic, as well as the Fed here at home.

There is some cause for optimism.  The last time we saw significant Quantitative Easing (QE), strong rallies ensued.  There is good reason to expect something similar going forward both in Europe, Asia and here.  There is a great deal of uncertainty in having a political news driven market, so we need to stay cautiously alert.  There is likely to be a morass of pain around the corner, however, trouble arrives at the party hand in hand with opportunity and who doesn’t like opportunity?