Week Ending June 15, 2012
Despite the election of a pro-austerity government in Sunday’s Greek elections, which led to a very brief relief rally Monday, investors realized that nothing fundamental had changed in the eurozone debt crisis. Spain’s weak economy and its failing banking sector regained the spotlight. Investors abandoned Spanish sovereign debt, pushing the yield on the country’s 10-year bonds above the sustainable 7% threshold to an all-time high. Italy’s bond yields also rose.
The safe havens of Danish, Swiss, and German short-term bonds had negative yields, with investors essentially paying those governments to watch their money. Weak and disappointing data on eurozone business confidence, Chinese manufacturing activity, and US job openings added to the gloomy market mood.
A modest move by the US Federal Reserve Board to extend its Operation Twist stimulus program through year-end disappointed the markets, which had hoped for more aggressive action.
The price of commodities fell, including crude oil, which dipped below $80 per barrel, reflecting slowing global demand, rising inventories, and bearish leading economic indicators.
Major global equity indices had a rocky ride during the week but did not gain or lose appreciably overall.Amid this environment the DJIA was down -1.0%, the S&P 500 was down -0.6%, the Russell 2000 was up 0.5%, the Global Dow ex-US was down -0.1% and crude oil fell -5.4%. Spanish banks posted their highest level of past-due debts in 18 years in April. Concern over Spain’s increasing debt load and weak economy intensified, reflected by rising government bond yields. As the eurozone’s fourth-largest economy, Spain could become a much larger and more challenging regional weak link than Greece. The cost of a large-scale bailout of Spain could eventually deplete the region’s resources. Details on an immediate bailout package to keep Spanish banks afloat will be worked out at a June 28-29 summit meeting of eurozone government leaders, with the package to be finalized on July 9. Italy announced €80 billion in stimulus measures, primarily tax incentives to encourage home renovations and corporate research and development. As concerns about a possible Spanish government bailout rise, attention has increasingly been shifting to Italy as the next possible problem in the eurozone debt crisis, even though Italy’s economic fundamentals are healthier than those of Spain. In Greece, the formation of a three-party pro-bailout coalition this week gave some hope for the immediate future. But the reprieve from uncertainty and heightened concern regarding Greece did not last long. Greece’s challenges include an imminent cash crunch, already-high unemployment rates, and the need for additional austerity measures in order to appease the country’s creditors.
The US Federal Reserve Board extended its Operation Twist to the end of 2012. It was initially designed to end in June. Under the program, the Fed uses the proceeds of shorter-term bond sales to buy longer-term bonds and lower long-term interest rates. The extension makes available $267 billion in long-term US Treasury securities over the next six months. This is the Fed’s fifth attempt at economic stimulus since 2008. The Fed predicted that the unemployment rate would remain at 8% or higher for the rest of the year. It also lowered its forecast for economic growth in 2012 by half a percentage point, to a range of 1.9%-2.4%. US job openings fell to their smallest level in almost four years in April, according to a US Department of Labor report. The number of open positions dropped by 325,000 in April to 3.42 million. Weekly initial jobless claims were flat, with the four-week moving average of new claims rising 3,500 to 386,250. Housing reports did not give much shelter from the barrage of bad news. US existing-home sales fell 1.5% in May from April, but May sales rose 9.6% from a year earlier, according to the National Association of Realtors. Home construction slowed 4.8% in May from April, but housing starts were 28.5% higher than a year earlier, according to a report from the US Department of Commerce. Business activity in the eurozone declined for the fifth straight month in June, according to the preliminary composite purchasing managers’ index. Markit Economics said the PMI reports for the second quarter (April-June) pointed to the steepest downturn in three years. German economic expectations fell in June at their steepest rate in 14 years, according to the monthly report from the Center for European Economic Research (ZEW). The ZEW survey indicated a modest loss of business confidence in France. A survey by the Munich-based Ifo Institute pegged German business confidence at a two-year low in June. German producer-price inflation fell to a two-year low in May, according to a separate report, issued by Germany’s Federal Statistics Office. Consumers in the United Kingdom showed resilience in May, as the volume of retail sales rose 1.4% for the month and 2.4% compared with the year-ago period. The country’s consumer price index rose 2.8% annually in May, down slightly from 3% in April. Month-to-month prices dipped 0.1%. Annual inflation is at its lowest since November 2009. Manufacturing activity in China fell for the eighth straight month, according to the latest HSBC China Manufacturing Purchasing Managers’ Index. New export orders hit their lowest point since March 2009. There is increasing expectation that China will introduce new economic stimulus measures in July. Japan’s trade gap reached ¥907.26 billion ($11.5 billion) in May, almost twice as large a trade deficit as had been expected by economists. Surging energy imports and Japan’s first-ever trade shortfall with Europe were key factors.
Moody’s Investors Service slashed the credit ratings of a who’s who of large global banks, including Credit Suisse, Citigroup, Deutsche Bank, JPMorgan Chase, Morgan Stanley, and UBS. In all, 15 global banks had their credit downgraded by Moody’s, which had warned banks in February of the possible downgrades. The wide-scale reviews result in a better reflection of the current heightened risks faced by the global financial industry.