In this Week’s Issue
• U.S. leading economic index increased 0.8% in May to 114.7 (Conference Board)
• U.S. headline inflation rate in May rose 3.6% from a year earlier (Economist)
• Euro area annual inflation was 2.7% in May down from 2.8% in April (Eurostat)
• U.S. housing starts up 8.7% from April and 5.2% above May 2010 (US Census)
• India raises key interest rates by 0.25 percentage point to 7.50% (WSJ)
• Yields on Spanish 10-year bonds at 5.6% – highest in a decade (FT)
• U.S. trade deficit increased to $119.3 billion in the first quarter of 2011 (BEA)
• Chinese consumer prices rose 5.5% in May; biggest increase in 3 years (FT)
• China’s politically sensitive food prices surged by 11.7% (Economist)
• S&P cuts Greece’s longterm credit rating by three notches to CCC (FT)
• The Bank of Japan has kept its key interest rate at 0%-0.1% (Bloomberg)
It was all about the Greek credit crisis again this week. Images of violent protests in the streets of Athens sent shock waves through the financial markets squeezing the nervous investors’ arteries just a little tighter still. Greek government bond yields spiraled into stratospheric levels. After some of the ratings agencies dealt Greece a final blow declaring them essentially at default level, the yield on the 10-year Greek government bond touched 18 percent. Worse still, the two-year and three-year bond yields shot up to about 30 percent. Unthinkable for a European country one might assume; then again, investors’ memories are notoriously bad. Those who had witnessed the Greek financial tragedy early last year had been warned that there might be a slight problem with Greece’s ability to pay back its creditors.
In our article: A Series Of Unfortunate Events For Europe, we highlighted some of the important events leading up to the crisis.
The ongoing struggle to implement austerity measures has run its course; no significant improvement of their government coffers have been made which is why Greece is back to square one. Worse than that in fact, since they now have to borrow at essentially twice the cost of capital from a year earlier. When Monsieur Sarkozy and Frau Merkel embraced in harmony to come up with yet another negotiated bailout compromise of some sort, the market breathed a sigh of relief for a moment. While the Euro fared remarkably well, all things considered, it remains questionable how much longer the Greek tragedy can continue. Greece is clearly at a point where it will be increasingly difficult to find able and willing creditors. In this country we know what it means to “kick the can down the road” all too well. Lessons to be learned?
Lines In The Sand
Last week, we discussed the notion of lines in the sand suggesting that a price level of 1250 for the S&P 500 might be one of those important technical support levels upon which many traders hinge their next moves. The line in the sand has been holding but we came fairly close to it when the S&P 500 touched the 200-day moving average on Thursday.
Since March 2009, the market has made a remarkable recovery. Considering a still rather sluggish recovery on main street, the market is now looking for the next impetus to move higher. What is your take? Will 1250 hold or will we step back into the uncomfortable bear market territory again?
If you were to leave it up to Professor Robert Schiller, the question above would turn into a rather gloomy prediction. He believes that stocks are about 40 percent overvalued based on his cyclically adjusted PE ratio (CAPE). Please consider his explanation as to why markets are in for more downward pressure.
Good luck and good investing!
Clemens Kownatzki, MBA is an adjunct professor of financial risk management at the Graziadio School of Business and Management, as well as the founder and CEO of FX Investment Strategies, a Registered Investment Advisor. In addition to running his investment advisory firm, he is a contributing author at SeekingAlpha.com and BusinessInsider.com. He also authored the book, Money Music 101, available on Amazon and Kindle, in addition to publishing the popular investment blog www.fxinvestmentstrategies.com along with a weekly newsletter.
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