Why Are Greece and China Worries Fading? Weekly Update – July 13, 2015

Image courtesy of freedigitalphotos.net/Jeroen van Oostrom

Image courtesy of freedigitalphotos.net/Jeroen van Oostrom

Markets finally broke the losing streak, closing up for the week as worries about Greece and China faded. For the week, the S&P 500 gained 0.88%, the Dow rose 1.11%, and the NASDAQ grew 0.69%.1

Though a deal with Greece wasn’t reached on Sunday, both sides of the debt overhaul debate appear committed to finding a solution. Top-level officials from around Europe met to put together a deal that would be acceptable to creditors as well as Greece’s wary parliament. With Greek banks shut since June 28 and unlikely to reopen without additional funds, damage is already being done to the Greek economy.2  As of Monday morning, an “Agreement” was finally reached between the two sides; now, attention turns to Greek’s parliament, which must ratify the deal.3

China’s stock market, which has been experiencing a bear market correction, stabilized last week. Is the free-fall over? Hard to say, but we’re not worried. China’s stock market and investing culture is immature, and the recent 30% drop in the Shanghai Composite Index came after a run-up of 150%.4 Many analysts felt that Chinese markets were frothy and overpriced, so the correction isn’t unexpected. However, the stock meltdown does lower the expectation that China’s economy will reignite global growth.5

On the domestic side, the largest stock exchange in the U.S. experienced an outage last week that caused some to worry about the effects of software on markets. The technical fault that caused the New York Stock Exchange to halt trading for four hours on Wednesday gave investors pause but didn’t result in too much disruption to U.S. equity markets because orders were routed through other exchanges. While rumors of a malicious attack flourished, NYSE officials claimed a software glitch was to blame.6

In today’s software-reliant world, technical faults can and do happen. While other institutional traders who measure positions in microseconds can suffer serious losses when orders don’t go through in time, long-term investors aren’t usually affected by small glitches. Why? When you’re investing for long-term time horizons, the timing of individual trades doesn’t matter as much, and little ripples in the market generally won’t affect your long-term financial picture.

In the week ahead, Federal Reserve Chair Janet Yellen will be speaking about monetary policy to the House and Senate. Remarks that Yellen made on Friday suggest that she will probably reiterate the Fed’s intention to raise rates later this year as long as economic activity continues apace.7 Earnings season will ramp up with many banks reporting this week as well. We’ll have more for you on earnings next week.

ECONOMIC CALENDAR:

 Monday: Treasury Budget

Tuesday: Retail Sales, Business Inventories

Wednesday: PPI-FD, Empire State Mfg. Survey, Industrial Production, Janet Yellen Speaks 10:00 AM ET, EIA Petroleum Status Report, Beige Book

Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey, Housing Market Index, Janet Yellen Speaks 10:00 AM ET

Friday: Consumer Price Index, Housing Starts, Consumer Sentiment

7-13-15

HEADLINES:

Jobless claims rise to highest level since February. The number of Americans filing new claims for jobless benefits rose last week, though underlying trends remain stable. Seasonal factors may be to blame.8

Job openings soar. The number of available jobs rose again in May, showing that the economy had 5.4 million jobs to offer. Despite the increase, hiring remained flat, indicating that employers may be having trouble finding jobseekers with the right skills.9

Fed meeting minutes shows split. Meeting minutes from the June Federal Open Market Committee meeting show that economists were split, with some ready to vote for a rate increase. However, uncertainty around global risks won out, and officials chose to wait for more information.10

Consumer confidence rises more than expected in June. A gauge of how optimistic Americans feel about their economic prospects soared last month, stoking hopes that spending may boost economic growth.11

International Monetary Fund trims global growth expectations. Citing weaker-than-expected economic activity, weak inflation, and other factors, the IMF lowered its global growth projection to 3.3% from 3.5%.12

Hixon Zuercher July 2015 Monthly Market Update

What’s the Big Deal Now in Greece? Weekly Update – June 1, 2015

U.S. markets ended the week on a down note as investors struggled with weak economic data and concerns about Greek debt negotiations. However, markets were able to end the month of May in the black. For the week, the S&P 500 lost 0.88%, the Dow dropped 1.34%, and the NASDAQ fell 0.38%.[i]

On Friday, we got a look at revised first-quarter gross domestic product (GDP) growth numbers, and we found out that the economy actually shrank 0.7 percent last quarter instead of growing.[ii] The news wasn’t unexpected, as economists knew that the economy struggled with issues like a harsh winter, a port shutdown, and a strong dollar that ate away at U.S. exports. However, it’s unwelcome because it means that the economy still hasn’t reached escape velocity and the recovery may still be fragile.

Though we don’t have data on the spring quarter yet, many economists expect a significant rebound in economic growth. We’ve seen estimates ranging from 1.0 percent to 3.2 percent, so it’s clear that there’s a lot of room for debate.[iii] Markets also took a hit from stalled Greek debt negotiations. Greece is currently deadlocked in talks with creditors for a new round of loans needed to service its debt and make government payments. To give you a brief bit of history: Greece was at the center of the European debt crisis after financial markets imploded in 2008.[iv]

To ward off a sovereign debt default, which might have touched off another European crisis, Greece accepted loans from European and international lenders in 2010. In exchange for the money, Greece agreed to institute austerity measures, massive cuts to government spending, designed to bring the national debt under control.

However, the cuts were deeply unpopular with Greek citizens, and a new leftwing Greek government elected in January rose to power on a wave of anger at the effects of austerity – rampant unemployment, brain drain, and low economic growth.[v]

What’s the big deal now? New Greek leaders refuse to reinstate austerity measures, and their creditors don’t want to extend more loans unless they meet their economic terms. If Greece doesn’t get another infusion of cash by its next debt deadline on June 5, the country will default on debt payments, which may trigger a banking crisis and possible exit from the European Union.[vi] Though the long-term effects of a “Grexit” (Greek exit) can’t be predicted, investors are likely to worry that where Greece goes, other countries may follow.

If Greece fails to reach an 11th-hour deal with its creditors this week, it’s likely that European and U.S. markets would react badly to the news. Let’s hope that this latest round of brinksmanship can be resolved; as always, we’ll keep you informed. The week ahead is also filled with domestic economic data, including the May employment report, which investors hope will show that the labor market continued its upward trend after a March blip.

 

ECONOMIC CALENDAR:

 Monday: Personal Income and Outlays, PMI Manufacturing Index, ISM Mfg. Index, Construction Spending

Tuesday: Motor Vehicle Sales, Factory Orders

Wednesday: ADP Employment Report, International Trade, ISM Non-Mfg. Index, EIA Petroleum Status Report, Beige Book

Thursday: Jobless Claims, Productivity and Costs

Friday: Employment Situation

6-1-15

HEADLINES:

Consumer sentiment beats expectations though still weak. U.S. consumers remain cautious about the current state of the economy, leading some analysts to worry about consumer spending this quarter.[vii]

Durable goods orders fall. Orders for long-lasting factory goods fell in April, but the underlying data indicates that business spending is slowly picking up. Excluding volatile transportation orders, orders climbed 0.5%.[viii]

New home sales rise more than expected in April. Sales of newly constructed single-family homes surged in April, indicating that a housing sector resurgence may be underway. Hopefully, the strengthening job market will support sales activity.[ix]

Pending home sales looking up. A forward-looking indicator of U.S. home purchases rose in April for the fourth straight month in a very positive sign for the housing sector. The gauge rose 14% over April 2014, the highest level since May 2006.[x]

 

[i] http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#{“comparisons”:”^DJI,^IXIC,^GSPC”,”comparisonsColors”:”#cc0000,#009999,#ff00ff”,”comparisonsWidths”:”1,1,1″,”comparisonsGhosting”:”0,0,0″,”range”:”ytd”,”showPrePost”:false}

[ii] http://www.marketwatch.com/story/us-gdp-turns-negative-in-first-quarter-again-2015-05-29

[iii] http://www.marketwatch.com/story/us-gdp-turns-negative-in-first-quarter-again-2015-05-29

[iv] http://www.nytimes.com/2015/04/09/business/international/explaining-the-greek-debt-crisis.html

[v] http://www.theguardian.com/world/2015/jan/25/greece-election-vote-austerity-leftwing-syriza-eu

[vi] http://www.bloomberg.com/news/articles/2015-05-25/greece-points-to-june-imf-payment-as-next-cliffhanger

[vii] http://www.foxbusiness.com/economy-policy/2015/05/29/consumer-sentiment-picks-up-in-may/

[viii] http://www.foxbusiness.com/economy-policy/2015/05/26/durable-goods-orders-slip-match-views-in-april/

[ix] http://www.foxbusiness.com/economy-policy/2015/05/26/new-home-sales-prices-rise-strongly-in-april/

[x] http://www.foxbusiness.com/economy-policy/2015/05/28/pending-home-sales-jump-more-than-expected-in-april/