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6/5/2012 1:48 PM
Europe at the Center of Attention
By WSS Research Team
By Carlos Guillen
Investors continue looking at everything Europe, seeking to find some indications of what will happen to Greece and to the other debt stricken euro members. Unfortunately, there is no definitive answer yet. The G7 emergency meeting appears to have produced nothing significant as members made very short and vague comments of the outcome. And economic data around the world seems to continue indicating slowing growth.
The alarms and whistles that sounded prior to the highly tuned G7 emergency meeting appear to have been much ado about nothing. After the meeting was said and done, none of the members made any significant comments about the outcome of the meeting. Japan's Finance Minister Azumi told G7 members that Japan is confident in Europe's response to its problems. He also said that G7 members did not discuss Greece leaving the euro, but said they did agree to cooperate to solve the Greek and Spanish problems. And, in a public statement, the U.S. Treasury said that the G7 ministers and governors reviewed developments in the global economy and financial markets and the policy responses under consideration. So, in essence they said nothing. However, the meetings are not over yet; investors will now be waiting for the results of the European Central Bank meeting, which will take place tomorrow. Also, U.S. Federal Reserve Chairman Ben Bernanke is scheduled to testify before the Joint Economic Committee Thursday morning.
At the moment, the speculation that Greece will leave the euro zone continues. Most recently Standard & Poor's (S&P) has made a prediction that Greece has a one-in-three probability of exiting the group of 17. On the other hand, S&P made a more positive prediction, saying that it saw a very remote likelihood of other members exiting after Greece.
On the Spanish front, there are growing concerns about whether Spain can restore health to its banks as Budget Minister Cristobal Montoro said high borrowing costs meant Spain was effectively shut out of the bond market. According to the Spanish Budget Minister, the current debt premium is conveying that Spain will have a problem getting access to markets when the need comes to refinance the nation's debt.
Perhaps a bit encouraging today was that the pace of growth in the U.S. services sector picked up in May as the Institute for Supply Management's services index edged up to 53.7 from the 53.5 reached in April, landing above the Street's estimate of 53.5. The new orders component also increased nicely to 55.5 from 53.5, indicating improving customer demand and strong sales for the rest of 2012. While equity markets originally reacted quite positively to the result, given that the services sector is the largest sector of the economy, the enthusiasm faded away as investors turned around to look at Europe once again.
All in all, the volatility resulting from the euro zone saga continues, and this has the Dow Jones Industrial Average moving in a sinusoidal fashion to flat from yesterday's closing price. Continue to expect more of the same for the rest of the week.
Services Lack Spark
By David Urani
The market made a move into positive territory on the release of the ISM services index which was somewhat encouraging as it showed a slight increase to 53.7 from 53.5 versus expectations that it stay flat. Despite the flat consensus estimate, I think the market was braced for a dip given all the bad indicators lately in the global economy. The highlights of the report were slight increases in activity and new orders but I think there are a couple of key reasons why the market changed its tune shortly after the release:
* Employment component slipped to 50.8 from 54.2 (just barely above the 50.0 growth/contraction threshold).
* Remember that bad ISM manufacturing report last week? It was a 53.5, only just slightly worse than the 53.7 reading for services.
By the way, Markit sent out various world services and composite (manufacturing and service together) indexes today. All together, it culminated with the Global Composite PMI which for May registered a 52.1, down from 52.3. I suppose it could have been worse, but it only illustrates that the world is shuffling slowly closer to the cliff edge. If not for the relative outperformance of the USA (which accounts for 28.1% of global activity in the index) this would have been even worse.
Now that we know the awaited G7 phone call was a dud today, the ball looks to be in Ben Bernanke's court when he speaks on Thursday. This man has the power to shake up the world markets with cheap dollar policy which is frankly a bit scary but also a reality in the current situation. The market is going to be listening very closely to what he says, as well as to the various other Fed officials who speak later today and tomorrow.
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