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6/18/2012 1:50 PM
The Hope is Ending
By WSS Research Team
By Carlos Guillen
Equity markets continue trading with lots of volatility, as investors continue to focus on all things Europe. Clearly, the Greek elections have managed to defuse a bomb that would have caused reverberations around the world. The market's initial reaction was quite favorable, as the victory of Greece's center-right New Democracy party means no Greek exit, but the positive feeling was short lived as investors still see serious debt issues not only in Greece but also in Spain and Italy, sending these two nation's bond yields much higher and pushing the Dow much lower at the open of trading.
After taking a momentary a sigh of relief as a result of the Greek elections, investors have now turned to Spain and Italy and are seeing greater risks given these country's debt troubles. While Greece will not be leaving the euro zone anytime soon, their financial problems are still present and pose a big problem for the entire zone, and this was reflected by the rising Spanish and Italian bond yields, which signaled increasing fear of euro zone debt crisis contagion that will likely first affect the weakest nations, including Spain and Italy. Spanish 10-year bond yields soared above 7 percent for the first time in the euro era. The 7 percent threshold has been considered by many economists as a psychological level where it is speculated that Spain will not be able to service its debt and be shut out of debt markets.
Despite the Greek election results, German Chancellor Angela Merkel said she does not see any reason to speak about a new aid package for Greece on top of the two already agreed. This served to frighten investors who were hoping Greece would get more time to meet its fiscal targets. So the euro fears continue, and today world leaders are expected to put pressure on Europe at the G20 summit to outline a lasting strategy to save the euro currency and end financial turmoil. The group of 20 will be discussing a mix of measures to secure the global recovery that will include deficit reduction for some countries and pledges for additional stimulus by others.
All in all, equity markets are holding up well so far in today's trading session, with the Dow Jones Industrial Average flat with Friday's closing level. With little in terms of economic data and with all eyes on Europe, we still expect to see plenty of volatility in the short term.
Housing Holding Up
Housing stocks are seeing a decent boost today on the back of the NAHB/Wells Fargo Housing Market Index, which rose modestly to 29 from 28, but represents the highest reading since May 2007. That's an intriguing result considering all that's been happening in the world markets over the past couple of months; the fact that this index rose in both May and June is impressive, although I do have to wonder if some of the increased activity is seasonal factors outpacing any demand softness from Europe woes.
Looking at it regionally, the Northeast and South were actually down while the West and Midwest were up. This would make sense considering there are actually reports of lack of inventory in the West, including California. Therefore, homebuilders may be responding to a need for homes in certain areas, while in our mind there is still a question as to how well overall demand is holding up amid economic struggles over the past couple of months.
Facebook – Guess what, FB is up 3 days in a row, and up more than 19% from the lows earlier this month, to above $31.00. But for some reason the media doesn't want to talk about it when it's up. That's making for a nice lift to other internet stocks as well, including GRPN, P and ZNGA.
Microsoft – There's a "big announcement" coming up from MSFT later today and it's widely expected to be a new tablet. Initially the rumor was that it would be a partnership with Barnes & Noble (BKS) (think Nook), but that rumor has been being dumped for NOK; we shall see. Look for other products including Windows 8 capabilities, like phones. That said, considering MSFT's track record with hardware flops like the Zune and the Kin this new product may not necessarily be a big breakthrough.
Greece – Polls leading up to the election seemed to have New Democracy squarely in the lead, so the pro-euro Greek rally was last week, today it's sell on the news. Merkel further crashed the party by reiterating that Germany will not budge on Greece's fiscal rules despite the election outcome. Suddenly the market remembers that it's going to be very tough for Greece to stay solvent.
Spain & Italy – Spain and Italy may have been forgotten for a couple of days during Greek election and world bailout enthusiasm; Spanish and Italian 10-year yields continued to rise above 7% and 6%, respectively and their markets were each down almost 3%.
Obligatory Rumor Mill – No doubt this market has an itchy trigger finger; a market spike at 10:48 on vague QE rumors was good for 30 Dow points. The rumor quickly faded away though.
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