Stocks Retreat on Worldwide Economic Worries
Market Commentary
By WSS Research Team
By Carlos Guillen

Equity markets started the trading session on a sharp decline after news from Japan served to remind investors that all is not well around the world and that further monetary stimulus has already been built into equity markets.

After a rather encouraging run in the S&P 500 index, a run that lasted for six consecutive days, the index has been pulling back so far during today's trading session. The main component driving the current pullback is economic data from the world's third largest economy that showed Japan's economy grew a tepid 1.4 percent (annualized) in the second quarter, much weaker than economists' expectations for a rise of 2.7 percent and a sharp slowdown from growth of 5.5 percent in the March quarter. Perhaps not surprising was that the European debt crisis continues to affect all major economies, and in Japan's case exports to Europe fell by 25 percent during the June quarter.

Adding to the mounting global economic woes, Bank of America/Merrill Lynch cut its 2012 growth estimate for China to 7.7 percent from 8 percent, as last week data from China showed that industrial production came in much less than expected and Chinese export growth collapsed as well; this again was sparked by the debt crisis in the euro region. Perhaps there is a silver lining to the poor economic data from around the world, and that is that the Fed here at home may set off a fresh round of bond-buying to stimulate growth, but this has been the hope for some time now, and more than likely it has already been priced into equities.

On the European front, Italy successfully sold €8 billion of bills at auction as investors remained focused on the prospect of the European Central Bank buying short-dated sovereign debt soon as part of efforts to tackle the euro zone crisis. Italian 10-year bond yields were down to 5.84 percent from the 5.90 percent posted Friday. Spanish 10-year bond yields dipped slightly to 6.84 percent from 6.90 percent Friday. Nonetheless, European stock markets ended their respective sessions slightly lower. Likewise, stocks here at home are still trading in the red, and with little in terms of domestic economic data today, we'll likely end the session in losing territory.

No Welcoming Party for Merkel
By David Urani

The Dow has spent the last week having trouble breaking through the 13,200 mark (S&P 1405) and today we're seeing the trade deflect off of it again. The jitters may be originating out of Europe (surprise, surprise), with eyes on Germany. Word has it there is another suit against the ESM bailout fund heading to the high court. The issue has already been brought up, leading to delays for Germany's eventual ruling on the fund. As of now, the decision would come on September 12th, but this new suit could push that back yet further. The problem is, there's already some worry that more problems can pop up in Spain, Italy and Greece before then, and the more Germany beats around the bush the more chance there is for one of these nations' time to run out (namely Spain) before they get the needed funds. You also get a sense that Germany may purposely be procrastinating to what ultimately comes down to them putting the most skin in the game to bail out everybody else's irresponsibility.

This new development may not be all that much of a coincidence either considering Europe's top dog, Angela Merkel, is back in town after a two and a half week vacation. That's significant because if you ask me she may be the most important person on the planet right now. There are no fliers, or party hats, or cakes waiting for her arrival today as far as the markets, Spain, Italy and Greece are concerned. Surely there are plenty of things in the European pipeline for her to shoot down, including Mario Draghi's grand statements about saving the Europe by all means necessary and fashioning a big bond buying program. As we know, Merkel has the most sway of anybody on these kinds of matters and the answer more often than not tends to be "nein." Look out for the rumor mill to start back up, likely in a bad way, which it may already have judging by the market action.

 

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