Europe in Remission … for a Week
One of the best weekly indicators for stocks and cyclical commodities has been Spanish bond yields. As such, their decline this week told the story of both the Greek conservatives’ election win and the incrementally positive developments in Spain. With a new government in place, Greece is anticipating continued financial assistance from the European Union. Whether or not continued aid materializes will depend in large part upon how Germany views Greece’s latest attempt to extract concessions to aid packages previously granted. Indeed, what’s new is old again in Greece. While “Merkel & Co.” may agree to some leniency in the time frame demanded for Greece to demonstrate fiscal reform, the “Northern Enforcers” are likely to frown upon Greece’s idea of ceasing additional public sector layoffs. One thing’s for sure, Greece will run out of money sometime in July if additional billions of euros fail to flow their way.
In Spain, sovereign debt benefitted from bank stress test results evidencing a smaller than anticipated capital injection necessary to keep key financial institutions afloat in a modeled crisis. Spanish bonds also appear to have gained a bid from a sense that European leaders set to meet for their nineteenth European Summit next week are open to the idea of putting public debt holders on equal credit footing with Europe’s bailout facilities. Investors are headline weary of Europe, but the fact that stocks bounced back from heavy losses Thursday to finish the week with only modest losses speaks volumes about how much geopolitical uncertainty from the Continent is already discounted in stock prices.
The Bernanke Put?
Economic data globally remains soft. Against this backdrop, the Federal Reserve met this week and agreed to extend “Operation Twist”—the program whereby the Fed sells short-term Treasuries and buys longer term debt. The idea here is to continue supporting what appears to be a nascent rebound in housing by driving down interest rates on the Treasury bonds that help set mortgage rates. Some investors had hoped for additional balance sheet expansion by the Fed, which could still materialize if job gains don’t.
Back at the Earnings Trough …
Anecdotally, bulls and bears have much to feast on these days. Global shipping giant Fed Ex reported better-than-expected earnings this week, but revenues fell short of expectations and management warned that shipping trends are soft—particularly for time-sensitive airfreight. The latter commentary points to weakness in tech shipments, which are often flown from Asian manufacturing hubs to endpoints around the world for final consumption. Sticking with the tech theme, business software titan Oracle also reported an upside earnings surprise this week; while tech software is less cyclical, news about strong bookings in the quarter reassured investors that tech spending hasn’t crashed.
With one week to go in the second quarter, earnings warning season has unofficially begun. The stronger dollar has already led bellwether companies McDonalds and Philip Morris International to temper investor expectations for earnings; coupled with the second quarter having witnessed largely softer economic data, more companies could come to the confessional. Finally, the healthcare sector will be in view next week as the Supreme Court is expected to announce its decision about the constitutionality of Obama Care.
Our Takeaways from the Week
- Political and macroeconomic data continue to dominate the airwaves, but investors will start pivoting back to earnings as the quarter draws to a close