SEC and greece competing for investor attention

News surrounding the SEC and Goldman Sachs continued to permeate the markets, but it was not enough to deter equity investors as the S&P 500 index rose 2.1% and the Dow Jones Industrial Average increased 1.7%. 

 

An area of concern for consumers is energy prices, which have been on the rise since early 2009, feeding through to higher gas prices at the retail level.  The average retail gas price now stands at $2.86/gallon, $.80 higher than the same time last year but for anyone concerned that cost will surge into the summer driving season, have no fear.  Or maybe have only a small bit of fear.  Officials in Kuwait came out over the weekend and said that oil prices over $100 would “damage the economic recovery”.  If such a scenario occurred, expect OPEC countries to step in and boost supply, placing an upper boundary on gas prices. 

 

Source: US Energy Information Administration

 

Greece made an inevitable revelation on Friday, announcing that it would require assistance from the International Monetary Fund (IMF) and European Union to sustain debt payments moving forward.  Many questions linger about what the ultimate package will stipulate, and market participants made their objections known.  Evidence of that was apparent in the spread between 2-

year and 5-year Greek credit default swaps.  Currently, 2-year CDS is trading at a premium to 5-year contracts, indicating concern that Greece is likely to face more severe problems in the near-term than many are predicting.  A major concern lies in the fact that most feel the bailout will not be enough to stave off default further down the road, when Greece will ultimately need to return to the capital markets.  

 

Source: Markit

 

Unfortunately, with all the focus on Greece, one might assume that once that country receives aid from the IMF/EU consortium that the worst will be behind us.  That is not the case, and markets are already beginning to penalize countries such as Belgium and Portugal, where government bond yields are quickly on the rise.

 

IMF Grabs the Spotlight

Officials at the International Monetary Fund kept a busy schedule last week, releasing a hefty report on the state of the world economy while also attempting to bring Greece back from the brink of default. 

 

In a positive development, the IMF ratcheted up global growth rates, predicting the world economy would grow by 4.2% in 2010, up from a previous estimate of 3.9%.  The disparity between developed and developing countries continues to increase, as the IMF sees emerging countries growing by 6.5% and developed countries expanding by 2.4% during the year.  Differences are also emerging in the developed world, as the US is expected to grow 3.1% and the Eurozone will grow a meager 1%.  

 

Source: International Monetary Fund

 

The IMF brought to light several concerns that could potentially derail the recovery, primarily higher government borrowing as a result of financial supports put into place during the global economic crisis.  As we see in the chart below, public debt in the advanced economies will surge in the coming years, rising above 100% of GDP by the middle of this decade.  Officials at the IMF view a public debt scare as “unlikely” but are concerned that investors will show a “greater sensitivity to deteriorating budgetary outlooks”, placing pressure on government bond yields in certain countries.    

 

Source: International Monetary Fund

The IMF also warned G-20 officials that they are too optimistic about the speed of recovery, suggesting that many developed countries are displaying an air of confidence at their ability to bring back the world economy from financial disaster. 

 

The banking sector received some encouraging news as the IMF reduced its estimate of write downs associated with bad loans from $2.8trln to $2.3trln.  So far, the IMF believes that $1.5trln of those write downs have been realized.  Banks in the US are clearly the biggest losers during that period, but with “only” $200bln of write downs left to take, it seems the end is becoming ever closer. 

 

 

In another sign of the sea change unfolding, the World Bank transitioned a greater percentage of its voting power to developing economies over the weekend.  The United States remained the largest voter, with a 16% stake, but a reduction in Japan’s voting power to 6.8% allowed China to become the third largest voting power, with a 4.4% allocation.    

 

It is clear that more and more people are becoming cautiously optimistic about the recovery unfolding around the globe but a number of risks remain unresolved and will likely stay that way for years to come.   That should provide plenty of fodder for the economic pessimists and optimists.  

 

The week ahead

Investors should brace for a bevy of news from every angle this week. 

 

The Treasury is auctioning off $129 billion worth of bonds this week.  That includes 5-year TIPS ($11bln) on Monday, 2-year notes ($44bln) on Tuesday, 5-year notes ($42bln) on Wednesday and finally 7-year ($32bln) bonds on Thursday. 

 

Earnings will continue garnering attention.  Reuters reports that of the 172 S&P 500 companies to report, 83% are beating analysts’ expectations, slightly ahead of the record 3Q09, which saw companies beat at a 79% rate.  Several of the prominent companies ready to report this week includes Caterpillar, 3M, DuPont, US Steel Corp, Texas Instruments, Visa, Exxon Mobil, Chevron, UPS, Ford, Dow Chemical, Procter & Gamble and US Airways.  In the financial sector, the focus moves from US banks to those in Europe with Barclays, Deutsche Bank, Lloyds, Banco Santander and Swedbank all releasing results this week.  

 

On Tuesday, President Obama assembles the first annual meeting of the committee designed to create ideas that will help cut the federal deficit.  The goal is to slash the deficit to 3% of GDP before 2015. 

 

The Federal Open Market Committee will meet on Tuesday and Wednesday to discuss the latest state of the economy.  Expectations are for the fed funds target rate to remain within a range of 0% to 0.25%.  Use of the terminology “extended period” remains a focal point for investors as the removal of that language would signal that rate hikes are moving imminently closer. 

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