EU News Wins Out Over More Dismal Economic Reports!
Saturday, June 30, 12 noon. The news from the European Union’s summit meeting surprised markets, which by Thursday afternoon had pretty much given up on anything positive coming out of the meeting. And no wonder they were surprised. Only a few days earlier Angela Merkel, Chancellor of Germany, the dominant country in the EU, said [...]

Saturday, June 30, 12 noon.

The news from the European Union’s summit meeting surprised markets, which by Thursday afternoon had pretty much given up on anything positive coming out of the meeting.

And no wonder they were surprised. Only a few days earlier Angela Merkel, Chancellor of Germany, the dominant country in the EU, said emphatically that some of the subsequently announced measures would not take place “as long as I am alive”, and she does seem to still be quite alive. Hard to believe that a politician flip-flopped?

The surprise news pushed all previous concerns about global economic slowdowns, recessions, bear markets, fiscal cliffs, earnings warnings, and the like to the back burner if not completely off the stove.

So what that the week’s economic reports were more of the same dismal news of the last three months; that Consumer Confidence in the U.S. fell again in June to a 6-month low, that the previous report of 1st quarter corporate profits rising $11.4 billion was revised to a decline of $6.8 billion (the biggest decline since during the financial meltdown in 2008). Or that globally, Japan’s industrial output plunged 3.1% in May, or that Moody’s moved on from the euro-zone banking crisis to cut the ratings of 8 banks in Brazil.

Also, in the final analysis stock prices are based on corporate earnings, or more accurately the outlook for earnings going forward.

And once the EU announcement was released the market didn’t even seem to notice the report from Thomson Reuters that 2nd quarter earnings warnings are the most negative in more than 10 years, since the 3rd quarter of 2001, in the midst of that recession. An average of 122 S&P 500 companies provide guidance, and as of yesterday, 94 S&P 500 companies have issued negative warnings versus only 26 raising guidance.

And it’s not just S&P 500 companies. Goldman Sachs reports that companies across a broad section of the economy have issued warnings, with their latest guidance 2% to 20% beneath Wall Street’s previous estimates.

But the big news and market-mover is the EU’s latest and most promising rescue effort yet for the euro, the euro-zone, and particularly Spain and Italy.

Friday’s market spikes produced interesting chart conditions.

It wasn’t just stock and bond markets that reacted in a big way to the EU announcement. Commodities surged up just as dramatically, if not more so.

Does that mean the EU’s latest actions to save the euro and contain the euro-zone debt crisis is expected to also quickly end the economic recessions in Europe, and economic slowdowns in Asia, the U.S., Brazil, etc., and have demand for commodities surging in a new period of strong economic growth?

Apparently, given the way the price of oil and other commodities spiked up yesterday.

63012a

But as shown in the next chart, it wasn’t a big move on the intermediate-term charts. So if yesterday’s spike was the beginning of a new bull market for commodities there’s probably time to wait a bit for more confirmation, to make sure it wasn’t just brought on by the oversold condition beneath the 30-week m.a., made more dramatic by a short squeeze on short-sellers.

63012b

Gold also spiked up yesterday along with commodities (and the decline in the U.S. dollar), spiking back up to $1,600 an ounce.

63012c

That could also be the beginning of a positive reversal for gold. But as always, we’ll just follow the signals of our indicators. And yesterday’s spike doesn’t even show as a blip on the intermediate-term chart, for the moment anyway.

63012e

We’ll reserve our latest on stock markets, and the implications of the 450 point upside reversal by the Dow from late Thursday afternoon to Friday’s close, for subscribers in the premium content area.

Other Voices.

The EU announcement seems to have caught everyone by surprise, so much so that there hasn’t been time for meaningful analysis. At least, the commentaries and opinions are quite few and far between so far.

Financial Times, editorial: ‘One Small Step for European Mankind’.  “That all the significant euro member states moved towards tying their fates more inextricably together makes the threat of disintegration a bit more remote than just a few days ago. . . . Much work remains to be done. As for banking union, no doubt domestic political constituencies will balk when they realize what it entails. But the steps taken this week show that pessimism may be overdone. Perhaps it could one day be morning in Europe again.”

Financial Times, John Authers, The Long View column: ‘Spain and Italy defenses likely to be tested again’. “This summit sharply improves the chances of keeping the capital markets in check, but does little to deal with the longer-term problems. A logical outcome for markets would be a recovery for awhile, followed by another downturn.”

The Wall Street Journal. Heard on the Street column: ‘Summit Gives Relief, Not Results.’ “The euro-zone’s crisis response remains one of small steps, not decisive solutions. There is good news here. . . The attempt to break the links between sovereigns and banks by allowing the European Stability Mechanism to recapitalize banks directly is a welcome one for markets. . . But there are hitches too. The ESM will only be able to recapitalize banks directly after the euro-zone introduces a single bank supervisory body, a process that will take time. The European Council is being asked to look at proposals for it by the end of 2012.”

Barron’s, Michael Santoli: ‘A Summer to Celebrate?’. “In U.S. stocks, Friday’s 2.5% gain in the Standard & Poor’s 500 index to 1362 brought it quite close to the level where it sat the first week of July one year ago, when it traded as high as 1356. Of course, a year ago, the market also seemed to have survived a springtime gut check and sidestepped an imminent Euro-meltdown when Greek authorities seemed to forestall default.

As we now know, the market promptly took a nasty turn within weeks, thanks to the U.S. debt-ceiling impasse, Treasury downgrade threat, and another round of Euro-debt and slowdown fears.

So, does this symmetry doom the markets to another summer of disappointment and macroeconomic malaise? Based on the evidence at hand, no.

Most obviously, there will be no maddening game of Congressional chicken over the debt ceiling this summer and the Treasury’s credit has already been downgraded, to little tangible effect. Neither the coming election nor the subsequent "fiscal cliff" expiration of stimulus measures carries the kind of chaotic, short-term, mutually-assured-destruction implications as last summer’s flap.”

To read my weekend newspaper column ‘EU Rescues Markets Just in Time – Again!’ click here.

Subscribers to Street Smart Report: In addition to the charts and updates in the ‘premium content’ area of this morning’s blog, the new issue of the newsletter from Wednesday is in the subscribers’ area of the Street Smart Report website.

Yesterday in the U.S. Market.

A big spike-up rally, with the Dow closing up 277 points. And volume picked up significantly, to 1.1 billion shares traded on the NYSE.

The Dow closed up 277 points, or 2.2%. The S&P 500 closed up 2.5%. The NYSE Composite closed up 2.7%. The Nasdaq closed up 3.0%. The Nasdaq 100 closed up 3.1%. The Russell 2000 closed up 2.9%. The DJ Transportation Avg. closed up 2.8%. The DJ Utilities Avg closed up 0.7%.

Gold surged up $48 an ounce to close at $1,597 an ounce.

Oil spiked up a huge $7.07 a barrel to $84.76 a barrel.

The U.S. dollar etf UUP closed down a huge 1.4%.

The U.S. Treasury bond etf TLT closed down 1.3%.

Yesterday in European Markets.

Eurozone markets also surged up yesterday in response to the EU actions. Not so much for London (The U.K. is a member of the EU but not the eurozone).

The London FTSE closed up 1.4%. The German DAX surged up 4.3%. And France’s CAC spiked up 4.8%.

Global markets for the week.

The big spike-up rally yesterday saved what was headed for a quite negative week. For instance, thanks to closing up 4.3% yesterday, the German DAX closed up 2.4% for the week, instead of down 1.9% which it was as of Thursday’s close. It was the same with other markets including in the U.S., where the Dow surged up 447 points, or 3.6%, from its low late Thursday afternoon to its close Friday, to give it a gain of 1.9% for the week.  


THIS WEEK (June 29)
DJIA12880+ 1.9%
S&P 5001362+ 2.0%
NYSE7801+ 2.4%
NASDAQ2935+ 1.5%
NASD 1002615+ 1.2%
Russ 2000798+ 3.0%
DJTransprts5209+ 2.5%
DJ Utilities481+ 2.0%
XOI Oils1,165+ 4.5%
Gold bull.1,597+ 1.6%
GoldStcks157+ 0.8%
Canada11596+ 1.4%
London5571+ 1.1%
Germany6416+ 2.4%
France3196+ 3.4%
Hong Kong19441+ 2.3%
Japan9006+ 2.4%
Australia4135+ 1.0%
S. Korea1854+ 0.4%
India17429+ 2.7%
Indonesia3995+ 1.7%
Brazil54354- 2.0%
Mexico40199+ 2.9%
China2330- 1.6%
LAST WEEK (June 22)
DJIA12640- 1.0%
S&P 5001335- 0.5%
NYSE7616- 0.6%
NASDAQ2892+ 0.7%
NASD 1002585+ 0.5%
Russ 2000775+ 0.5%
DJTransprts5083- 0.2%
DJ Utilities472- 2.3%
XOI Oils1,115- 3.0%
Gold bull.1,571- 3.3%
GoldStcks156- 4.8%
Canada11435- 0.8%
London5513+ 0.6%
Germany6263+ 0.6%
France3090+ 0.1%
Hong Kong18995- 1.2%
Japan8798+ 2.7%
Australia4093- 0.3%
S. Korea1847- 0.6%
India16972+ 0.1%
Indonesia3889+ 1.9%
Brazil55438- 0.7%
Mexico39071+ 3.5%
China2367- 2.0%
PREVIOUS WEEK (June 15)
DJIA12767+ 1.7%
S&P 5001342+ 1.3%
NYSE7663+ 1.5%
NASDAQ2872+ 0.5%
NASD 1002571+ 0.5%
Russ 2000771+ 0.3%
DJTransprts5091+ 0.6%
DJ Utilities483+ 1.0%
XOI Oils1,150+ 2.2%
Gold bull.1,624+ 2.0%
GoldStcks164+ 1.2%
Canada11524+ 0.2%
London5478+ 0.8%
Germany6229+ 1.6%
France3087+ 1.2%
Hong Kong19233+ 3.9%
Japan8569+ 1.3%
Australia4107- 0.1%
S. Korea1858+ 1.2%
India16948+ 1.4%
Indonesia3818- 0.2%
Brazil55844+ 2.9%
Mexico37751+ 1.1%
China2416+ 1.1%

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Next week’s Economic Reports:

Next week will be a holiday-shortened week, the U.S. market only open 3 1/2 days, closing early Tuesday, and all day Wednesday for Independence Day.

But there will be important potential market-moving economic reports, including the ISM Mfg Index, Construction Spending, Factory Orders, and on Friday the Labor Department’s Employment Report for June. To see the full list and times for each release click here, and look at the left side of the page it takes you to.

As subscribers know, for many years we have referred to the employment report as The Big One because of its history of so often coming in with a big surprise in one direction or the other, which in turn causes a one to three-day triple-digit move by the Dow in one direction or the other.

This past week’s reports were mostly more of the same dismal variety of the last several months, providing further evidence that the economic recovery is still stumbling. And that had the market down for the week until late afternoon Thursday when the EU news first arrived.

To read my weekend newspaper column ‘EU Rescues Markets Just in Time – Again!’ click here.

Subscribers to Street Smart Report: In addition to the charts and updates in the ‘premium content’ area of this morning’s blog, the new issue of the newsletter from Wednesday is in the subscribers’ area of the Street Smart Report website.

I’ll be back with the next regular blog post on Tuesday morning at 9:25 a.m.

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