Saturday, June 25, 2011

stock market forecast (June 27, 2011)

The U.S. Dollar Index closed out the week at 74.98 as global equity markets were highly volatile thanks to a round of soft June U.S. manufacturing data and fears that European policy makers had lost control of the Greek sovereign debt crisis. The S&P500 avoided a seventh straight down week, finishing higher by less than 0.10%, the NASDAQ continued to languish, losing 1.0% while the DJIA eked out a small gain finishing up 0.40%. The deteriorating situation for Greece is perhaps the most pressing concern for the markets as the global implications of this situation are particularly vast

Last week, the effort to keep a member of the EU (the world’s largest collective economy) from falling into default was made more difficult when Greece’s Prime Minister, George Papandreou was forced to shuffle his cabinet and call a vote of confidence. Considering the Troika (EU, ECB & IMF) was already facing considerable troubles to meet a resolution on the nation’s second bailout, the addition of a more demanding Greece in the negotiations will only make matters worse. A short-term fix will be put in place as Germany seems resigned to abandon demands for a rollover in bonds to a seven year maturity - but that is only for the next tranche of aid from the first package.

Depending on how the Greek band aid is perceived by the market, it can temporarily curb the pressure on capital markets and cool support for the U.S. Dollar. On the other hand, should the market turn skeptical on the outcome of this effort or find a road block on progress; then there will be support for the Greenback as fear of financial crisis for the Euro-area will encourage foreign investors to pull their capital and put it in an alternative market with equivalent liquidity - the U.S. Dollar.

Fallout from a Greek default would have immediate implications for many fellow EU members that have exposure to the nation’s public and private debt but importantly, the sudden rush of capital to safe haven assets will cause a ripple effect to global equities, speculative commodities, debt markets and the U.S. Dollar as a currency of last resort.

The Greenback’s safe haven appeal is unique in that it stands out when there is a need for liquidity (the ability to access your money). Looking at the week ahead, Tuesday sees existing home sales followed by Wednesdays FOMC rate decision with Thursdays new home sales and Fridays core durable goods report rounding out the week. With QE2 scheduled to end this month, the Federal Reserve is unlikely to withdraw all of its capital immediately but expectations are for markets to start pricing in the eventuality.

North American markets got a bit of good news in an upbeat report on U.S. durable goods orders, which rose faster than expected, but that was not enough to overcome worries about European sovereign debt after Moody's Investors Service said it may downgrade 13 Italian lenders.

The Dow Jones industrial average fell 115.42 points, or 0.96%, to 11,934.58, while the Nasdaq composite index lost 33.86 points, or 1.26%, to 2,652.89. After a volatile week of trading - in which stocks were buffeted by fears of Greek debt default, plunging oil prices and a dimmer view on U.S. economic growth from U.S.

Federal Reserve chairman Ben Bernanke - the week ahead offers little respite.

"European markets will dominate global concerns next week and there are [some] key factors to watch," said Scotia Capital economists Derek Holt and Karen Cordes recently.

"One is that Greek politicians will vote Tuesday on whether or not to approve further austerity equalling 78-billion euros worth of cuts, not to mention privatization efforts and a so-called 'crisis levy' on wages," they said.

"Also on tap for European markets are a series of Italian government bond auctions on Tuesday following warnings by S&P and Moody's that Italy's debt rating may be cut