Ameriprise Financial, Inc. : A Brief Respite from the Turmoil

With the European Central Bank meeting and Federal Reserve Chairman Bernanke testifying on Capitol Hill last week, expectations were high that some policy signal or outright action might be forthcoming. In particular, a rate cut by the ECB was considered a distinct possibility. Well, markets did get central bank action, just not from the most likely source. It was the People's Bank of China that energized markets with a rate cut that was a surprise, at least in terms of its timing. The PBOC lowered its official rate by one-quarter point, to 6.31 percent, its first rate cut in four years, in response to rising evidence that the Chinese economy continues to slow. Consumer inflation in China has fallen to 3.0 percent, its lowest level in two years and down sharply from 6.5 percent last summer. Producer prices fell for the third straight month in May. And the latest data on industrial production, electricity usage offered further evidence of economic deceleration.

The rate cut in China did little for its domestic equity markets, which fell 4.0 percent for the week, on fears that the renewed focus on economic stimulus has been too slow in coming and too timid so far. But it did help push U.S. equities higher on Friday, on their way to their best week of the year, as the S&P 500 rose 3.7 percent. Contributing to the better tone late in the week were building expectations that a deal would be reached to recapitalize the Spanish banking system, and indeed just such a deal was agreed to on Saturday. Funds totaling up to 100 billion euro will be made available to strengthen the banks which face daunting funding challenges as the interest rates on Spanish sovereign debt have risen to unsustainable levels. The timing of the deal comes as a relief ahead of next Sunday's election in Greece which could further unnerve markets. Eurozone stocks also rose sharply last week, matching the U.S. experience, led by an 8.0 percent gain in Spain.

Safe haven sovereign bond yields rose in response to the policy activity. The ten-year U.S. Treasury note yield soared to 1.64 percent from last week's record low of 1.45 percent. The ten-year German Bund yield climbed to 1.33 percent from 1.17 percent last week. The yield on below-investment grade bonds fell modestly, as did the yield on emerging market debt.

What these moves collectively reflect was a ratcheting down of the fear associated with the chances of a blowup in Europe. And while the debt crisis continues, at least the likelihood of it all unraveling in the next week diminished. However, despite the better tone in equities, and the modest reacquisition of risk within bonds, other assets continued to exhibit concerns over the pace of global activity. Copper fell once again last week, to its lowest level of the year. Aluminum did as well. And energy prices remained soft. The rate cut in China follows similar action in Australia, Brazil, and India in recent days. The rhetoric from both the Fed and the ECB has also turned somewhat more dovish of late, as both job growth and manufacturing activity have slowed. So, while the European debt crisis is at center stage, the issue of a global growth slowdown remains waiting in the wings. To be sure, the former has an important influence on the latter, but the stabilization of conditions in Europe will be no automatic panacea for the global economy. Should Europe settle down, risk assets would surely rally, as they did last week. But if China continues to slow, those gains could be short-lived.

The week's economic calendar in the U.S. contains the latest look at retail sales and industrial production, and both are expected to be soft. Producer and consumer prices are also expected to have declined. But as the week wears on the focus will turn towards Greece and its election on Sunday. The last polls on June 1 showed a virtual tie between the leading party in support of the bailout and the primary opposition. But even if no pro-bailout government can be established, the opposition has stated its desire for Greece to remain within the Eurozone, just on easier terms. Whether anyone is sympathetic is another question. So, not only is the outcome of the election uncertain, so are its implications.

Important Disclosures:

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.

It is not possible to invest directly in an index.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.

Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. Some products and services may not be available in all jurisdictions or to all clients.

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