Ameriprise Financial, Inc. : A Brief Respite from the Turmoil
06/11/2012| 04:42pm US/Eastern
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.
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
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is the most notable of the many indices owned and maintained
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