Last Week’s Wrap-Up: U.S. Equities Best Start Since 97’ – Treasuries Worst Since 03’
U.S. stocks rose for the third week in a row, representing the longest streak of gains since October, on better-than-estimated economic data and earnings releases, as well as the muted reaction to S&P’s downgrades. Asian and European equities have responded to much of the same data, and have now gained five weeks running. Bank of America (BAC) led gains on the Dow Jones Industrial Average after releasing earnings in which they posted an unexpected profit. For the week, the S&P 500 advanced +2%, and for the year it is up +4.6%, representing the best start for a year since 1997. The DJIA gained +2.4% on the week, reaching its highest level since July 21. Out of the 51 companies that have reported this year, 33 of those have posted earnings that beat analyst projections. Jobless claims hit their lowest level since 2008, and homebuilder confidence topped forecasts. “The domestic economy is strong and that’s helped the stock market,” Mark Bronzo, who helps manage $23.4 billion at Security Global Investors. “The market’s done pretty well in the face of some good earnings news and it seems to be overcoming some of the fears around Europe.” U.S. Treasuries are off to their worst start since 2003, as debt auctions in Europe continue to go smoothly, and the domestic economic picture continues to look up. In late Friday trading, the 10yr Treasury was at 2.03%, up 5bps on the day, and the spread between the 10yr and 2yr had widened 4bps to 178bps. Widening yield curve spreads are consistent with positive investor sentiment.
Friday, Standard & Poor’s Rating Services affirmed the AAA/A- 1+ rating of the long- and short-term credit ratings of the European Union. The outlook according to S&P is negative because of “ongoing risks” for the Eurozone, but the long-term rating was removed from CreditWatch negative where it was placed on Dec. 7. Frank Gill, an analyst with S&P, said in the statement, “Nevertheless, in our opinion, the supranational entity known as the EU benefits from multiple layers of debt-service protection sufficient to offset the current deterioration we see in member states’ creditworthiness.”
At a G-20 meeting in Mexico City on Friday, officials agreed on the need to do more to support indebted nations, however, they did not mention any specifics about how much they would loan to the IMF. Earlier last week, the IMF proposed to raise its lending capacity by as much as $500-$600B to prevent the Euro debt crisis from worsening. On Jan. 25, policy makers and business leaders begin meetings at the World Economic Forum. This comes after the World Bank cut its global growth forecast from its June estimate of 3.6% to 2.5% for this year; the biggest cut in three years.
Newt Gingrich’s victory in South Carolina means that a different candidate has now won each of the first three Republican primaries, raising the stakes at the next contest to be held in Florida. Gingrich won 40% of the vote and was followed by Romney with 28%, Santorum with 17%, and Ron Paul with 13%. In an interview with CNN, Gingrich said, “My job in Florida is to convince people that I am the one candidate who can clearly defeat Obama in a series of debates.”
Greece and its private creditors still appear to be on track to reach an agreement, one that is essential to cutting the country’s borrowings and thus allowing it to receive its second round of financial aid. According to Hans Humes, a member of the creditor committee responsible for negotiating a deal with the indebted nation, “There’s been significant progress…(and there is) broad agreement about the coupons and structural elements.” In October, European officials and private bondholders agreed to a 50% cut in the face value of $259B of Greek debt through voluntarily exchanging outstanding bonds for new securities. This next accord with bondholders will prove imperative if Greece is to make its upcoming €14.5B bond payment on March 20.
Rescuers now believe there may have been unregistered passengers aboard the Costa Concordia, which is hampering efforts to determine how many people remain missing after the ship capsized off the coast of Italy. A Hungarian family is insisting their daughter was on the ship, although she is not listed on the official passenger registry. According to the family, she is still unaccounted for. The official death toll has climbed to 13, but rescuers are unclear how many people remain missing.
Treasury yields are holding near their highest levels of the year before EU finance ministers meet in Brussels to discuss new budget rules and a Greek debt swap. Bondholders have made their “maximum” offer, leaving it up to the EU and IMF to determine if the deal is acceptable. The euro is strengthening this morning and European stocks are broadly higher, with the Euro Stoxx 50 up +0.7%, led by Italy’s FTSE MIB up +1.65%.
Striking truckers and cab drivers across Italy are disrupting traffic in protest to Prime Minister Mario Monti’s policies as he presents a plan to European finance ministers today. Trucks were scattered across the highway so as to disrupt traffic flows; striking cab drivers have left people stranded at airports and train stations. “The resistance to these reforms at a time when the economy is contracting is likely to be fierce,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “Opposition to structural reform in Italy is legendary. Mr. Monti knows these measures will be fiercely resisted, but is under enormous pressure to present an agenda for growth.”