By eToro – The news on Friday that the Securities and Exchange Commission of the United States was charging Goldman Sachs with Fraud related to sub-prime mortgages rocked the equity markets disturbing a week that had seen the Dow and the S&P 500 make new 18 month and 19 month highs. The petroleum complex was hit as crude oil fell more than $2.25 dollars a barrel. The news overshadowed excellent earnings released during the week from Intel, JP Morgan Chase, Bank of America and GE which all beat analyst estimates by robust margins. For the week, the S&P 500 lost on .2%, but shed 19.5 points or 1.6% on Friday.
Will Europe formally discuss Greece?
The European summit in Madrid appears to be underway and the general news environment is not promising. The Greek Prime Minister still is denying that funds are needed, claiming the facility is a safety net and unbelievably suggests that the IMF involvement was not a Greek idea. Germany, in effect, for its own reasons, called the Greek Prime Minister Papandreou’s bluff, and will use this advantage to demand more concessions from Greece. Many European officials still seem to be in denial. Rather than prepare the public for an eventual use of those funds, for example, the German Finance Minister, is saying that Greece is on the right path and there is no need for emergency funds. The ECB’s is saying that backstop can only be used if Greece looses market access. To summarize, an issue that desperately needs closure will not likely see an end to Greece’s insolvency problems for a while. Europe’s proposed facility, even if implemented, has a few important short falls. First, the sums discussed will only produce coverage for one year. Second, Europe is not considering what will happen to other countries such as Portugal or Spain. European officials could have helped stabilize investor sentiment if they would have used the Greek crisis to recognize the sovereign risk and come up with a scalable plan and facility. Additionally, interest in a Greek dollar-denominated issue is reportedly unsatisfactory and the anticipated size has been cut dramatically, which could lead to the entire issue being pulled. Comments by ECB’s Trichet about the difficulties Greek banks are facing in terms of liquidity have somewhat undermined the Euro. A Brookings Institute report highlights the bribery, patronage and corruption behind Greece’s debt. The study estimates that their nefarious activities cost Greece 8% of GDP or around 20 billion Euros.
China continues to impress
Global markets initially needed to absorb a plethora of data release by China on Thursday. As expected Q1 GDP, rose 11.9% and March CPI increased 2.4%. Industrial output rose 18.0% in March, retail sales was up 18%, fixed asset investment was up 26.4% and all were in line with expectations. There is heightened talk of another hike in reserve requirements and of course speculation of an imminent revaluation. China did hike mortgage rates and boosted required down payments on some home purchases, warning that “more forceful” steps are needed to stem the rise in property prices that rose at a record pace last month. Additionally, China reported that it would raise the prices for retail fuels by 320 Yuan ($46.81) a metric ton to reflect higher costs for crude oil, according to the National Development and Reform Commission, the country’s top economic planner. The current average of the retail price ceilings for Chinese provinces and major cities is 7,900 Yuan per ton for gasoline and 7,160 Yuan per ton for diesel. A 320-Yuan increase would amount to a price boost of 4.0% for gasoline and 4.5% for diesel. China will also raise the benchmark ex-factory price of No.3 jet kerosene by 500 Yuan per ton, or 9.6%, to 5,690 Yuan. The price rises will boost the April consumer price index by about 0.07 percentage points. In general, the rise is to support refiners, but it might have the effect of decreasing demand, which could put a damper on the Chinese economy.
Bernanke Pledges to Keep Rates Low
There was some speculation that Bernanke would tout a less dovish line in his testimony before the Joint Economic Committee of Congress. This week’s CPI figures and market inflation expectations underscore the reason why it may still be appropriate to look for rates to remain low for “an extended period of time”. Headline CPI rose 0.1% and the core was flat. The core CPI was flat for the entire first quarter. This is the weakest quarterly performance in more than a quarter of a century. Excluding housing costs, core CPI rose 0.1%. Clothing prices fell 0.4% year-over-year service prices were up 0.2%. Auto prices are up 5.3% year-over-year while the medical care index rose 3.7% year-over-year. The Beige Book report also showed a positive outlook on the economy. The U.S. economy continued to improve across much of the country last month, according to the Federal Reserve report released Wednesday. The Fed in its monthly beige book said that overall economic activity rose in 11 of its 12 districts between February’s end and April 5 2010. The commercial real estate sector, however, remained weak across most of the country. The overall labor market, also remained weak.
US Housing Picks Up Some Steam
In the Housing sector, the National Association of Home Builders’ monthly gauge of confidence in new-home sales rose to 19 from an unrevised 15 in March. The better-than-expected reading of 19 matched its level in September 2009, just before the government’s first tax credit for buyers expired. Housing starts increased 1.6% to a seasonally adjusted 626,000 annual rate in comparison to the prior month, according to the Commerce Department. Construction rose in the South but fell in the three other regions of the US. March single-family housing starts slipped, after two big increases. February starts, originally seen down 5.9%, were revised to an increase of 1.1%. January starts jumped 6.3%. Single-family housing starts in March fell 0.9% to 531,000 month-over-month. In February, single-family starts climbed 5.7%, revised up from a previously reported 0.6% decline. January single-family starts rose 5.4%. March apartment construction, housing with two or more units, rose 18.8% to 95,000. Within that multi-family category, groundbreakings of homes with five or more units were 39.7% higher. Regionally, housing starts in March rose 18.2% in the South. Starts fell 8.3% in the Northeast, 28.4% in the Midwest, and 2.1% in the West. Year-over-year overall housing starts in the U.S. last month was 20.2% higher than the pace of construction in March 2009.
Japan’s Government has two views
Japanese government appears to be increasing pressure on the BOJ to take more steps to counter deflation. Yesterday a panel called for yen at 120. The BOJ recently upgraded its assessment of the economy. The government, which is the ministry of finance, did not follow suit. A Japanese government spokesperson raised the prospect of intervention to weaken the yen and for the BOJ to buy more government bonds. The ministry of finance is determined to increase the liquidity in the market to increase domestic growth, increase exports and fend off deflation. Unfortunately, the flight to quality lifted the Yen against the dollar, closing the week near 92.10.
Next week the markets will begin on edge as Asia might feel the brunt of the SEC action against Goldman Sachs. Market participants will also be watching Japanese Consumer Confidence on Monday. On Tuesday, the RBA will release minutes from its recent central bank meeting. UK CPI will also be important, as recent numbers have been conflicting. On Wednesday, UK Jobless claims will be closely watched. US Jobless Claims, PPI and Existing Homes Sales will the economic headlines on Thursday. Friday the main market mover will be the UK GDP and US Home Sales.
Daily Forex Market Analysis provided by eToro
Disclaimer: Trading in the Foreign Exchange market might carry potential rewards, but also potential risks. You must be aware of the risks and are willing to accept them in order to trade in the foreign exchange market. Don’t trade with money you can’t afford to lose.
