Last Euro Summit Already Irrelevant
Will they or won’t they? “They” is the Federal Open Market Committee, the Federal Reserve policy-setting group that meets again next week. Minutes from recent meetings show the FOMC members paying more attention to their “communications” strategy – perhaps because words may be their last remaining weapon.
With that in mind, consider Tuesday’s revelation by the Wall Street Journal. Reporter Jon Hilsenrath, nicknamed “Fed Wire” because of his apparent high-level Fed contacts, now suggests the Fed is greatly disappointed by the weak economy and is “moving closer” to new stimulus plans.
We are not exactly sure who is using whom and for what purpose. Did the Fed purposely leak something to Hilsenrath as part of its new “communication” efforts? Or are unknown parties sending a message to the Fed through Hilsenrath? The possibilities are endless. All we know for sure is that expectations for Fed action are rising. The consequences of a disappointment are unpredictable.
For the moment, Europe is still the driving force in financial markets. Spain’s bond yields are climbing quickly, rendering last month’s Euro summit solution irrelevant. Spanish two-year sovereign debt yields are now above 7%. Some local governments are already locked out of debt markets. This is an unsustainable situation. Someone needs to blink soon.
Back in the U.S., quarterly earnings look a little better than expected. Profits are down but sales are holding up well for most companies. Energy prices seem to be stabilizing following a countertrend rally. Treasury rates plumbed even deeper lows; today’s five-year note auction went through at a record 0.584%. For whatever reason, investors are still happy to accept negative real returns. They won’t do it forever.
Renewed investor nervousness is evident in this week’s sector rankings. Almost every sector lost momentum. We also see shifts in relative strength: Utilities reclaimed the first-place position it recently lost to Telecom, mainly by keeping its one-week pullback limited. Telecom, now in second place, had its momentum score cut in half following a sharp pullback. Health Care also lost its footing and slipped to #3. Consumer Staples rounds out a still-defensive top-four sector grouping.
Energy continued climbing the chart as one of only two sectors to gain momentum since our last report. Whether the trend continues may depend on cooperation from crude oil prices – which may not be forthcoming. Financials and Consumer Discretionary both flipped from positive to negative readings, and are now part of a crowded bottom tier. Short-term action suggests the Financials group is vulnerable to further weakness. Materials, Industrials, and Technology again compose the weakest trio and are in the same relative order. Dispersion is presently small, but the disappointing report from Apple (AAPL) may solidify Technology’s grip on the bottom.
We have a major shake-up in today’s Style rankings. Last week only two categories had negative momentum; now there are nine. The only remaining uptrends are in Mega Cap and Large Cap Value. The other two Large Cap categories are close behind with slightly negative readings. This ownership of the top by four largest-cap categories is consistent with the defensive theme in our Sector rankings. Previous leader Micro Cap is in fifth place, followed by Mid Cap Value and then a three-way tie in the Small Cap groups. Mid Cap Blend and Mid Cap Growth hold the bottom.
The U.S. was deposed from Global leadership. Pacific ex-Japan is now on top and is the only category with positive momentum. Singapore deserves most of the credit for this feat. The U.S. is still in second place, however, and could easily reclaim the lead by next week. World Equity and the U.K. held their third and fourth-place positions though both flipped into negative trends. The next five categories rearranged themselves after being tightly clustered in our last report. Canada seems to be the best of this bunch and could challenge the U.K. for the #4 spot soon. Latin America is next in line, followed by EAFE, and Emerging Markets. Japan slid further down the ranks to land in ninth place despite a stronger Yen. China and Europe swapped seats to put the E.U. in last place for now. The gap between these two is widening in China’s favor. Europe may be secure on the bottom of the list for at least one more week.
“Jon Hilsenrath is actually the chairman of the Fed. When he writes something in the Wall Street Journal, Bernanke has no choice but to deliver on what he wrote.”
Stephen Roach, former chairman of Morgan Stanley Asia, on Bloomberg TV, July 25, 2012
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