by Shawn Narancich, CFA
Vice President of Research
Risk Off It used to be that rising bond prices would accompany rallies in the stock market, but those halcyon days of the 1990s are long gone, leaving investors to ponder the wreckage in equities as the 10-year U.S. Treasury yield fell to an all-time low of 1.46 percent this week. U.S.stocks have erased most of their year-to-date gains, and emerging market stocks are now underwater as investors “batten down the hatches” for an environment of slower economic growth worldwide, punctuated by unpredictable shocks from Europe.
In the U.S., investors witnessed downward revisions to first quarter GDP, another weekly rise in jobless claims, and the coup de grâce of a payroll report that undershot even the most pessimistic forecasts. If this wasn’t enough to dampen investor moods, the Department of Labor reduced previously reported job gains and announced that the unemployment rate rose to 8.2 percent. The fact that the Institute for Supply Management’s monthly manufacturing report came in at levels showing continued expansion provided little relief to investors who are increasingly concerned by what they see domestically and overseas.
Europe Festers Spain’s plan to recapitalize Bankia (the nation’s third largest lender) with government-issued bonds went over like a lead balloon, as the European Central Bank balked at the idea of using this backdoor maneuver to fund an undercapitalized lender. European leaders appear no closer to bringing the necessary fiscal union to their collection of 17 countries that share a common currency. Accordingly, the euro is under pressure and Spanish sovereign 10-year debt yields are now well above 6 percent, an unsustainable level for their debt load. Ahead of government elections considered key to deciding the fate of Greece on June 17, retail and corporate customers of Greek banks are increasingly taking their deposits elsewhere, fearing a Greek exit from the euro would devalue their deposits. With the economy there continuing to deteriorate, European leaders, who are scheduled to meet again this weekend, may decide that another dose of policy medicine is necessary.
BlackBerry Anyone? In the category of slow-motion train wrecks, BlackBerry maker Research in Motion announced that it will lose money in the second quarter as it continues to cede market share to Android and Apple smartphones. It has hired JP Morgan to investigate strategic options ahead of what increasingly appears to be its “Hail Mary pass” of launching an all-new device this fall. The news did little to assuage investors, as the stock fell another 9 percent this week.
Natural Gas Exports Fall Victim to Politics Finally, what would this week be without a comment about natural gas, the only major commodity to rise in the month of May? For the third consecutive month, the U.S. Department of Energy (DOE) announced onshore supply declines domestically, the result of reduced drilling for natural gas in light of its low price. Despite an overabundance of the stuff and proliferating demand for natural gas overseas, the DOE announced this week that it will be unable to approve new liquefied natural gas exports until … after the presidential elections.
Our Takeaways from the Week
- Softer economic data coupled with lack of a comprehensive solution to Europe is pressuring stocks
- While volatility will remain elevated, we see longer-term value in equities amid an extended period of low interest rates