The markets are in a much better mood this morning after yesterday’s sell-off in risk assets. While stocks held up a little bit better than expected, US dollar strength pushed other currencies lower and gold fell to 7-week lows. Stocks and commodities are higher this morning, as European yields appear to be falling which makes borrowing costs lower for the beleaguered region.
While Moody’s has put European credit on negative review, at this point none of the ratings agencies has made an official downgrade. Spain was able to issue notes that were close to a full percentage point lower than just one month ago. The EFSF was also able to issue short-term paper and it’s offering was 3x over-subscribed showing great demand.
This appears on the surface to be positive so it will be important to see that fiscal agreements are adhered to going forward to keep the bond vigilantes away. If the debt-strapped countries can continue to service their debts and get some relief on the cost to do so, then the Euro zone has a much better chance of survival. Of course the trick will be how to simultaneously get governments to cut spending AND avoid an economic recession. Lower interest rates thanks to Draghi are a step in the right direction, though he needs to be sensitive to possible inflation.
Today’s FOMC meeting will be interesting as it is likely that the Fed will attempt to steer the markets toward optimism by stating a position that is helpful to the Euro zone. What exactly that is remains questionable at this point but they are likely to remain accommodative for an extended period. At what point inflation expectations start to rise is anyone’s guess but this can also be detrimental to economic health despite the Fed’s view to the contrary.
US advanced retail sales are likely to have a big impact this morning as the US economy has been slowly gaining traction in “stealth mode” and the recent economic data has come in better than expected. The early reports from the holiday shopping season have been better than expected, though it is questionable whether or not the consumer can maintain such levels of consumption going forward.
Overnight, the economic data reported was largely positive as well, with both the ZEW German and Euro zone economic sentiment figures coming in better than expected. Confidence should improve in the Euro zone if a lower valued Euro can help contribute to economic growth.
In the UK, home prices fell less than expected which shows that the housing market may be stabilizing and inflation in the UK did indeed fall from 5% to 4.8%, as expected. The retail price index also came in as expected. The BOE has been begging or inflation to come down despite their easy money policies and perhaps that stubborn inflation is starting to fall in line with their expectations.
**This just in: US advance retail sales figures came in worse than expected, showing a gain of .2% vs. the expectation of .6%. Bear in mind that this figure is for November, so perhaps people have been saving all of their shopping for the December holiday shopping season.
Futures are giving back some early gains but not to the point where it would reverse sentiment though these sales figures are clearly a disappointment. Today’s FOMC meeting could be critical for investor confidence, though they are not going to save the world today.
Overall risk in the market has not abated, though every day we can move in a positive direction will help confidence going forward. There will likely be a point where market correlations will begin to break down as some of the risk themes become more specific and we move away from this “risk on, risk off” environment.
However until that happens, keep it to the short-term. My feeling is next year will provide an opportunity to pick individual winners and losers.