Asset Management

Markets waiting, hoping for reasons to give thanks

November 21, 2012

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The week began with U.S. and global equity markets surging 2% as Congressional leaders and President Obama offered encouraging comments about fiscal-cliff negotiations. On Tuesday, markets began to pull back modestly from Monday’s gains and finished flat. With the trading week shortened to three and a half days and transaction volumes light, markets are essentially in a wait-and-see mode.

Congress is in recess for Thanksgiving, so there is little prospect of major news on the fiscal front until after the holiday. However, in a November 20 speech, Federal Reserve Chairman Ben Bernanke warned that uncertainty surrounding the fiscal cliff is already hurting the U.S. recovery, and he urged lawmakers and the president to strike a compromise quickly. In the wake of Bernanke’s remarks, U.S. Treasury prices dropped and their yields rose, with the bellwether 10-year yield rising to 1.66% as of November 20, after closing at a two-month low of 1.58% the previous week.

Article Highlights

  • Thanksgiving brings light volume, shortened trading week.
  • Treasuries slip following Bernanke fiscal cliff speech.
  • U.S. home sales and housing starts continue to climb.
  • France is downgraded; Greek bailout funds are delayed.
  • Oil prices are volatile amid Israeli-Hamas conflict.

More solid gains for the U.S. housing market

Data released during the week showed the U.S. housing recovery is continuing to pick up steam:

  • Existing home sales jumped 2.1% in October, to a seasonally adjusted annual rate of 4.79 million—nearly 11% higher than a year ago.
  • The median sales price for an existing home also climbed 11% in October, reflecting both stronger demand and limited supply, with the inventory of homes for sale at a 10-year low.
  • Housing starts surged 3.6% in October, to a seasonally adjusted annual rate of 894,000—the highest since July 2008 and 46% higher than last October.
  • Building permits, a forward-looking indicator, dipped 2.7% from September levels but were 30% higher than a year ago.
  • Homebuilder confidence rose for the seventh consecutive month, reaching its highest level in six years, as measured by the National Association of Home Builders/Wells-Fargo Housing Market Index.

In Europe, a downgrade for France and a delay for Greece

France and Greece were the primary focus in Europe.

France’s sovereign credit rating was cut from “AAA” to “AA1” by Moody’s Investors Service, matching the downgrade announced by Standard & Poor’s in January 2012. Market reaction to the Moody’s decision was negligible, as it had long been expected and was already priced in. The yield on the 10-year French government bond barely rose in response to the news.*

Greece was the subject of a meeting between European Union finance ministers and the International Monetary Fund (IMF) to determine whether, when, and under what conditions Greece would receive its next payment of bailout funds. The meeting ended on the morning of November 21 without resolution, resulting in yet another delay in the ongoing Greek debt drama. Discussions are set to resume on Monday, November 26.

Looking ahead: Fiscal cliff, eurozone, oil prices, Hurricane Sandy’s impact

After the relative lull of Thanksgiving, we expect to see investors refocus attention on a number of key macro themes that have the potential to drive markets in the near- and medium-term:

  • Avoiding the fiscal cliff and its potential hit to U.S. growth;
  • Continued progress, or lack thereof, in addressing the European debt crisis;
  • The future direction of oil prices, which have been volatile amid the Israeli-Hamas conflict but could stabilize if a truce proves successful; and
  • Further evidence of the economic impact of Hurricane Sandy, which only marginally affected October data but is likely to show up in a number of upcoming releases for November.