Via Rational Capitalist Speculator [22],
Bull
+ In Euroland, ECB’s Draghi warns the bears: “believe me, it will be enough [23]” on resumed sovereign bond buying. Chatter of a banking license for the ESM [24] is sure to cause a shift in elevated bearish sentiment. The Bundesbank may oppose these measures, but it’s best to ignore them [25], given they only hold 2 out of 23 votes on the ECB board. Spanish and Italian bond yields plunge [26] in response and risk markets rally (S&P 500 hits a new high this week from early June lows). The Eurogroup [27] and Merllande [28] state that they remain committed to preserve the Euro’s stability. Again, Draghi [29]: “They don’t recognise the political capital that our leaders have invested in this union and Europeans’ support. The euro is irreversible.
+ China looks to be experiencing a soft landing as the HSBC/Markit Manufacturing PMI [30] is only a few tenths away from expansion and is at its highest level in 5 months. Backlogs are now in positive territory. Leaders are “bringing her in” [31] and the trajectory is looking good. Copper is sniffing this development [32].
+ “Don’t fight the Fed.” In the past, it’s been extremely unprofitable to do so. Officials will do what is necessary [33] to quell market fears regarding the Eurozone. Meanwhile, lower interest rates are helping consumers’ income statements as refinancings reach their highest level since April 2009.
+ While investors are up in arms about what’s going on in Europe, “It’s not as bad as many think [34].” Market indicators show dramatically reduced probabilities of default in Portugal and Ireland, while Spain’s $900 billion of debt is already priced for a 20% haircut and is “a drop in the bucket” when considering total worldwide debt of roughly $50 trillion. Everyone knows that Greece is going to default, markets move when there’s a surprise; clearly there isn’t one here. Continued debt writedowns will clear the air and coupled with better [35] than expected [36] corporate earnings [37] and improving sentiment, will set the stage for a sustainable rally.
+ The resilient U.S. economy continues to grow. The Chicago Fed National Activity Index [38] rebounds from a weak reading in May. May travel volume rises 2.3% YoY [39], the largest gain since 2009. Increased transportation is a sign of a healing economy, not one about to fall into recession. In manufacturing, trucking bounces back in June [40], while growth continues [41] in Kansas City. In housing, the Federal Housing Finance Agency reports that home prices climbed 0.8% in May on a month to month basis and 3.7% year over year. Home prices have now risen 4 months in a row and the latest report was better than expected. This confirms Zillow’s belief that housing prices have finally bottomed [42], it’s only stabilization or recovery from here. New Home Sales fall, but for a bullish reason [43]. Inventory levels are back to healthy levels and the job-creating construction industry is set to restart after a dismal 6 years. Speaking of jobs, the 4-Week average of jobless claims hits its lowest level since March [44]. The labor market continues its improvement; no sign of recession here.
Bear
- Draghi steps up to the plate, but his team doesn’t back him [45]. Sorry Bulls, No banking license for you [46] (they may have 3 votes, but the reality is they call the shots). A Greek default this fall is inevitable [47]. Moreover, Spain reports a worsened [48] economic situation [49], while more regional authorities [50] request bailouts from the state. The negative feedback loop is gaining strength [51]. Falling confidence [52] (EFSF [53] and Europe’s strongest [54] are downgraded by Moody’s while Italy is downgraded further into junk status [55]) has led to a deepening Eurozone recession as per Markit’s July Eurozone Composite PMI [56]; the horizon looks bleak with backlogs shrinking at the fast rate since mid-2009. Germany’s important Ifo survey falls for the 3rd consecutive month in July [57]. Greece is in a Great Depression [58]. So can we finally change the prescription? Nope [59], the beatings [60] continue. Good luck Europe.
- Global growth is stalling [61]. Taiwanese industrial production surprises to the downside [62] with its 4th consecutive drop, while South Korean GDP growth was underwhelming [63]. Chinese officials are underestimating the financial turbulence to come, determined to enforce housing curbs [64] even in the face of continued weakness from Europe. The U.K. reports [65] a deepened double-dip recession. Bellwether companies such as UPS [66], Siemens [67], Whirlpool [68], Cisco [69], and Ford [70] are either cutting outlook/estimates or looking to restructure (ie shed jobs) — for the first time in 3 years, quarterly earnings are poised to drop [71].
- The approaching fiscal cliff is damaging sentiment [72]. Businesses are holding back, a trend clearly visible when perusing the latest Richmond Manufacturing Index, which implodes [73] from -3 to -17 (well weaker than consensus of 0) as well as core-durable goods orders (a measure of business spending)— 3 out of the last 4 readings has been negative. From Econoday [74]: “Outside of transportation, weakness was widespread in June following a notable gain in May.” Meanwhile, consumers are saying [75] things are getting worse.
- Confidence in governmental organizations is collapsing - and why shouldn’t it [76]? From former IMF division chief Peter Doyle: “After twenty years of service, I am ashamed to have had any association with the Fund at all. [77]”
- Civil war continues unfettered [78] in Syria. Religious tensions are simmering [79] and the worst case scenario [80] of sectarian conflict throughout the region may be close to taking hold. War games [81] between Iran and the U.S. continue, while Israel bluntly states [82] that it will act if Syrian non-conventional weapon stocks are raided by militants. Meanwhile, China raises the stakes [83] in an already tense South China Sea. Schumer says U.S. should play “hardball” [84] on Cnooc’s deal with Nexen; probably because the Yuan as begun to weaken. Will this turn into a flashpoint for Chinese-U.S. relations? Beware of oncoming protectionism.