By Sy Harding
Having topped out into corrections in March and April, most global markets rallied back some in June, fueled by hopes that June’s unusual schedule of promising events would provide rescues for the eurozone and the U.S. economy. As those events arrived, if one or two failed to produce results, the rally only paused momentarily as there were still remaining events that might produce results.
But now we’re out of promising events for a while.
June’s first hope was that Spain would receive its requested bailout loans for its banks and Spain would go away as a worry. Next was the scheduled election in Greece that might prevent it from exiting the euro-zone. Then the G-20 summit on June 19 was hoped to produce a big coordinated global stimulus effort, and the Fed’s FOMC meeting was anticipated to result in new QE3 stimulus efforts for the U.S. economy. That was closely followed by the EU summit meeting and hope that it would result in a promising plan to control the eurozone debt crisis. This week it was that the European Central Bank and the Bank of England would cut interest rates at their meetings.
Markets won some, lost some.
Spain did receive the bailout loans for its banks. But the market’s euphoria lasted less than a day before it was realized that Spain’s government debt crisis was worse than its banking crisis.
The G-20 summit produced nothing except an agreement to continue to monitor conditions. The Fed’s FOMC meeting produced only an extension of the current ‘operation twist’ (which was already failing to halt the economic slowdown).
However, it seemed to get a big win last week from the EU summit, a major agreement to allow European banks to borrow directly from the established rescue programs, for the bailout funds to be used to buy the bonds of individual countries having difficulty selling their bonds to investors, and giving the European Central Bank more control over the rescue funds.
Unfortunately, the excitement over the agreement was short-lived when it was realized that much of the promised action would be delayed until the details are worked out later in the year.
But both the Bank of England and the European Central Bank came through with the hoped for interest rate cuts on Thursday. The Bank of England even included a degree of QE3 stimulus by adding to its bond-buying program. And China’s central bank chimed in with an unexpected rate cut of its own.
Unfortunately, markets had apparently already factored those central bank actions into prices since they declined on the news, apparently also concerned about the next event, Friday’s U.S. monthly employment report.
And that jobs report was a disappointment. Only 80,000 new jobs were created in June. New jobs therefore averaged only 75,000 a month in the 2nd quarter, down a big 66% from the average of 226,000 in the first quarter. That’s on top of all the other economic reports showing the 2nd quarter to have been much worse than the 1st quarter.
So the economy continues to run out of steam at a worsening pace.
The lack of positive response to the further monetary easing by central banks, and the biggest effort yet from the EU summit to contain the euro-zone debt crisis, indicates that central banks have also run out of firepower.
Can markets be far behind?
Consider also that ultimately stock prices are driven by corporate earnings, and Thomson/Reuters reported this week that warnings from corporations that their 2nd quarter earnings will not meet estimates are at the highest level in ten years.
Bullish analysts are confident the dismal jobs report will force the Federal Reserve to rush in with the additional QE3 type of stimulus program they failed to produce at their FOMC meeting two weeks ago.
But the Fed was already reluctant to try to come to the rescue. In testimony before Congress Fed Chairman Bernanke denied that it was because the Fed has run out of ammunition, even though the positive effect of QE2 in 2010, and ‘operation twist’ last year, each lasted only six months before the economy ran into trouble again.
Now it faces the fact that the additional monetary easing by central banks in Europe on Thursday seems to have had no effect in reassuring markets, at least so far, with markets down two days in a row after the actions. That may have the Fed even more reluctant to follow with similar action. After all, if the Fed fires off what ammunition it may have left and it fizzles, what if more is needed down the road? It may be better to wait and keep markets hoping they still have something left for down the road “if needed”.
My forecast at the beginning of the year was for the market to top out in April into a tradable summer correction, and then launch into a substantial rally in the market’s favorable season beginning in the October/November time-frame.
I could be wrong. But so far, short-term rally attempts notwithstanding, it seems to be working out that way. June’s rally is beginning to look like a rally to be sold into, another opportunity for short-selling and profits from downside positioning in inverse etf’s.