The E-Mini S&P 500 trended higher Thursday morning with expectations for perhaps a more "accommodative" testimony by Federal Chairman Ben Bernanke. The data both in the US and emanating from the Euro Zone was lackluster to say the least. US Initial Jobless Claims fell 12,000 to a seasonally adjusted 377,000 while the previous report was at 383,000. The last US Unemployment report came in at +69,000 workers added when expectations were set for +150,000. The US Unemployment rate is holding at 8.2%. US Consumer Credit in April increased by $6.5 billion, under the forecast of $11 billion and the $12.4 billion increase in March.
US household debt decreased at a 0.4% annual rate for the first quarter of 2012. Household wealth increased by $2.8 trillion at the same time. Fitch's credit rating agency had restated that it may downgrade the US in 2013 if the deficit is not contained and if there is no credible fiscal consolidation plan in effect! The US is the only AAA rated country without a fiscal consolidation plan in place. Standard and Poor's credit rating agency downgraded the US back in August, 2011 creating quite a stir as the AAA went to AA-. Moody's has the US at Aaa with a negative outlook as of the fall of last year.
Thursday put Federal Chairman Ben Bernanke in the limelight as traders anxiously waited for any hint of easing. His testimony turned into a bit of a disappointment as he assured that the Fed was prepared to take action should the financial condition worsen but restrained any thought of easing. He noted that both Congress and the Fed were closely watching the "significant risks" to the US recovery in light of the euro crisis. Economic growth appeared to continue at a moderate pace and despite the problems in the Euro Zone, US exports maintain their momentum. The next policy setting meeting of the Federal Reserve is scheduled for June 19th and 20th.
Operation Twist ends in June, which is the program revived from the 60's where they bond the long-term bonds and sell the short-term bonds to stimulate the economy. The Greek election takes place on June 17th, which gives the Fed two days to digest the potential effects spreading to the US and derive a solution. Between June 17th and 19th, the markets may have either a meltdown or a boost depending on the management of the election results. Regardless, there may be erratic moves and increased volatility during that time.
The talk of Greece exiting the European Union (EU) is considered a probable outcome as bankers spoke more freely about a potential exit plan for the indebted country. Greece is facing a snowball effect as tourism revenue declined 11.7% in the first quarter. Tourism is key to Greece's economy, accounting for $215 billion euros and supplying one out of every five jobs. The Bank of Greece reported travel receipts decreased to $396 million euros from an average of $405 million euros per trip. The concern is the run on the banking systems as consumers and business's pull their funds out of Greek banks to either transfer the funds outside the country or to replace the funds with hard currency such as gold.
The return to the Drachma is a large change that will affect the global banking systems and creditors. The Greeks are afraid of rapid devaluation of the currencies. The EU insists that they wish to keep Greece in the EU yet on the other hand are making plans for a managed exit. The French banks hold the most Greek debt and must have a contingency plan in place prior to the June 17th election. If Greece left the euro FX, it may be construed as a failure to get their fiscal house in order. Inflation may soar. Purchases of goods for businesses may have to be paid in full prior to delivery. Credit may be denied or placed at high costs.
The European Central Bank (ECB) President Mario Draghi disappointed investors yesterday as he temporarily took any stimulus plans off the table. He further explained that it is the Euro government responsibility to solve the debt crisis. The ECB left interest rates at 1%. The ECB has already infused the Euro Zone with over a trillion euros in cheap loans to increase lending and promote some of the bond buying of the indebted nations. There has been talk that the program was insufficient to a certain degree as some of the recipients of the loans seem to redeposit the monies back into the banking system nightly.
Spain had an auction yesterday selling $2 billion euros worth of bonds with good demand at yields just over the non-sustainable 6 % level. Spain's banking system is suffering from bad real estate loans. The European Commission offered Spain more time to reduce its budget deficit. Fitch's credit rating agency downgraded Spain by three notches to BBB and placed the country on negative outlook! Standard & Poor's downgraded five Spanish banks previously.
They may receive a credit line from the European Financial Stability Facility which is set to end this month to be taken over by the permanent fund which is the European Stability Mechanism or possibly they may be able to receive a direct loan to Spain's FROB bank rescue fund. They still need to access the legal ramifications of the possibilities. German Chancellor Angela Merkel insists that the Spanish government place themselves under the rescue aid of the European Union. It is thought that the Spanish banks need about $40 billion euros worth of additional capital and that the alleged crisis in Spain may be overblown according to Emilio Botin, the Chairman of Banco Santander.
Spain has an unemployment rate of 24% to add to the pressure. The Spanish Economy Minister has said that Spain borrowed about 58% of the gross funding that it needed to date with yields that were within range. The International Monetary Fund Managing Director Christine Lagarde announced that the euro leaders need a 'master plan' and 'collective determination' to support the euro FX. The Governing Council wishes to look for the long-term vision for the Economic and Monetary Union. China cut their one-year interest rates by 25 basis points to 6.31% for loans and 3.25 % for deposits which supported the markets somewhat.
The next US sanctions on Iran are for June 28th as pressure is applied to force the country to either halt its nuclear program or agree to have NATO inspectors visit the sites such as Parchin. The UN nuclear inspectors, through satellite imagery, have reported what appears to be a clean-up at the Parchin site. Iran is still in talks with the European Union Foreign Policy Chief Catherine Ashton who hopes that the nuclear research program is at the beginning of the end. They met in Bagdad on May 23rd to resume negotiations but now will resume talks in Moscow on June 18th - 19th. Iran is hoping to reduce the sanctions placed on it by the US and the EU.
The financial constraints have forced Iranian business to be bartered in Gold and Rupees as the Iranian banks have even been banned from SWIFT transactions. The energies have come down in price as a result of increased production by Saudi Arabia and some global growth slowdowns. The US will not lift any bans until entry to the nuclear research sites are given to the NATO inspectors. Iran still insists that it has the right to make the enriched uranium. In response, the US, Russia, China, Britain and Germany have offered fuel to keep Iran's medical isotope reactor running with assistance in their nuclear safety and to end the embargo on civilian aircraft parts. Iran insists that the enriched uranium is used to promote electricity and isotopes for cancer patients.
Crude oil demand has been poor with China's economy slowing. The next OPEC meeting is slated for June 14th, perhaps where the production may decrease from the 10 million barrels a day output to stabilize the oil prices. The Middle-east is still vulnerable to conflict until a resolution has been reached. The US for the first time in 62 years is an energy exporter as natural gas production has increased. The concern is to prevent price spikes in the prices by stabilizing the export demand. The month of June is packed with crossroads for many countries and many issues! The volatility may be high and the moves erratic, be extra vigilant in using stops and monitoring the trades!
On the stock side: JP Morgan Chase and Co. (JPM) was down 0.60 % to $32.87. Citigroup Inc. (C) was down 0.88 % to $26.90. Bank of America (BAC) was up 2.88 % to $7.42. Alcoa Inc. (AA) was up 0.02 % to $8.64. Boeing Co. (BA) was up 1.48 % to $70.04. Caterpillar Inc. (CAT) was up 0.51 % to $87.10. General Electric Co. (GE) was up 0.79 % to $19.03. Halliburton Co. (HAL) was up 0.11 % to $28.13. Hewlett Packard Co. (HPQ) was down 1.30 % to $22.06. SPDR Select Sector Fund - Financial (XLF) was up 0.11 % to $13.99.
E- Mini S&P 500 Chart.
Friday, what to expect: We maintain a bullish bias unless the E-Mini S&P 500 penetrates $1263.25. Friday, we anticipate an inside to lower day. Thursday's range was $1329.50 - $1312.00. The market settled at $1316.75. Our comfort zone or point of control for this market appears to be $1319.50. Our anticipated potential range for Friday's trading could be $1323.50 - $1297.50. Longer-term, please reference the channel on the Daily Chart.