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Market Fundamentals and the Week Ahead

Fundamentals

Greece requested financial assistance from the European Union (NYSEARCA:EU) on Friday after a week which showed the country’s 2009 budget deficit was worse than expected. Moody’s Investor Services cut Greece’s credit rating, while the International Monetary Fund (NYSE:IMF) called the country’s crisis a “wake up call” on sovereign debt risks. The Greek government needs to raise about EUR 10 billion by the end of May. The yield on Greece’s 10-year bond rose above 8 percent, the highest in more than a decade and credit-default swaps soared to record levels.

The EU’s statistics office reported that Greece’s deficit was 13.6 percent of gross domestic product (NYSEMKT:GDP) in 2009, while Ireland’s was highest in the region at 14.3 percent. The total budget shortfall for the 16-nation euro region widened to 6.3 percent of GDP, from 2 percent in 2008.

The IMF raised its forecast for global growth this year saying the economy will expand 4.2 percent in 2010, compared to its January projection of 3.9 percent. However, the IMF warned that a failure of nations to contain rising public debt might have “severe” consequences for the world economy.

Goldman Sachs said the Security Exchange Commission (SEC) fraud case was “unfounded in law and fact” adding that the case hinges on the actions of a single employee. In addition, two people with knowledge of the situation said the SEC didn’t unanimously approve pursuing the case. Later in the week, however, a Senate subcommittee revealed emails that top executives at the company profited by aggressively betting against the housing market.

The National Association of Realtors reported that sales of previously owned homes rose 6.8 percent to an annual rate of 5.35 million in March, while the average price increased 0.4 percent from a year earlier. The data presented a first increase in four months as the association reasoned that buyers took advantage of a tax credit. A follow-up report showed that new-home sales jumped 27 percent in March to 411,000 units.

Orders for U.S. durable goods, excluding transportation items, rose 2.8 percent in March, after a 1.7 percent increase in February, the Commerce Department reported. However, total orders dropped 1.3 percent due to a 67 percent decline in demand for commercial aircraft.

Initial claims for state unemployment benefits dropped 24,000 to a seasonally adjusted 456,000, the Labor Department said.

Investor sentiment in China was hurt by reports that the government was ordering banks to stop giving loans in certain cities to people buying a third home. The move was seen as the latest in a series of actions to prevent speculation that could create an asset bubble.

The Week Ahead

Investors will be eyeing the first quarter preliminary Gross Domestic Product (GDP) data scheduled by the Commerce Department for release on Friday. They will also be hoping that Tuesday’s April consumer confidence report by the Conference Board will spark further signals of the economic recovery.

At the Fed’s policy meeting on Wednesday officials will likely discuss how to get rid of around $1 trillion worth of mortgage-backed securities acquired in the past 15 months. These have sparked speculation about possible asset sales soon. Speculation that the Fed will be the first of the major central banks to raise interest rates is unlikely to trigger a hike this month, and may prompt another signal from the chairman that rates will stay low for now.

Japan’s March retail trade data is scheduled for release on Tuesday before the country’s Bank Holiday the next day, and March unemployment figures on Thursday. The European Monetary Union’s March unemployment rate is expected on Thursday, which may further signal the depth of the continent’s economic woes. The EU and the IMF will also be tested on its response to Greece’s request for a bailout.

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