A look at some of the market movers from the week:
- Broker MF Global filed for bankruptcy protection and CEO Jon Corzine resigned
- For the period ending in September, bonds beat stocks over 30 years for the first time since 1861
- Greek Prime Minister George Papandreou riled markets by calling a referendum vote on the recent bailout
- … and then he later canned the vote
- After the vote was put to bed Papandreou won a parliamentary confidence vote
- The U.S. fired verbal volleys at China over cyber attacks
- The European Central Bank unexpectedly cut its key interest rate
- The Federal Reserve held rates steady but cut growth forecasts
- Groupon completed its IPO
- Bank of America said it may issue shares to retire preferred stock
- The Bureau of Labor Statistics reported 80,000 new jobs in October
After a screaming bull run through October, the market cooled as the month came to a close and major indices finished in the red for the week. At Friday’s close, the S&P 500 index showed a 2.5% loss for the week, with big drops on Monday and Tuesday more than offsetting a more moderate snap-back on Wednesday and Thursday. October closed out with an impressive 10.8% gain, though the year-to-date performance for the S&P dipped back below even, to a 0.4% loss.
Unsurprisingly, it was Europe that drove much of the action during the week. After the wild market rally last week that followed the announcement of agreements to backstop Greece and provide financial firepower for the entire region, markets became more skeptical on Monday as investors considered the details that are yet to be determined.
The concerns were seriously stoked on Tuesday when Greece Prime Minister George Papandreou announced that the country would hold a referendum vote on the just-agreed-upon bailout. Investors around the globe reacted harshly as fears rose that the Greek people would not back the bailout — which will almost certainly entail further austerity measures — and that Greece would end up falling victim to a disorderly debt default. The even bigger concern was that such a scenario would further spook bond investors about the entire Eurozone region and impact the borrowing abilities of larger countries like Spain, Italy, and Portugal.
In an emergency meeting of euro-area leaders, the respective heads of state from Germany and France applied significant pressure to Papandreou, suggesting that the referendum vote would determine whether Greece would stay in the euro — a membership that most Greeks cherish. The pressure was enough to cause the Prime Minister to back off the referendum plan, and though the whole debacle called his leadership status into question, that was reaffirmed in an end-of-week confidence vote by the Greek parliament.
While a big bullet may have been dodged in Europe during the week, the market is still left with the concerning question that it started the week with. That is, how quickly and effectively the region’s leaders will be able to hammer out the details of the agreements reached last week.
Europe commanded much of the headlines during the week, but it was anything but a quiet week back in the U.S. Not least among the major events was the bankruptcy of futures broker MF Global. The firm, run by former New Jersey governor Jon Corzine, was sunk by an outsized position in European sovereign debt. The good news is that the market seemed to handle the bankruptcy announcement in an orderly fashion without any significant hiccups.
Meanwhile, on the economic front, The Federal Reserve held its rate-setting meeting and, as widely expected, left its target rate at a range of 0% to 0.25%. The Fed did note some signs of weakening economic growth and reaffirmed its commitment to the so-called “Operation Twist,” which is designed to lower longer-term borrowing costs. In an interesting development, the only vote against the Fed’s policy decision came from Charles Evans, who was in support of the central bank taking further accommodative action.
Among the scheduled economic reports for the week, the monthly employment report from the U.S. Bureau of Labor Statistics was far and away the most notable. During October, the U.S. economy added 80,000 jobs, below the 85,000 that were expected. As government layoffs continued, private-sector hiring was more robust — with 104,000 jobs added — but still below what economists were predicting. On a more positive note, in revisions to the data from August and September, the BLS boosted both tallies, revealing an additional 102,000 jobs added during those months.
Finally, third quarter earnings continued to roll on and with market volatility turned up to blaring levels thanks to Europe, individual companies were seeing huge swings to the upside or downside, depending on their results. However, earnings reports seem to be having very little broad impact on the market at this point in the reporting season.Looking ahead
Earnings season will still be in full swing next week, but as with the past week, high-level-focused investors shouldn’t expect to see much broad impact from individual releases. The economic calendar will be significantly toned down from last week, with wholesale inventories, initial unemployment claims, and the University of Michigan’s sentiment survey likely providing the highlights.
So what should investors be ready for next week? Almost undoubtedly, more developments in the European debt crisis. The much-awaited G-20 summit in Cannes, France ended without much new and concrete, so as we head into next week, investors around the globe will continue to grapple with how to set odds for the outcome in the Eurozone. Glimmers of good news will encourage risk taking — which will mean good news for stocks in general, particularly growth stocks and those based in Europe — while increased concerns will push investors to take risk off the table, which would likely push up prices for U.S. bonds, while hurting the stock market.
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