Additional Medicare Payroll Tax: High Income Individuals Face New Medicare Taxes in 2013

Additional Medicare Payroll Tax: High Income Individuals Face New Medicare Taxes in 2013

Week in Review: Spain bank woes drive fresh flight to safety

For the week ended June 1, 2012



As the economic situation in Italy and Spain continued to deteriorate, the flight to safety picked up this week. Benchmark borrowing costs in the United States plunged to levels last seen in 1946 and those in Germany and the United Kingdom hit all time lows. German two-year bund yields fell to zero for the first time, while government yields in Italy and Spain hit worrisome levels.
Concern that Spain would not be able to save its troubled banks sparked a broad selloff in global equity markets and the euro. For the week, major stock benchmarks declined 2% to 3%. For the month of May, broad equity indices, including the Dow Jones Industrial Average and Standard & Poor's 300 Stock Index 500, gave back 6% or more after peaking early in May. It was the Dow’s worst month in two years. Crude oil futures fell to seven-month lows — below $83 a barrel — reflecting renewed signs of weakness in the US economy, rising oil stockpiles, and deeper eurozone worries. Oil prices have plunged by close to 25% since their $110-a-barrel peak in February; the price of a gallon of regular gasoline in the United States fell 45 cents to $3.67 per gallon and is expected to drop further.
After May ended with financial markets down substantially for the month, June began with a spate of more bad news from the eurozone, including record-high unemployment, along with disappointing data on Chinese manufacturing activity and US employment, which grew by its smallest monthly margin in a year. The US unemployment rate rose to 8.2%.

US and global economic news

Spanish woes intensify eurozone crisisThe eurozone crisis reached a new level of intensity this week as the Spanish government battled to save the troubled Bankia. Last Friday Spain announced plans to nationalize the bank, which is a real estate lender in need of a €23.5 billion bailout. The European Central Bank this week refused the Spanish government's request to recapitalize Bankia. That refusal has forced the Spanish government to consider an alternative––issuing bonds to the bank, which then would be used as collateral to raise cash from ECB lending facilities. As leaders grappled with a solution, ECB President Mario Draghi urged Europe's political leaders to come up with a longer-term vision for the region. Elsewhere companies and banks seemed to be steeling themselves. Multinational companies focused on retrieving cash from Greece and some of China's biggest banks cut off European counterparts from borrowing and derivatives trading.
Spanish retail sales fell by a record 9.8% in April from a year earlier, the twenty-second consecutive monthly decline. The country’s unemployment rate is at 24.4%. The European Commission said it would recommend extending the timeline for the country to reach targets on its deficit level, recognizing the challenges faced by the region’s fourth-largest economy and the financial strain of having to bail it out. 

Weak US jobs data adds to spate of bad newsMonthly US payrolls rose by much less than expected in May, as American employers added 69,000 jobs, far fewer than the 150,000 that had been forecast. The nation’s jobless rate rose to 8.2% from 8.1% in April, while hours worked fell. Private payrolls rose 82,000, half of the projected 164,000 increase. Government payrolls declined by 13,000. April’s jobs increase was revised down to 77,000 from a previously reported 115,000. Initial unemployment insurance claims rose by 10,000 to 383,000 for the week ended May 26. The US economy grew just 1.9% annually in the first quarter, according to the latest update from the US Department of Commerce, which had previously estimated a growth rate of 2.2%. The Conference Board’s consumer confidence index fell to 64.9 in May from 68.7 in April, the third straight month of declines. 
Eurozone data show continued regional weaknessUnemployment in the eurozone reached an all-time high of 17.4 million people in April, 1.8 million more than a year earlier, and 110,000 higher than in March. The seasonally adjusted unemployment rate remained at 11%. Manufacturing activity in the 17-nation economic region reached a three-year low, as the final manufacturing purchasing managers’ index fell to 45.1 in May from 45.9 in April. It was the index’s tenth straight month of contraction. Eurozone economic confidence fell to its lowest point since October 2009, according to a report from the European Commission. An index of eurozone executive and consumer sentiment dipped to 90.6 in May from 92.9 in April. 
Gap between safe-haven and risky sovereign bonds growsYields on two-year German bunds fell to -0.012% while 10-year bunds yielded 1.123%. In sharp contrast, 10-year Spanish government bond yields climbed to 6.56%. This is viewed as dangerously close to the 7% mark, at which point Spain’s sovereign bonds may be seen as unsustainable, prompting a bailout initiative. Italian 10-year bond yields inched up to just below 6%, also indicative of troubles in the eurozone’s third-largest economy. 

Chinese manufacturing activity slows, economic stimulus initiatedTwo measures of Chinese manufacturing activity indicated further slowing in the world’s second-largest economy. The official China purchasing managers index fell to 50.4 from 53.3 in April, while HSBC’s gauge fell to 48.4 in May from 49.3 in April. Various reports indicated that Chinese leaders are quietly beginning to add stimulus to the country’s economy. Since early April, the National Development and Reform Commission has approved major infrastructure projects including clean-energy hydropower stations, four new airports, and the renovations or expansions of three large steel mills.
India’s economy slowsIndia’s economic growth tapered to its slowest pace since 2003 in the first quarter of 2012, with the nation’s gross domestic product growing 5.3% from a year earlier, far slower than its 8% growth rate of recent years. Economists had forecast 6.1% GDP growth.
Japan posts positive dataCapital spending by Japanese companies rose 3.3% in the first quarter, corporate current profits were up 9.3%, and corporate sales were 0.6% higher than a year earlier. Japan’s economy grew an annualized 4.1% in the quarter, based on preliminary GDP data. Much of this activity is a result of government spending to spur recovery from the earthquake and tsunami of March 2011. Domestic Japanese sales of new cars, trucks, and buses rose 66% in May from a year earlier, according to the Japan Automobile Dealers Association.

US and global corporate news

IPO issuers get cold feet after Facebook’s disappointmentWould-be issuers of initial public offerings appear to be waiting for signs of a shift in market conditions before they attempt to go where Facebook ventured and stumbled. London-based jeweler Graff Diamonds, travel-listings website Kayak, and Formula One Group are holding off from going public for now. Graff was a day away from pricing its IPO when it hit the pause button. Kayak has yet to launch its roadshow to pitch its stock to potential investors; it is now taking a break, but its revenue is growing despite the company facing stiff competition in the online travel services space. Formula One was planning to launch a preliminary prospectus for a $2.5 billion IPO with the Monetary Authority of Singapore on June 5.
Two more Canadian banks post solid profitsBank of Nova Scotia and Canadian Imperial Bank of Commerce joined three other Canadian banks in posting strong earnings for the latest quarter. Scotiabank’s profit fell almost 10% after benefiting from acquisition-related gains a year ago. Excluding those gains, the bank grew its earnings by 16%. Its adjusted earnings beat expectations. CIBC also beat analyst expectations in posting a 6% increase in earnings.
Research in Motion warns of money-losing quarterCanadian BlackBerry maker Research in Motion warned that it would likely lose money for the second straight quarter. The firm is trying to cut costs and turn its business around before launching the next BlackBerry later this year and has hired external advisers to help management determine how to salvage or sell parts of its business.
Moody’s downgrades Nordic banksMoody’s Investors Service this week downgraded the ratings of nine Danish financial institutions, citing a “weak operating environment, pressurized asset quality, and poor profitability.” Last week, Moody’s lowered its ratings for two Swedish banks and a Norwegian bank. Just as noteworthy is the criticism some of these banks and asset managers have had for Moody’s, and the market response, which has been to ignore the downgrades and send bond and stock prices higher. Among the most severe downgrades was a three-notch downgrade of mortgage lender Nykredit Realkredit A/S and its Nykredit Bank A/S unit.
US automakers post robust sales in MayChrysler Group continued to register rapid sales growth, with a 30% increase in May from a year earlier, while fellow US automakers Ford Motor (a 13% sales increase) General Motors (up 11%) also did well.

The week ahead

• The US Department of Commerce releases its May factory orders report on Monday, June 4.Japan issues its monthly industrial production report on Wednesday, May 30.
• The Institute for Supply Management releases its non-manufacturing report for May on Tuesday, June 5.
• Markit releases the eurozone Services Purchasing Managers' Index for May on Tuesday, June 5.
• The European Union issues its gross domestic product (GDP) data for May on Wednesday, June 6.
• The US Federal Reserve Board releases its Beige Book for May on Wednesday, June 6.
• Japan ues its quarterly GDP report on Thursday, June 7.

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon, and tolerance for risk. Diversification does not guarantee a profit or protect against loss.
The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell, or an indication of trading intent on behalf of any MFS product.
Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual, or quarterly report. Full holdings are also available on the individual Fund Profile tab in the Products and Performance section of mfs.com.
Past performance is no guarantee of future results.

Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; msnbc.com.

--see disclaimer below--