For the week ended May 7, 2010
Fallout from Greece’s debt crisis continued to roil world financial markets this week. Stocks plunged as fears of contagion from Greece grew. The euro fell to its lowest level in 14 months as investors worried about rising debt levels in Portugal and Spain as well as Greece. It was almost impossible to escape the global impact of Greece’s debt crisis, which caused the euro to fall against the U.S. dollar and other currencies.
The U.S. dollar’s relative strength led to a decline in the price of gold after it had rallied as a safe-haven asset for investors to hedge risk during a crisis. Investors also were drawn to U.S. Treasuries and German bonds. The yield on Greece’s 10-year note rose to 12.76%, a record 966-basis-point premium over the 10-year German bond yield. Crude-oil futures fell below $77 per barrel, from $87 per barrel on Monday, and their lowest level in two months.
On Thursday, Greece agreed to austerity measures as required by an aid package worth 110 billion euros ($140 billion) from the European Union and the International Monetary Fund. The Bank of Japan responded to the crisis by injecting 2 trillion yen ($22 billion) in funds to financial institutions to ease liquidity and stabilize markets. On Friday, the German parliament approved the Greek bailout package. Later Friday, finance ministers from the Group of Seven industrialized nations were to hold a conference call to discuss a potential Grecian financial formula.
In the United States, a series of positive economic reports, including a much-better-than-expected gain of 290,000 jobs in April released Friday morning by the U.S. Department of Labor, stood in sharp contrast to the European worries. However, by then global markets had plummeted to one of their worst weekly performances ever. In the first four days of the week, the Dow Jones Industrial Average lost 4.4%, the Standard & Poor's 500 Stock Index was off by 5.0%, and the NASDAQ Composite Index had retreated 7.2%. U.S. markets opened lower on Friday.
Both the Dow Jones Global and Europe’s Stoxx 600 indices fell 7% or more during the week while the MSCI Emerging Markets Index dropped 8.8%. Bloomberg reported that the Stoxx 600 fell 12% from its April 15 peak.
On Thursday afternoon, investors were shocked by a jaw-dropping plummet of almost 1,000 points in the Dow Jones Industrial Average, which went into a freefall for about 15 minutes. The fallout from Greece was exacerbated by high-frequency automated trading, which typically accounts for more than half of its daily volume.
U.S. economic news
U.S. employers added 290,000 jobs in April
The United States experienced its fastest pace of job growth in four years, according to a report from the U.S. Labor Department released on Friday morning. The nonfarm payroll increase of 290,000 easily surpassed the consensus economists’ estimate of a 180,000-job gain. It came after an upwardly revised increase of 230,000 jobs in March. However, the U.S. unemployment rate rose to 9.9% in April. Over the past two years, the U.S. economy has lost 8.5 million jobs.
Signs of economic rebound grow
A variety of reports gave positive indications regarding the direction of the U.S. economy. Private sector jobs grew by 32,000, according to a report released on Wednesday by Automatic Data Processing (ADP) and Macroeconomic Advisers. Initial claims for jobless benefits fell by 7,000 to 444,000 in the week ended May 1, the Labor Department reported. The four-week moving average of initial claims fell to 458,500 from 463,250.
Factory orders rose by 1.3% in March, more than twice as much as had been estimated, the U.S. Department of Commerce reported. The overall index for manufacturing activity from the Institute for Supply Management reached 60.4 in April, up from 59.6 in March. Any number above 50 shows expansion. Productivity continued to improve. Nonfarm labor productivity rose by 3.6% on a seasonally adjusted annual basis, the U.S. Labor Department reported. Business leaders reflected the sunnier outlook as well. A survey of CEOs by the Business Council and Conference Board pegged overall business confidence at 66.6 in May, up from 64.7 in February, and far above the mark of 50 from a year earlier.
U.S. and global corporate news
Beazer Homes profit up
Homebuilder
Beazer Homes posted a profit for the third consecutive quarter, a positive signal for a housing recovery. Its orders rose 49% and it had a lower cancellation rate, aided by improved home affordability, more stable prices, low interest rates, and improved liquidity.
Freddie Mac loses $8 billion, asks for $10.6 billion more
After a first-quarter loss of $8 billion,
Freddie Mac, which is now effectively owned by the U.S. government, asked for $10.6 billion in additional aid, bringing the total taxpayer bill for rescuing the mortgage guarantee firm to $61.3 billion.
Financial firms post profits
Further signs of an economic turnaround came from several financial firms, which posted profits. Swiss giant
UBS reported its highest quarterly profit in three years, as it turned a year-earlier loss of 1.98 billion Swiss francs to a net income of 2.2 billion Swiss francs in this year’s first quarter. The biggest contributor was a rebound in debt trading.
Marsh & McLennan, one of the world’s largest insurance brokers, had a 41% increase in first-quarter earnings, largely due to a rebound in its consulting business. Credit card-issuer
MasterCard beat analysts' expectations in achieving a 24% increase in its first-quarter profit, as higher payment processing reflected increased consumer spending.
Global economic news
UK election casts more uncertainty
While Greece, Portugal, and Spain occupied much attention, the United Kingdom shared the European spotlight. The U.K. election, which appears to have produced a minority Conservative government or a coalition, added to existing concerns.
Earlier in the week, the European Commission said that the U.K. government would borrow 12% of its gross domestic product (GDP) in calendar 2010, above Greece’s and Ireland’s respective debt levels of 9.3% and 11.7% of GDP. The commission forecasts U.K. economic growth of 1.2% this year and 2.1% in 2011 after a 4.9% contraction in 2009. A more positive report, released on Tuesday, showed the UK’s manufacturing sector grew at its fastest pace in more than 15 years in April, largely due to record-high export orders and weakness in the British sterling.
Inflation a concern in Asia
As Europe tries to limit damage from sovereign debt, Asian markets are focused on rapidly rising prices as the region’s economic recovery far surpasses that of the West. Australia reported a 4.8% rise in prices in the first quarter of 2010. South Korea reported a 2.6% rise in its consumer price index in April from a year earlier, while Indonesian and Thai consumer prices rose 3.9% and 3.7%, respectively, from a year earlier. Although these price rises are not alarming,
The Wall Street Journal reported that Asian economies are running at or near capacity and the rise in prices makes tighter monetary policy more likely.
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 views expressed here are those of MFS
®and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any MFS investment product. Individual securities mentioned are for illustrative purposes only and may not be relied upon as investment advice or as 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.
Past performance is no guarantee of future results.
Sources: MFS research;
The Wall Street Journal; The Wall Street Journal Online; Bloomberg News;
Financial Times; boston.com.
--see disclaimer below--
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