Europe is again in the news this morning, with Spain-centric
fears reminding investors that the region's problems are far from
settled. With yields on Spanish government bonds reaching Euro-era
highs, market participants are justifiably wondering whether the
government will need much more than a banking lifeline.
These fears are showing up in the government markets of Italy and
Germany as well, with yields on the former moving up and shorter
maturities of the latter now in negative territory. This is a clear
sign of heightened market anxieties that investors are paying the
German government for lending it money. It is not much different
this side of the Atlantic either, with yields on U.S. Treasury
instruments at historically low levels.
These low yield levels are likely key contributors to the Fed's
hesitation to announce more QE despite market clamor. These calls
on the Fed will only increase in the coming days as more evidence
of economic slowdown shows up.
We don't have a particularly busy economic calendar this week,
though the first read on the second quarter GDP on Friday morning
will show a sharp deceleration in growth. Consensus expectations
are for the GDP report to show a growth rate of 1.3%, compared to
1.9% in the first quarter and 3% in the fourth quarter of 2011.
Estimates for the second quarter GDP kept coming down in recent
weeks in response to soft incoming data, but the same for the third
quarter and beyond still remain north of 2%. Downward adjustments
to those expectations will be a key risk factor in the coming days.
Other major economic reports on deck this week include New Home
sales for June (Wednesday), Durable Goods Orders for June
(Thursday), Jobless Claims (Thursday) and the University of
Michigan Consumer Sentiment survey for July on Friday.
We also get into the thick of the second quarter earnings season
this week, with reports from more than 850 companies coming out,
including more than 160 companies in the S&P 500, taking us
past the halfway mark by the end of this week. The results thus far
have belied pre-season fears of sharp deterioration in corporate
earnings. In fact, by most measures, the second quarter earnings
season may not be that different from what we saw in the preceding
That said, a couple of things do stand out. Companies are finding
it difficult to achieve top-line gains in the face of the
synchronized global slowdown. The strength of the U.S. dollar
relative to other major currencies, primarily a function of the
flight-to-safety trade, is proving to be another headwind for
We have seen these two elements show up repeatedly in quarterly
reports in recent days, including this morning's reports from
). We will get results from a number of companies that are
effectively pure plays on the global economic outlook, including
). But it is perhaps fair to assume that the mighty
), which reports after the close on Tuesday, is immune from these
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