Stocks began the session higher and held those gains -- well for most of the session at least, we’ll get into that in a moment -- as this especially mercurial market appears to have shifted back to believing in the cycle again (I’m referring to the business cycle recovery).    Europe did print a good industrial production number, which many cited as the reason the euro caught a bid and equity markets moved higher. But this data was for April, things will look quite different when we receive figures for the back half of 2010. 

Investors appeared willing to look beyond the funding squeeze that’s likely to become more evident within the European banking system, which is something we’ve spent a decent amount of time discussing over the past month and is now getting mainstream press coverage.  The problem was traders were willing to side step the European debt problems only for about 5 ½ hours as stocks turned down in the final 30 minutes of trading – erasing what was a 116-point gain in the Dow.  Again, sentiment is ever-changing as we continue to go round and round -- Big Ben, Parliament.

Market activity began to show pressure just after lunch, not long after Moody’s downgraded Greek government debt to junk – down four notches in one fell swoop.  What an admission of being horribly behind the curve, four notches. 

Stocks approached the 200-day moving average, a level the broad market dove below on May 20 and has been unable to surface even since.  If we can inch above that mark, currently about 1110 on the S&P 500, and hold there, technicians may find reason to push this market higher in the short term.  If it fails to eclipse the 200-day, then I guess we’ll get a retest of that 1040 level.

Utility and consumer staple stocks were the best performing groups.  Financials and basic material shares, the day’s worst. 

Market Activity for June 14, 2010

European Banking Troubles Brewing

European banks, specifically in the backbone countries of Germany and France, have huge exposure to government debt at a time in which the value of those securities are in question, to put it mildly.  As a result, the cost of interbank lending has increased and if spreads on interbank lending continue to widen it will have rather large implications for euro-zone growth. 

These government bonds are treated as capital within the banking system, so any additional downside to these securities erodes capital ratios, which reduces the amount they can lend and of course adversely affects growth.  The euro-zone accounts for 25% of global GDP, so this is a big deal.  Banks are increasingly dependent upon the ECB’s deposit facility as banks are shying away from lending to one another (sound familiar? – this is just the second stage of the credit crisis), and hence the rise inter-bank lending costs. 

According to Bloomberg News, European lenders have deposited a record 369 billion euros in the ECB’s overnight deposit facility on June 9, which was more than when Lehman was going down – in the eight years prior to the Lehman collapse euro-zone banks deposited an average 277 million euros with the ECB.  When counterparty risks worry banks to the point that they are not willing to lend to each other then they leave the cash with central bank, it’s no more complicated than that.

Week’s Data

We were without an economic release yesterday after a big week of data since the jobs report on June 4.  But we get back to it today with Import Prices for May, Empire Manufacturing for June (the first look at factory activity for the month) and the NAHB’s Housing Market Index. 

For the rest of the week, the big releases to watch will be Housing Starts (May), Industrial Production (May) and the always important Initial Jobless Claims. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900