[dropcap]A[/dropcap] Friday the 13th rally reversed a string of losses, leaving major global equity indexes about flat for the week. A lack of negative surprises drove the gains, rather than any particular good news. JP Morgan reported solid earnings and eased concern regarding the final tally for its highly publicized trading losses. A Chinese GDP report confirmed slowing growth, but was better than some feared. Treasuries rose again, with yields approaching the record lows set in June. Gold was relatively flat while oil rose.
S&P 500: 1,357 (+0.1%)
MSCI EAFE: (-0.2%)
US 10 Year Treasury Yield: 1.49% (-0.06%)
Gold: $1,589 (+0.4%)
USD/EUR: $1.225 (-0.4%)
- Monday – US consumer credit grew by an 8.04% annualized rate in May, a positive sign for the economy.
- Monday – Obama proposed a one year extension of the “Bush-era” tax cuts for families making less than $250,000 and individuals making less than $200,000.
- Tuesday – San Bernardino city council authorized a bankruptcy filing, potentially setting the stage to become the third California city to file in a matter of weeks.
- Tuesday – Germany’s top court ruled against speeding a decision to determine if the ESM bailout fund is consistent with the country’s constitution.
- Tuesday – Details from recent agreements show that Spain will be forced to give up most of its control over its banks as part of the bailout agreement. Additionally, private debt holders may be forced to take losses.
- Wednesday – Minutes released from the June Fed meeting show members are split on how much and what type of additional stimulus should be implemented.
- Thursday – The US applied sanctions to the National Iranian Tanker Company and four other companies cited as fronts for Iran’s oil trade. Oil prices rose.
- Friday – China reported 7.6% GDP growth in the most recent quarter, roughly in line with expectations.
Europe has hogged most of the headlines this year, but developments in China will ultimately prove just as important to the fragile global economy. China reported Q1 GDP growth of 7.6%. It’s a tough number to interpret. To start, all Chinese data must be met with skepticism. This type of growth is envied by the world, but it is noticeably slowing. The number was roughly in line with expectations, pleasing those who feared worse and fueling speculation for additional stimulus. Overall, markets viewed the report favorably. We continue to believe the bad-loan problem in China is much worse than most expect, but are pleased to see the slowdown happening at a modest pace, at least in the official version.
This week featured the sensational bankruptcy filing of another futures dealer – Peregrine Financial, whose founder allegedly masterminded theft from client accounts for many years, got caught, rushed to marry his girlfriend in Las Vegas, then conducted a failed suicide attempt. We also learned the extent of JP Morgan’s unauthorized trading loss – “less than $7.5 billion.” While these are interesting headlines, the Libor scandal could be much more meaningful. Peregrine was tiny, and a few billion in losses is a mere speed bump for JP Morgan. Trillions of dollars are tied to Libor rates. The lawsuits alone could be crippling to the financial industry if the worst emerges. Revelation that the major players in the banking system were deliberately and systematically cheating customers and rigging capital markets would deal a major blow to the industry’s already tarnished image. Barclays has agreed to settle for $450 million and it is likely other banks will follow. If evidence of collusion actually emerges, and it cost retail customers, it would offer even more ammunition for politicians to regulate banks. Five years ago, we may have viewed heavier regulation as a bad thing. But after sub-prime and more global bank bailouts than we care to list, this is becoming a harder and harder argument to make.