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All Quiet on the Eastern Front

Market Digest – Week Ending 5/9

All eyes were on Ukraine, but nothing happened to firmly support bulls or bears. On Wednesday, Putin suggested delaying a referendum on seccession planned for this weekend, but it was ignored by separatists. Stocks finished modestly lower for the week, while small cap stocks again fell more sharply. 10 year Treasury yields flirted with yearly lows as some investors sought safety.

Weekly Returns:

S&P 500: 1,878 (-0.1%)
FTSE All-World ex-US: (-0.1%)
US 10 Year Treasury Yield: 2.62% (+0.04%)
Gold: $1,288 (-0.8%)
USD/EUR: $1.376 (-0.8%)

Major Events:   

  • Monday – Target CEO Gregg Steinhafel was forced out in the wake of the massive data breach suffered during the holiday season.
  • Tuesday – Chinese Internet giant Alibaba filed for an IPO in the U.S. that would value the company at more than $100 billion.
  • Wednesday – Fed Chairwoman Janet Yellen said the economy was on track for “solid growth” in the current quarter after a harsh winter that temporarily crimped business activity, but noted weakness in housing.
  • Wednesday – Russian President Putin allegedly asked pro-Kremlin separatists in southeastern Ukraine to postpone a series of disputed referendums planned for this weekend on declaring greater autonomy or outright independence from Kiev.
  • Thursday – Pro-Russian separatists in eastern Ukraine said Thursday they would go ahead with a referendum on secession set for Sunday.
  • Thursday – The European Central Bank indicated it would likely cut interest rates or take other stimulus measures in June to combat low inflation.
  • Thursday – Apple announced a $3.2 billion deal to acquire Beats Electronics, a high-end headphone maker that recently launched a subscription music service.
  • Friday – Ukraine said around 20 armed rebels were killed in the port city of Mariupol in a battle for control of the police headquarters.

Our take:

Europe has been slow to recover from the US sub-prime crisis, and was set back by its own government debt crisis. But the continent appears to be pointed in the right direction now, and could be a bullish driver for global equities looking ahead.

One headwind for the European economy has been the persistently strong Euro, even in spite of lower growth rates. This may change. This week Central Bank President Draghi said, “The governing council is comfortable with acting next time,” which is as direct as you will hear a Central Bank Leader speak and indicates that the ECB will begin some combination of lower interest rates and/or quantitative easing.

This is reminiscent of Draghi’s famous “whatever it takes” to keep the Euro together in 2012. Europe’s growth rate may finally start to catch up to the US, which is winding down its own quantitative easing. But be careful about being long the Euro. It has been butting up against $1.40, but we don’t doubt Draghi’s resolve to keep it from going higher.

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