Daily Insight: Driven to the Shadows, Lost in Translation and Pending Home Sales

U.S. stocks took a little bit of a beating yesterday, as the market has run into the headwinds of EU debt troubles and China’s early-stage unwind of their stimulus measures via the tightening of lending standards. The broad market has dropped 3.5% over the past seven sessions, but then again it had rallied 80% from the March 9, 2009 13-year low.

As we’ve been touching on, the Chinese are in the process of reining in their stimulus efforts for fear of further inflating the housing market. Traders on the Shanghai Exchange got their first chance to react this week (they were closed on Monday) and pushed the index down another 1.2% to a seven-month low. Also in the region, the Aussie central bank hiked their benchmark interest rate for the fifth time in six months – man, it would be nice to have short-term rates at 4.25%. But maybe a little too much too fast Aussie’s, looks like you’ve been tricked into thinking the Pacific growth story is sustainable; we’ll see as the Chinese lay off the nitrous.

The EU sovereign debt crisis also played a role in spooking traders after Germany’s economic minister added uncertainty to the situation when he stated the $140 billion EU/IMF rescue was not intended to cover Greece’s borrowing needs for the next three years, but possibly just 18 months – more on this below.

Market sentiment will continue to ebb and flow because the EU government debt problem isn’t going away. Talks, plans and even implementations of bailouts may ease investor concerns in the short term but the reality of dealing with these structural issues will be harsh and felt by the global economy.

Basic material shares led the major industry groups lower, with industrials and tech also down big. The relative winners were traditional areas of safety – health-care and consumer staples – but they also closed lower as all 10 major groups declined.
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Brent Vondera, Senior Analyst
Acropolis Investment Management
www.acrinv.com