EmailThe news out of Europe has been unremittingly bad. Yet, the US stock market has been surprisingly resilient. It may be that expectations of a further round of Fed stimulus are behind the support for stocks. If so, that creates downside risk.
Spanish 10-year bond yields touched the 7% that global financial markets have deemed the level at which panic, or something close, should ensue.
The bond yield jump was after Spain received a significant credit downgrade from Moody's Wednesday that will have lasting impact. Greek banks are under serious pressure ahead of Sunday's election, and companies across Europe are retrenching and preparing for the worst. The news is not good.
Yet, the Spanish stock market is up fractionally. S&P futures suggest a near flat open.
The lack of reaction may be due to expectations that the Fed will announce a third round of quantitative easing as early as next week, or perhaps the week after. An added dose of liquidity certainly wouldn't hurt stock prices. There is also the possibility that the Fed will take even more dramatic action of a new nature.
Regardless of what the Fed does, counting on their actions to support stock prices in the face of seriously negative news is risky.
US economic growth is slowing and earnings forecasts are being lowered. Liquidity is nice, but there ultimately needs to be value to support stock prices.
New claims for unemployment for the week ended June 9 rose to 386,000 from 380,000 the prior week. The May core CPI was 0.2%, unchanged from April but higher than the 0.1% expected. Not quite as bad as the news out of Europe, but nothing to cheer about either.
The market risks deserve attention, even with the Fed poised to act.
Founder and Chairman, Briefing.com
