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EU fixed; US now in focus

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by Peter Switzer

The European Union focus only lasted a day on Wall Street. Weaker US economic data worked against the rally continuing for the Dow, but the broader S&P 500 and Nasdaq indexes both went higher. Optimism wasn’t helped by Goldman Sachs, which told the market it expects stocks to go markedly lower this year, but they did say the same thing last week, missing the big spike last Friday.

Against these negative inclinations, the market did claw back towards positive territory with the weaker than expected ISM manufacturing data raising hopes that the Fed will ride to the market’s rescue with QE3.

The Dow ended down 8.7 points or 0.07 per cent to 12,871.39 — that’s nothing and shows that traders and investors don’t want to sell now post-EU summit. The S&P 500 was up 3.35 points or 0.25 per cent to 1365.51.

US data

The big focus for negativity was the ISM manufacturing index, a survey of purchasing managers, and this was 49.7 in June instead of the predicted 52. This is the first contraction since 2009 but it was not a big miss and it is a small contraction. And it is understandable when you throw in the fears around Europe and China in the past few months. The US dollar has also been strengthening, which hurts US manufacturing.

In contrast, and importantly, construction spending was up 0.9 per cent in May and this was the best level in two and a half years, CNBC reports.

Right now Wall Street and all stock markets are challenged by economic question marks over Europe, China and the USA. I argue they will all improve over the rest of this calendar year but now is the tricky bit as economic data will not be good for a few months.

Bears vs. bulls

On June 21 Goldman Sachs recommended shorting the market with a tip that the S&P 500 index was heading to 1285. This was before the EU summit agreement, however they reaffirmed their negativity today in New York.

Like Wimbledon, we’re in a game of economic tennis where there will be some good shots pointing to a bulls victory soon — say three months — but then the bears will come up with some economic revelation that will give it the upper hand.

What I’m saying is expect volatility. I expect the bears to look quite worrying but month by month I reckon the positive economic light will shine through.

The EU problems are not fixed yet but they are less worrying today than they were a week ago. I maintain my view that selloffs are buying opportunities.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Tuesday, July 03, 2012

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