Economic sectors

All sectors were positive this week, but industrials and small cap value sectors turned in the best results. Health and large cap value sectors performed the worst. This week, the economic releases again portrayed the best of times while the euro currency warned of the worst of times. Economic releases showed signs of firming economic activity. Quarterly corporate earnings reports through this week generated more positive surprises than normal. While the 750 million euro package provided support for the sovereign debt crisis, the drop in the euro showed lack of confidence in the European Union. On the week, equities rebounded from the previous week’s collapse. Government bond markets and financial conditions were little changed after last week’s softening. Oil prices dropped another $3 to just under $72.

Perspective

The lyrics of Rudy Clark’s Shoop Shoop Song ask the question:
Does he love me?
I wanna know!
How can I tell if he loves me so?

After considering the usual suspects, the question is answered:

If you wanna know
If he loves you so
It’s in his kiss!

And so it is with the euro-zone this week. If you want to know if it was under pressure, it was not reflected in the stock markets. The French CAC was up 4.9 percent and the German DAX was up 6.0 percent on the week. It was not reflected in their bond markets. Bond yields for French and German bonds were little changed.

If you wanna know
If the EU can go
It’s in its currency!

The euro dropped over -3 percent on the week against the U.S. dollar. On a quarter-to-date and year-to-date basis, the euro is down over -8 percent and 13 percent respectively. At the beginning of the week the markets were exuberant over the announcement of a 750 million euro support program, but as the week progressed, questions were raised. Chancellor Merkel said the situation was “very, very serious.” ECB President Trichet called for a “quantum leap” in the way budgets are set. The Greek people responded by protesting in the streets and their Prime Minister Papandreou blamed the foreign banks for the crisis. What is ahead for the EU? It’s in its currency!

Economic releases

The Bank of England met and announced no change in rates, 0.50 percent. UK March industrial and manufacturing production rose +2.0 percent and +2.3 percent respectively. Similarly, in France, industrial and manufacturing production rose +1.0 percent and +0.8 percent respectively. First quarter French GDP increased +0.1 percent from the previous quarter. German GDP was up +0.2 percent. Greece’s GDP was down -0.8 percent with February unemployment up a percent to 12.1 percent.

In the United States, April retail sales rose +0.4 with and without including autos and gas. Industrial production rose +0.8 percent and capacity utilization rose a half percent to 73.7 percent in April. The University of Michigan’s Confidence Index rose a point to 73.3 in mid-May.

U.S.  capacity utilization for April gave another indication of the state of recovery this week. Capacity utilization improved to 73.7 percent, well above the 69 percent registered a year ago, but well below the 81.2 percent high in August of 2006. Those who assign letters to the shape of the recovery can see from the chart below that this measure was “V” shaped, but the shallow slope of the back end indicated a soft recovery.

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Sources: Bloomberg LP

Equities markets

The equity markets were all up on the week despite Friday’s sell-off. The European markets were particularly strong on the back of a 750 million euro support program for Greek debt.

 

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Bond markets

With the exception of the UK, government bond markets were little changed on the week.

 


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Currencies

The euro dropped to the lowest level against the dollar in over four years this week on concern about the future of the EU, which is under pressure from the Greek sovereign debt crisis. The euro, which had touched $1.50 less than a year ago, fell below $1.25 Only the looney bested the dollar this week.


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Economic sectors
All sectors were positive this week, but industrials and small cap value sectors turned in the best results. Health and large cap value sectors performed the worst.

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