“The world’s favorite season is the spring. All things seem possible in May,” said Edwin Way Teal.
And so it seemed during the past week as we witnessed a further improvement in investor sentiment and risk appetite, supported by the viewpoint that the worst of the credit crisis might be behind us. The end result by Friday’s close was strong gains for stock markets (with the Volatility Index at its lowest level since December), a further recovery of the US dollar, a sell-off of most commodities, and a weak undertone in government bond markets.

The Fed laid the foundation for investors’ actions at its policy meeting on Tuesday and Wednesday, the outcome of which was the FOMC cutting the Fed funds rate by 25 basis points to 2.0% – the lowest level since late 2004.
The accompanying press statement cited weakness throughout the US economy and stress in financial markets. It noted higher inflation, but also said that inflation should moderate in the near term. In a departure from the previous wording, the statement made no reference to downside risks to growth.
Overall, the market interpreted the Fed’s directive to imply that it was most likely to pause and await the impact of the 325 basis point reduction in the Fed funds rate, the economic stimulus package, and other programs put in place. Interest rate futures price in a rate rise towards the end of the year.
The US dollar’s strength was rooted in the expectation that the Fed was possibly done with reducing rates for the moment. However, the Fed was not done with its efforts to improve liquidity in stressed markets as indicated on Friday when it raised the amounts available for depository institutions at its biweekly term-auction facilities by 50% and broadened the types of acceptable asset-backed collateral.
Although the US GDP growth rate was very weak in the first quarter – just 0.6% at an annualized rate – this was better than the consensus expectation of 0.2%. Growth was also 0.6% in the fourth quarter of 2007. Compared with the fourth quarter, however, investment in inventories was a positive for growth. This was offset by stronger imports, a decline in non-residential construction, and weaker growth in consumer spending.

But investors have also nervously wondered whether stock markets were nor getting ahead of themselves. After all, May has a reputation as the advent of six “bad” months in the stock market, hence the axiom “Sell in May and go away”. (Click here to read my recent post on whether this is fact or fallacy.)
Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the financial markets’ movements on the basis of economic statistics and a performance round-up.
Economy
In addition to the FOMC’s rate announcement and the GDP numbers, the past week saw a myriad economic reports.

Summarizing the upshot of the most recent batch of statistics, John Mauldin (Thoughts from the Frontline) said: “Real (inflation-adjusted) retail sales have been flat for the last six months. Incomes are stagnant. Consumer spending is showing every sign of slowing even more. This employment report was ugly, when you look at the numbers under the headline statistics. Consumer sentiment is at 25-year lows.
“You can count on it that the National Bureau of Economic Research (NBER) will show a recession starting in the fourth quarter of last year and continuing at the least through the first quarter of this year. This one could last another six months. I still think long and shallow with a very slow recovery.”
Elsewhere in the world the European Commission’s economic sentiment indicator fell sharply in April, the Eurozone’s manufacturing PMI continued to ease, and German retail sales contracted as households struggled against higher prices for food and energy.
In the UK, the Nationwide Housing Price Index fell by 1.0% in year-ago terms in April – the first contraction in annual price growth in more than a decade. Consumer confidence continued to slide as households worried about their finances and the UK economy.
The Bank of Japan held interest rates unchanged at 0.5%, but cut its growth estimates for the year ahead, citing higher raw material prices and a slowing US economy.
WEEK’S ECONOMIC REPORT
| Date |
Time (ET) |
Statistic |
For |
Actual |
Briefing Forecast |
Market Expects |
Prior |
| Apr 29 |
10:00 AM |
Consumer Confidence |
Apr |
62.3 |
62.0 |
61.0 |
65.9 |
| Apr 30 |
8:15 AM |
ADP Employment |
Apr |
10K |
- |
-60K |
3K |
| Apr 30 |
8:30 AM |
GDP-Adv. |
Q1 |
0.6% |
0.7% |
0.5% |
0.6% |
| Apr 30 |
8:30 AM |
Chain Deflator-Adv. |
Q1 |
2.6% |
3.0% |
3.0% |
2.4% |
| Apr 30 |
8:30 AM |
Employment Cost Index |
Q1 |
0.7% |
0.8% |
0.8% |
0.8% |
| Apr 30 |
9:45 AM |
Chicago PMI |
Apr |
48.3 |
49.0 |
47.5 |
48.2 |
| Apr 30 |
10:30 AM |
Crude Inventories |
04/26 |
3848K |
NA |
NA |
2421K |
| Apr 30 |
2:15 PM |
FOMC Policy Statement |
- |
- |
- |
- |
- |
| May 1 |
12:00 AM |
Auto Sales |
Apr |
- |
5.1M |
NA |
4.9M |
| May 1 |
12:00 AM |
Truck Sales |
Apr |
- |
6.3M |
NA |
6.2M |
| May 1 |
8:30 AM |
Initial Claims |
04/26 |
380K |
358k |
360K |
345K |
| May 1 |
8:30 AM |
Personal Income |
Mar |
0.3% |
0.4% |
0.4% |
0.5% |
| May 1 |
8:30 AM |
Personal Spending |
Mar |
0.4% |
0.3% |
0.2% |
0.1% |
| May 1 |
8:30 AM |
PCE Core Inflation |
Mar |
0.2% |
0.2% |
0.1% |
0.1% |
| May 1 |
10:00 AM |
Construction Spending |
Mar |
-1.1% |
-1.0% |
-0.7% |
0.4% |
| May 1 |
10:00 AM |
ISM Index |
Apr |
48.6 |
49.0 |
48.0 |
48.6 |
| May 2 |
8:30 AM |
Average Workweek |
Apr |
33.7 |
33.7 |
33.7 |
33.8 |
| May 2 |
8:30 AM |
Hourly Earnings |
Apr |
0.1% |
0.3% |
0.3% |
0.3% |
| May 2 |
8:30 AM |
Nonfarm Payrolls |
Apr |
-20K |
-70K |
-75K |
-81K |
| May 2 |
8:30 AM |
Unemployment Rate |
Apr |
5.0% |
5.2% |
5.2% |
5.1% |
| May 2 |
10:00 AM |
Factory Orders |
Mar |
1.4% |
0.4% |
0.2% |
-0.9% |
Source: Yahoo Finance, May 2, 2008.
The next week’s economic highlights, courtesy of Northern Trust, include the following:
1. International Trade (May 9): The trade deficit is predicted to have narrowed to $61.5 billion in March from $62.3 billion in February, based on the assumptions in the advance estimate of GDP. Consensus: $60.8 billion.
2. Other reports: ISM non-manufacturing (May 5) and Pending Home Sales (May 7).
Markets
The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.

Source: Wall Street Journal Online, May 4, 2008.
Equities
Global stock markets were in rally mode and added to the previous week’s gains, with the MSCI World Index closing 1.1% higher on Friday. European stocks (+2.3%) fared the best among the mature markets, whereas emerging markets (+0.3%) lagged the major markets.

The Brazilian market was a highlight of the week with the Bovespa Stock Index surging by 6.4% to hit an all-time high on the back of Standard & Poor’s awarding the country an investment grade rating. The Bovespa Stock Index has registered a gain of 438% since its low of August 2003.
The Chinese market also performed well with the Shanghai Stock Exchange Composite Index improving by 3.8% (on top of the previous week’s gain of 15.0%), while the Hong Kong Hang Seng Index and the Bombay Stock Exchange Sensex 30 Index both finished 2.8% higher.
The strongest stock market index was again the Nasdaq Composite Index with a gain of 2.2% (YTD: -6.6%), followed by the Dow Jones Industrial Index with +1.3% (YTD: -1.6%), the S&P 500 Index with +1.1% (YTD: -3.7%) and the Russell 2000 Index with +0.5% (YTD: -5.3%).
A number of key technical resistance levels were breached as a result of the improvement in prices, most notably the S&P 500 Index’s 1,400 level (closing level: 1,414). The next resistance level is at 1,435 where the Index will encounter its 200-day moving average. The Dow Jones Industrial Index already crossed this barrier on Friday.
Fixed-interest instruments
US government bonds rallied for the first four days of the week, but sold off on Friday on the back of better-than-expected jobs data.
The yield on the two-year US Treasury Note closed the week three basis points higher at 2.46%, whereas the US Treasury Note yield declined by two basis points to 3.86%.
Government bonds elsewhere in the world followed a mixed pattern.
The lower Fed funds rate pulled US mortgage rates down sharply, with the 15-year fixed rate dropping by 16 basis points to 5.41% and the 5-year ARM rate falling by 33 basis points to 5.48%.
Money market stress eased somewhat as far as the three-month US dollar interbank rate was concerned, but euro rates tightened further.
Currencies

Following the FOMC’s rate cut on Wednesday many pundits argued that it could be the last reduction for a while. This boosted the US dollar to a five-week high against the euro and a two-month high against the Japanese yen.
The euro declined on the back of a perception that the ECB may be moving closer to a rate cut as the economic outlook in the Eurozone deteriorated further.
The stronger dollar impacted negatively on commodity prices and the currencies of commodity-producing countries such as the Canadian dollar.
High-yielding currencies such as the Australian and New Zealand dollars strengthened markedly as a result of a resurgence of carry trade transactions. On the other hand, the Japanese yen and Swiss franc came under selling pressure.
Commodities
The improving US dollar caused the correction in commodity prices to intensify, as illustrated by the following graph:

Source: StockCharts.com
Now for a few news items and some words and charts from the investment wise that will hopefully assist in steering our investment portfolios on a profitable course.

Hat tip: Barry Ritholtz’s The Big Picture
Business News Network: Donald Coxe – How to structure a global portfolio

Source: Business News Network, April 30, 2008.
MarketWatch: Peter Bernstein – Saving for survival

Click here for a written version of E.S. Browning’s interview.
Source: MarketWatch, April 29, 2008.
CNBC: Bill Gross – “Euphoric” stock market rebound may be premature

Source: CNBC, May 1, 2008.
(more…)

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