Monday, December 5, 2011
Growing hopes of positive momentum on the Euro-zone front will likely help stocks build on last week’s strong gains as European leaders meet on Friday for a decisive summit meeting. The expectation is that this week’s summit meeting will help provide the framework for greater fiscal integration in the union, which will pave the way for the European Central Bank (ECB) to play a decisive role in propping up individual member country bonds.
On the U.S. front, we have a relatively quite economic calendar this week, though we have the non-manufacturing ISM and Factory Orders reports on deck for release a little later. The rest of this week brings in International Trade and Consumer Sentiment readings, both on Friday. Notwithstanding the paucity of U.S. economic data this week, the domestic outlook appears to be in very good shape. The holiday shopping season has gotten off to a solid start, the labor market is steadily improving, and the manufacturing sector appears to have rebounded nicely from the summer slump. All high-frequency indicators are pointing towards fourth-quarter GDP growth in the 2.5% to 3% range.
The only source of uncertainty for the market at present is Europe, with the recent uptrend in the Italian government bond yields, the third largest bond market in the world, raising doubts about the union’s long-term survival. It is in this context and the significance of Friday’s summit meeting that a number of market watchers are calling this week as a ‘make-or-break week’ for Europe.
We will see if those lofty expectations come to fruition. But in the run up to the Friday summit, the technocratic government of Italian prime minster Mario Monti unveiled today austerity measures aimed at bringing down the country’s budget deficit. These spending cuts and other pension changes, which are equivalent to roughly 1.9% of Italy’s GDP, will be presented to the Italian parliament for approval late today. The bond market appears to be giving these measures a vote of confidence as evident from the drop in Italian government bond yields today. We will have to wait and see if this trend can be sustained in the coming days.
In corporate news, we have a solid earnings and revenue beat from discount retailer Dollar General (DG). In another sign of continued move towards cloud computing, business software giant SAP (SAP) is acquiring SuccessFactors (SFSF) for $3.4 billion.
Sheraz Mian
Director of Research
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