Market Commentary: 'Groundhog Day' Playing Again in the Eurozone

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The world financial markets of late remind us of the movie “Groundhog Day,” where the main character discovers he is in a time loop in which he is reliving the same day over and over.

By Arne Espe, Vice President, Mutual Fund Portfolios

The European financial crisis began in 2007, and Greece became a center-stage player in this drama in 2009. This week, once again, the headlines seem eerily repetitious. Spain may need to seek a financial aid package. Greece will need more bailout funds or it may leave the eurozone. The world’s central banks may be planning yet another round of money printing.

Rumors of coordinated central bank action, fueled by Thursday’s announcement that the U.K. central bank would provide more quantitative easing, lifted stocks Thursday and Friday. Speculation is increasing that the U.S. Federal Reserve may announce another round of quantitative easing (printing money to purchase U.S. Treasury bonds and/or mortgage-backed securities) at next week’s Federal Open Market Committee meeting. There is also increasing chatter that the European Central Bank may step up with its own cheap funding for its banking system, similar to the long-term-refinancing operation announced last December.

World financial markets were underwhelmed by the proposed 100 billion euro Spanish bank bailout announced last weekend. Although there was a brief relief rally in stocks Monday morning, stocks closed the day significantly lower because of concerns that the Spanish government would need financial assistance similar to earlier aid packages received by Greece, Ireland and Portugal. This concern permeated the week, as evidenced by a climb in Spanish bond yields, which briefly crested the 7% level before ending the week at 6.81%.

In addition, the markets are focused on this Sunday’s Greek elections. Many investors fear that Greece’s anti-bailout party may gain support in government and lead to further uncertainty of the country’s fate in the eurozone. Many companies and financial institutions are preparing for the possibility of a Greek exit. Although we believe the markets are much better prepared for such an event, the consequences and outcomes are difficult to predict.

The S&P 500 rose 1.3% on the week to close at 1,343. Longer-term U.S. Treasury bonds rallied (prices go up when yields drop), with the yield on the 10-year declining 0.06% to 1.58%. Gold rose 2.1% to close at $1,627 per ounce.

Economic data in the U.S. remains mixed overall. On Wednesday, the retail sales report indicated declines of 0.2%, the second consecutive monthly decline. Inflationary pressures appear to be moderating as the producer price index declined 1% in May and the consumer price index decreased 0.3%. As both reported inflation and observed inflation expectations decrease in the U.S., the likelihood of further rounds of quantitative easing increases. Should this occur, we expect risk assets such as emerging markets and precious metals and mining stocks to outperform.

This content is provided courtesy of USAA.

This material is for informational purposes and is not investment advice.

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