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To Rally, Stocks Need Europe End Game

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After stocks wrapped up their worst month in more than a year, investors will face next week with caution as things are unlikely to get better until the Europeans force their debt crisis to an end game.

A Fitch Ratings downgrade of Spain on Friday drove the three major U.S. stock indexes down 1 percent for the day. For some investors, Fitch's decision highlighted the need for the European Central Bank to come up with stronger response to the debt crisis before stocks will be able to rally.

The first wave of May U.S. economic data next week could bring what investors fear most: signs that shock waves from Europe are crossing the Atlantic. That would probably show up first in the two monthly ISM surveys, seen as an early reading of the U.S. economy's pulse.

If those reports -- based on statements from purchasing and supply executives in the manufacturing and services sectors -- are weak, it will come down to a strong May U.S. nonfarm payrolls number on Friday to help investors keep their faith in the U.S. recovery.

"All of the macro data is going to be seen through the prism of Europe," said John Praveen, chief investment strategist at Prudential International Investments Advisers in Newark, New Jersey. "You've had this huge problem in Europe. Is there any fallout from that on U.S. economic data?"


Investors also need to watch for negative earnings pre-announcements. Shares of a tiny IT company called Blue Coat Systems Inc (BCSI.O) plummeted on Friday after it cut its outlook, citing Europe's turmoil, while retailer Guess Inc (GES.N) fell after it said the weak euro would hurt profits.

On the bright side, market technicals may favor a relief rally -- providing there is no bad news.

Chart-minded investors say stocks are oversold, with the Standard & Poor's 500 Index .SPX down below its 200-day moving average.

Carmine Grigoli, chief U.S. investment strategist at Mizuho Securities in New York, also points to the widening spread between the number of S&P 500 stocks advancing and declining.

"The market (is) deeply oversold, actually almost the most oversold condition we've seen since the height of the (financial) crisis," he said.

In May, the S&P 500 fell 8.2 percent in its worst monthly slide since February 2009, the month before the broad-based index hit a 12-year closing low. The Dow industrials lost 7.9

percent in May, while Nasdaq tumbled 8.3 percent.

The sharp drop marked the worst May for the S&P 500 since 1962 -- and the worst for the Dow since 1940. It also called to mind the old stock market adage: "Sell in May and go away."


Prudential's Praveen believes that despite slight gains in the last week of May, the U.S. stock market won;t make significant progress until the European Central Bank steps up its purchasing of government debt as the U.S. Federal Reserve did early last year.

"The end game in this European crisis, at least for the near term, is going to be if the ECB comes up with some kind of quantitative easing package," Praveen said.

After an initial bounce, stocks have fallen further in the three weeks since the EU approved a $1 trillion safety net for indebted nations, with financial markets unconvinced that the measures are sufficient to avert the spread of the crisis.

So if Europe clears it's losses stocks will recovery? If Europe admits it's losses it will be the end of fiat.

Still getting the ECB to buy turds will clearly help. I'll have some in the morning if Trichet is interested. Great quality higher than Greek debt certainly.

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  • 434 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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